**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, 2006**





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


For
      the
      transition period from ____ to _____





Commission
      File Number: **000-28083**









**SKYE
      INTERNATIONAL, INC.**


(Exact
      name of small business issuer in its charter)






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







**7650
                E. Evans Road, Suite C
                Scottsdale, AZ 85260**(Address
                of principal executive offices) (Zip Code)Issuer’s
                telephone number: **(480)
                993-2300**Securities
                registered under Section 12(b)
                of the Exchange Act: **None**Securities
                registered under Section 12(g)
                of the Exchange Act:**Common
                Stock, $0.001 Par
                Value**








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





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).   Yes
o   No
x





State
      issuer’s revenues for its most recent fiscal year. **$** 167,984





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the average bid and asked price of
      the
      issuer’s common stock as of December 31, 2006 was $3,233,626.


1





There
      were approximately 21,622,243 shares of the issuer’s common stock outstanding as
      of December 31, 2006 and the Company had approximately 415 shareholders of
      record on that date.





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





Transitional
      Small Business Disclosure Format (Check one):  Yeso No
x






























2


**SKYE
      INTERNATIONAL INC.**


**FOR
      THE FISCAL YEAR ENDED**


**December
      31, 2006**




**Index
      to Report**


**on
      Form 10-KSB**






PART
                I
            Page(s)





Item
                1.
            Description
                of Business
            5Item
                2.
            Description
                of Property
            14Item
                3.
            Legal
                Proceedings
            15Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            17





PART
                IIItem
                5.
            Market
                for Common Equity and Related Stockholder Matters
            18Item
                6.
            Managements
                Discussion and Analysis of Financial Conditions and Result of
                Operations
            20Item
                7.
            Financial
                Statements
            35Item
                8.
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            35Item
                8A.
            Controls
                and Procedures
            37Item
                8B
            Other
                Information
            37PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance With
                Section
                16(a) of the Exchange Act
            38Item
                10.
            Executive
                Compensation
            42Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            44Item
                12.
            Certain
                Relationships and Related Transactions
            46Item
                13.
            Exhibits
            47Item
                14.
            Principal
                Accountant Fees and Services
            49Signatures






3


**Forward-Looking
      Statements**





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





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





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




























4


**PART
      I**





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





**Business
      Development**





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





Skye
      has
      three subsidiary corporations, all wholly-owned:




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


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


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





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





In
      January 2004, Skye formed ION to perform research, development and marketing
      of
      new heating technologies. In January 2005, 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 7650 E. Evans Road, Suite C
      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.





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





Envirotech
      filed for relief under Chapter 11 of the United States Bankruptcy Code in the
      United States Bankruptcy Court for the District of Arizona, on August 6, 2004
      (the “Chapter 11 Proceedings”). The
      Seitz
      Suit was initially stayed pending the disposition of the Chapter 11 Proceedings,
      but on September 30, 2005, the Court allowed the plaintiff to re-open the
      suit .
      On
      December 5, 2005, the Court issued a preliminary injunction against Envirotech
      and its affiliated entities, including Skye, enjoining them from further
      marketing, advertising or offering for sale, or accepting any orders for (i)
      the
      Envirotech ESI 2000 heater, (ii) any other heater, regardless of its model,
      using parts of the Model ESI 2000 heater, and (iii) any other heater, regardless
      of model number, utilizing in whole any part (sic) any technology embodied
      in
      the Model ESI 2000 heater. At a hearing on May 17, 2006 the Judge issued a
      direction to Skye requiring it to engage in the discovery process relative
      to
      the FORTISTM and ParadigmTM products developed by Skye and Ion Tankless. Skye has
      complied with this direction for additional discovery. On May 16, 2006 the
      U.S.
      Patent and Trademark Office issued patent no. 7,046,922 to Ion Tankless, Inc.
      in
      connection with its modular tankless water heater technology.


5


ITEM
      1.  **DESCRIPTION
      OF BUSINESS - continued**




The
      filing of the petition with the Bankruptcy Court stayed all then-existing
      litigation, judgments and efforts to collect on judgments entered against
      Envirotech. With the exception of a guarantee to one critical supplier in the
      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, at the request of Envirotech. In connection with incurring
      legal fees to the law firm of Jennings Strouss & Salmon, PLC (“JSS”),
      Envirotech granted a security interest in all of its tangible and intangible
      assets in 2001
      and 2002 ,
      including its intellectual property (the “Envirotech Security”), to JSS (the
“Senior Secured Creditor”). After
      Envirotech filed for bankruptcy as noted above, JSS sold its claim and the
      related security interests to Sundance Financial Corporation. On June 1, 2006
      Sundance Financial Corporation entered into an agreement with the Company’s
      subsidiary, ION Tankless, in which it assigned the Envirotech Security to Ion
      Tankless, Inc. Because
      Envirotech has ceased operations, its only asset of any anticipated value is
      its
      intellectual property, including the patent as discussed above.





**ION**




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





With
      the
      exception of one patent held by Envirotech (discussed above), 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. Valeo has leased approximately 28,000 square feet of
      industrial space and has begun to oversee the production and distribution of
      our
      two new product lines, FORTISTM and ParadigmTM , that incorporate innovative
      technology not previously used in the water heating market. These new products,
      based on proprietary technology, are expected to serve as the foundation for
      the
      future growth of the Company.








6


**ITEM
      1.****DESCRIPTION
      OF BUSINESS - continued**




**Financing**




The
      Company, after the acquisition of Envirotech, has met its financial needs
      through its limited operations, debt financing and through the sales and
      issuances of its securities. Since January, 2005, the Company has undertaken
      the
      following sales of non-registered securities in a series of private
      transactions:




·
              On
                  January 14, 2005 the Company closed the sale of $100,000 principal
                  amount
                  of 10% senior notes due one year from date of issue and 50,000
                  unregistered common shares of common stock in private placements
                  in
                  connection with such notes.  The shares were restricted pursuant to
                  the provisions of Section 144 of the Securities Exchange Act of
                  1933.
                   The securities were sold only to persons who met the Accredited
                  Investor requirements and other requirements set forth in the offering
                  memorandum.




·
              Between
                  June 1, 2005 and July 28, 2005, the Company issued 1,998,819 shares
                  of
                  common stock at $0.55 per common share in private placements for
                  total
                  gross proceeds of $1,099,900.  The shares were restricted pursuant to
                  the provisions of Section 144 of the Securities Exchange Act of
                  1933.
                   The securities were sold only to persons who met the Accredited
                  Investor requirements and other requirements set forth in the offering
                  memorandum.




·
              Between
                  July 29, 2005 and August 15, 2005, the Company issued 565,000 shares
                  of
                  common stock at $0.55 per common share in private placements for
                  total
                  gross proceeds of $310,750.  The shares were restricted pursuant to
                  the provisions of Section 144 of the Securities Exchange Act of
                  1933. The
                  securities were sold only to persons who met the Accredited Investor
                  requirements and other requirements set forth in the offering
                  memorandum.
  ·
              During
                  2005, the Company also issued 50,000 shares in connection with
                  Bridge Loan
                  Financing arranged in January 2005, 252,357 registered shares and
                  400,000
                  unregistered shares for consulting, legal and other services rendered
                  valued at $651,943, 524,500 unregistered shares as employee stock
                  awards
                  valued at $536,170, 920,578 unregistered shares to retire $515,725
                  in debt
                  and associated interest.  In addition, between September 7, 2005 and
                  December 15, 2005, the Company accepted subscriptions for 470,000
                  unregistered restricted shares at an average price of $.54 per
                  share for a
                  total of $275,000 and agreed to issue 20,000 shares for outside
                  services
                  rendered valued at $11,000.  With the exception of the registered
                  shares, all shares issued were subject to the restrictions set
                  forth in
                  Section 144 of the Securities Exchange Act of 1933.




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


·
              During
                  the first nine months of 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.
  ·
                Between
                    April 10, 2006 and April 25, 2006, the Company issued 1,714,260
                    shares of
                    common stock at $0.35 per common share in a non-brokered direct
                    private
                    placement for total net proceeds of $600,000. The shares were
                    restricted
                    pursuant to the provisions of Section 144 of the Securities Exchange
                    Act
                    of 1933. The securities were sold only to persons who met the
                    Accredited
                    Investor requirements and other requirements set forth in the
                    offering
                    memorandum. No commissions or other fees were payable in connection
                    with
                    this private placement.


·
              Between
                  July 15, 2006 and September 30, 2006 the Company accepted loans
                  from five
                  individuals totaling $100,000. On March 1, 2007 these loans were
                  converted
                  into Units being offered by the Company in connection with a private
                  placement of convertible debt securities to accredited investors.
                  The
                  terms of the Units include: one restricted common share grant for
                  each one
                  dollar loaned to the Company, and a convertible one-year Note bearing
                  interest at the rate of 12% per annum. Each Note is convertible,
                  as to
                  both principal and interest, at the discretion of the holder, into
                  restricted common shares at any time and from time to time during
                  the term
                  of the Note at a floating rate derived by applying a 30% discount
                  to the
                  prevailing 10-day moving average of the company’s securities as quoted by
                  Bloomberg Financial Services®. 100,000 shares of common stock will be
                  issued to such persons as the stock grant of the private placement
                  detailed above.






7




**ITEM
      1.****DESCRIPTION
      OF BUSINESS - continued**




**Business
      of the Company**





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 tankless water heater is small, easy
      to
      install and supplies virtually endless amounts of hot water with energy savings.
      The unit is a microprocessor controlled electric water heater contained in
      a
      compact unit, eliminating the space demands of conventional water heaters.
      It
      incorporates automatic, precise temperature controls. It saves energy, space,
      and water and is suitable to most areas of the U.S. and worldwide. Prior to
      the
      development of new technology, which is discussed later in this section, the
      Company was dependent upon the operations of Envirotech for its revenue.
      Beginning in 2004 and continuing throughout 2005, Envirotech’s production and
      sales steadily declined while the Company embarked on an aggressive research
      and
      development program to develop new technologies and products for the tankless
      water heater market. 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 of
      the
      20 month research and development program, several patents have been issued
      and
      other patent applications are pending, and new products have been developed
      and
      will be ready for limited production in mid-2007.





The
      Company has ceased to manufacture the ESI-2000 water heater line of products
      developed by Envirotech. Our *FORTISTM* brand product line, which is expected to be delivered to the market during
      mid-2007, is the result of the R&D program discussed above. SKYE’s *FORTISTM* series is scalable from 40 amps to 120 amps of heating power and is a
      microprocessor-controlled electric water heater contained in a compact unit,
      which is designed to operate in most any climate. SKYE’s new and innovative way
      of heating water for home and business is contained in a small and easy to
      install unit. Not only does it supply virtually endless amounts of hot water,
      but it also offers substantial energy savings to most users. The *FORTISTM* series saves energy, space, water, and is suitable for most areas of the world.
      SKYE uses advanced technology and high quality parts in the construction of
      the *FORTISTM* series, which provides reliability and longevity. Most anywhere hot water is
      now
      being used, SKYE’s electric instantaneous water heaters can likely perform the
      task more effectively than most other appliances. 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 could be calculated to be reduced by as
      much
      as 20% - 40%. Because the *FORTISTM* series
      is compact it can be easily installed close to where hot water is being used,
      and it is ideal for hotels, motels, apartments, and homes where space is at
      a
      premium. SKYE believes its *FORTISTM* series
      heaters offers one of the most efficient solutions for on-demand endless hot
      water available today.





The
      Company has expended considerable efforts in working with its contract
      manufacturer, Jabil Circuit, Inc., in order to begin the production of the *FORTISTM* line of products. The Company expects that the first *FORTISTM* units will be produced in 2007 with sales and delivery to also commence sometime
      thereafter. Despite commencing production, the Company expects that it may
      take
      up to one year for the production design and processes to stabilize. Once the
      production and processes have stabilized the Company anticipates that it will
      seek to move production of the *FORTISTM*to
      a
      lower cost center in Mexico or China in order to gain additional
      margin.


8




**ITEM
      1.****DESCRIPTION
      OF BUSINESS - continued**




Additionally,
      the Company has continued to focus development efforts on the commercialization
      of its new *ParadigmTM* technology.
      Although we have been very excited about the functionality that the *ParadigmTM* technology offers, we have not been successful in developing a cost effective
      means to commercialize the technology into a consumer product line. We are
      currently 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 product utilizing the *ParadigmTM* technology
      by late 2007 or early 2008. 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 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, 2006,
      we have appointed a total of 17 manufacturer representatives covering a total
      of
      28 States. We are currently negotiating for the appointment of additional
      representatives in other US States, as well as Canada and Mexico. We expect
      that
      we will complete the appointment of representatives in States across the United
      States by the end of 2007.





**The
      Marketplace for Tankless Water Heaters** .





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





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





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




•
            The
                water heater replacement market continues to grow and is over 10
                million
                units annually.


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


•
            New
                home sales and home improvement spending are
                increasing.


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


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





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





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


9





**ITEM
      1.****DESCRIPTION
      OF BUSINESS - continued**




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





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




One
      of
      the significant barriers to the entry of an electric tankless unit has been
      the
      inability of an electrically powered unit to generate enough heated water flow
      for the average U.S. household. SKYE’s *FORTIS* TM 
      product addresses this problem by incorporating a “multi-pass” 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. 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 two series of what it believes will be the world’s most
      advanced, efficient and reliable 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 also offer up to six remote controls for
      home
      automation, programmable processor to allow easy installation of the latest
      software, a modular design for ease of expansion of heating capacity, easy
      replacement of immersion elements, and industry-standard non-proprietary
      components for cost-effective part replacement.





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





**The** ***FORTISTM*** **Series** ***.***





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





•  304
      series stainless steel housing


•  paddle
      wheel flow sensor that can be cleaned if necessary


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


•  Incoloy®
      sheathed immersion heating elements for longevity


10




ITEM 1.  **DESCRIPTION
      OF BUSINESS - continued**




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


•
            Custom
                microprocessor controller with backlit color LCD
                interface


•
            Avionic
                grade solid state relays


•
            Breaker
                sub-panel included inside each
                appliance


•
            Redundant
                mechanical power breakers


•
            Wet
                sensor


•
            Optional
                automatic flush cleaning system





The *FORTISTM* is
      a durable tank-replacement product that is capable of meeting the needs of
      most
      U.S. households. Endless hot water, energy savings, compact design and redundant
      safety systems make this tankless water heater a viable choice for most
      residential applications.




**The** ***ParadigmTM*** **Series**




The *Paradigm* TM 
      series water heaters heat water using new technology never before used in
      heating water in a residential appliance. Essentially, instead of putting the
      heater in the water, the *Paradigm* TM 
      series water heaters put the water through the heater. The *Paradigm* TM 
      series is currently in the final engineering and design phase with expected
      engineering for manufacturing to follow.





The *ParadigmTM* technology will offer virtually instantaneous hot water, and is extremely
      efficient. The *Paradigm* TM 
      series can heat water over 100° F in only seconds. The *Paradigm* TM 
      technology is even more energy efficient than *FORTISTM* .
      Like
      FORTISTM, *ParadigmTM* requires no tank. In *Paradigm* TM, 
      there is no impediment in the water flow, whatsoever, so it does not need an
      external cleaning system. *Paradigm* TM 
      technology provides virtually instantaneous heat response upon
      demand.





Included
      in the *ParadigmTM* series of heaters is a whole house, point-of-use and under-the-sink tankless
      water heater. Moreover, the Company believes that this smaller unit will find
      a
      market much larger than the whole-house unit and that the volume of smaller
      units will likely exceed the whole-house units.





**Product
      Development and Production Status - March 30, 2007**





***FORTIS*** **TM.** SKYE is
      completing the final controller design of the *FORTISTM* series of products at the present time and, when completed, anticipates the
      ability to deliver saleable volumes of *FORTISTM* product in 2007. Jabil Circuit has agreed to manufacture the first run of
      product at its Tempe, Arizona facility. Once the design of the *FORTIS* TM 
      has stabilized and larger production volumes are achieved, Jabil expects that
      manufacturing of product will be moved off-shore to lower cost centers.




***Paradigm*** **TM.** ** SKYE
      is
      engaged in the design phase and engineering for manufacturing phase for a line
      of point-of-use and whole-house water heaters. Once this engineering phase
      is
      complete, SKYE intends to seek the approvals noted below and anticipates that
      initial production will likely commence in 2007 with market introduction likely
      in late 2007 or early 2008. SKYE is currently in negotiations with key
      suppliers  to
      establish strategic relationships with certain component vendors that may be
      able to assist in reducing the time to market.




**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
      applications and swimming pools and spas.




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




•  UL/CUL


•  NSF


•  IAPMO/UPC




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. SKYE is not currently aware of any pending
      legislation that will adversely affect the ability of SKYE to conduct its
      business.


11


ITEM
      1.  **DESCRIPTION
      OF BUSINESS - continued**




**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. To date, SKYE has appointed
      manufacturer’s representatives in 28 states and expects that it will continue to
      appoint more representatives over the balance of 2007, including manufacturer’s
      representatives in Canada and Mexico.




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




**Manufacturing**





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





**Intellectual
      Property**





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





During
      the past two years, based on newly developed technology, ION has filed several
      applications for patents with the United States Patent and Trademark Office,
      and
      expects the products offered using this new technology to replace the products
      previously manufactured by Envirotech. All persons deemed inventors have
      executed written assignments to ION of proprietary and intellectual property
      rights relating to the inventions forming the basis of the various applications
      for patents and the attendant research and development. In November 2005, the
      Company received notice from the USPTO that the first such patent request has
      been allowed, which was issued on May 16, 2006 as US Patent No. 7,046,922.
      On
      August 8, 2006, the USPTO issued a method patent No, 7,088,915 to ION on the
      Company’s modular tankless water heater technology. On
      January 16, 2007, the Company was advised that its wholly owned subsidiary,
      ION
      Tankless, Inc., received US Patent No. 7,164,851 entitled "Modular Tankless
      Water Heater Control Circuitry and Method of Operation" as issued and published
      by the United States Patent and Trademark Office. Additionally, ION
      has
      further been notified that another patent has been allowed in connection with
      its thick film on steel heating technology developed in connection with the
      Paradigm research initiative. SKYE expects that such patent will be published
      in
      due course. While there can be no assurances that the other patents sought
      will
      be granted or that the technology will be considered proprietary to SKYE or
      ION,
      the Company believes that its applications are meritorious and will be granted
      at least in part.


12


ITEM
      1.  **DESCRIPTION
      OF BUSINESS - continued**





**Materials
      and Principal Suppliers** .





SKYE
      has
      retained Jabil Circuit, Inc. to manufacture its products, and, as such, is
      heavily dependent upon Jabil to perform satisfactorily so as to ensure the
      availability of product for sale. Jabil is required to buy components for SKYE’s
      products from the market at large, as well as from an approved list of
      suppliers, including Siemens, AG (electrical components), Lake Monitors (flow
      sensors), Tru-Heat (heating elements), Hydro Aluminum (extruded heating
      chamber), and Arnold Bros. (stainless steel sheet metal and components).
      Although limited production experience has been obtained, SKYE is satisfied
      that
      Jabil has the necessary experience to avoid supplier delivery problems. In
      order
      to avoid losses associated with lack of production components, SKYE has worked
      closely with Jabil to identify suppliers that have traditionally performed
      well
      in addition to ensuring that multiple suppliers for most components are
      available. With the exception of certain proprietary components manufactured
      by
      Jabil, and the preferred vendors noted above, the balance of components are
      readily available from a variety of sources both domestically and
      internationally. SKYE is satisfied that it and Jabil have adequately planned
      to
      avoid production disruption resulting from a breakdown in its supply
      chain.





**Research
      and Development**





The
      Company conducts all of its research and development activities through ION.
      All
      employees, contractors and consultants engaged in the research and development
      process by ION were required to execute non-disclosure, non-competition
      agreements covering the subject, scope and work product of the program. The
      Company expended approximately $26,878 in 2006 and $450,000 in 2005 on research
      and development.


**Employees**





At
      December 31, 2006, Skye had two full-time employees. Additionally, the Company
      retained the services of consulting professionals to provide on-going
      management, legal, accounting and engineering research and development work.
      The
      Company anticipates adding several full time employees in the near future in
      management and for administrative and technical support. Additional employees
      are expected to be engaged as revenues from operations permit.





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





Skye
      expects to commence the wholesale introduction of its products sometime during
      the second quarter 2007 or later. It has not developed a dependence upon any
      single customer or group of customers. By necessity, initial sales of Skye’s
      products may be concentrated with certain distributors or retailers until a
      broader distribution network can be achieved. Skye will monitor its sales and
      distribution activities closely to avoid such reliances.





**Costs
      of Environmental Compliance**





Because
      Skye does not manufacture any of its products, it does not anticipate incurring
      material costs related to environmental compliance, which is the responsibility
      of the manufacturer.





**Recent
      Developments**





·
            On
                August 8, 2006, the USPTO issued a method patent No, 7,088,915 toIONon
                the modular tankless water heater.




·
            On
                January 5, 2007, the Company was advised that its securities had
                been
                cleared by the compliance unit of the National Association of Securities
                Dealers ("NASD") for quotation on the OTC Bulletin Board. 
                Accordingly, the Company commenced trading on the OTCBB under the
                trading
                symbol SKYY effective on the opening on January 8, 2007.









13


ITEM
      1.  **DESCRIPTION
      OF BUSINESS - continued**




·
            On
                January 16, 2007, the Company was advised that its wholly owned
                subsidiary, ION, received US Patent No. 7,164,851 entitled "Modular
                Tankless Water Heater Control Circuitry and Method of Operation".





·
            ION
                also received notice of patent allowance for its thick film on steel
                heating technology developed during the Paradigm research initiative.
                SKYE
                expects that such patent will be published in due
                course.




·
            On
                January 19, 2007, legal counsel on behalf of the Company filed, in
                the
                United States District Court for the District of Arizona, the Registrant's
                Response and Counterclaims to that certain derivative lawsuit filed
                as
                case No.: 2:06-CV-1291. The Registrant's Response and Counterclaim
                was
                filed against JEFFREY M. STEBBINS, CORBIN T. JONES, DAN DE SADE,
                BRODY
                HANNSEN, LEON SLADE, and DWAIN MENDENHALL, as Counterclaim Defendants
                and
                TIMES SECURITIES, INC., a California corporation; JEFFREY M. STEBBINS
                and
                JULIANE A. STEBBINS, husband and wife; CORBIN T.JONES and CHELSEA
                JONES,
                husband and wife; STEPHANIE CHOOI, an individual; TARA LEWIS, an
                individual; MICHAEL STEBBINS, an individual; ERIC STEBBINS, an individual;
                DAN DE SADE, an individual; WILLIAM PAPAZIAN and MADELINE PAPAZIAN,
                husband and wife; SPINELLI CORPORATION, an Arizona corporation, as
                Additional Counterclaim Defendants. The Counterclaims by the Registrant
                against these other individuals and entities include claims for Fraud,
                Federal RICO Violations, Breach of Fiduciary Duty, Breach of
                Confidentiality Obligations, Misappropriation, Breach of Contract
                (Financing), Negligent Misrepresentation, Tortious Interference,
                Injurious
                Falsehood, Illegal Takeover of Skye, Defamation, State Racketeering
                Violations, Unauthorized Sale of Restricted Securities, Formation
                of
                Group, Breach of Contract (Non-Compete), Abuse of Process and Malicious
                Prosecution. The Counterclaim was amended on January 29,
                2007.




·
            On
                January 19, 2007 the Company issued a President’s letter to shareholders
                providing shareholders with an update of events in 2006 and an outlook
                for
                2007.




·
            On
                January 30, 2007, the Board of Directors of the Registrant filled
                two
                vacancies on the Board with the election of Mr. Perry Logan and Mr.
                Ted
                Marek. Both Mr. Logan and Mr. Marek will serve as directors until
                the next
                Annual General Meeting of the Registrant's shareholders. Mr. Logan
                and Mr.
                Marek were also appointed to serve as independent Directors on the
                Company's Audit Committee and Corporate Governance Committee and
                will
                serve in such capacity until the next Annual General Meeting of
                shareholders.




·
              On
                  February 5, 2007, the Board of Directors ratified and reaffirmed
                  the
                  consulting agreements previously entered into with Sundance Financial
                  Corp., Digital Crossing and Gregg C.
                  Johnson.







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




At
      December 31, 2006, the Company owned no real property.





Effective
      August 31, 2006, Skye acquired, and on the same day sold, its former offices
      located at 7150 W. Erie St., Chandler AZ 85226 to a third party for net proceeds
      to Skye of $75,000. Since September 1, 2006, until the date of this report,
      the
      Company has sub-leased office space, at a no-cost basis, located at 7650 E.
      Evans Road, Suite C, Scottsdale, AZ 85260 from Studio One Entertainment
      Inc.





Skye
      is
      actively seeking to lease new office and warehouse facilities for its growing
      business. Skye currently plans to locate its facilities in either Tempe or
      Scottsdale, AZ ,and it hopes to conclude lease arrangements and complete its
      move to a new facility sometime during the second quarter of 2007.





**Investments**





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


14





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





The
      Company is currently engaged in a significant amount of costly and burdensome
      litigation, including:





Distributor
      Suit .
      Prior
      to the acquisition of Envirotech, by the Company, Envirotech was the defendant
      in a lawsuit filed by a former distributor alleging a breach of a Distributor
      Agreement entered into with Envirotech in May, 1998. On August 13, 2003,
      Envirotech entered into a Settlement Agreement and Release pursuant to which
      Envirotech agreed to pay the distributor the sum of $520,500 in installments
      over a period of ten years. The obligations under this Settlement Agreement
      are
      secured by a Security Agreement covering all assets of 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 filed of
      record so long as no default existed. On May 3, 2004, the distributor claimed
      a
      breach and filed the Stipulated Judgment. Management believes no default existed
      to warrant the filing of the judgment. With the filing of the Bankruptcy
      Petition by Envirotech (see below), this action was stayed. However, with the
      dismissal of the Chapter 11 Proceedings on February 28, 2006, this judgment
      is
      once again a claim against the assets of Envirotech, subject, however, to the
      claims and rights of the Senior Secured Creditor.





Seitz
      Suit .
      In
      2002, Envirotech was named as a Defendant in a law suit filed in the U.S.
      District Court for the Southern District of Texas, Houston, Texas (Civil Action
      No. H-02-4782, David Seitz and Microtherm, Inc., vs. Envirotech Systems
      Worldwide, Inc., and Envirotech of Texas, Inc., the “Seitz Suit”). The Company
      is not directly affiliated with Envirotech of Texas, Inc., which was a
      distributor of Envirotech’s products. The suit alleges that Envirotech infringed
      patent rights of others and seeks damages and an order to cease and desist.
      Management believes the suit is without merit. The suit was stayed pending
      the
      disposition of the Chapter 11 Bankruptcy Petition filed by Envirotech in August
      2004. On September 30, 2005, however, the Bankruptcy Court allowed the plaintiff
      to re-open the Seitz Suit and he has done so. The suit is in the discovery
      stage
      and the Company is vigorously engaged in the discovery process. On December
      5,
      2005, the Houston Court issued an injunction against Envirotech and its
      affiliated entities, including SKYE, enjoining them from further marketing,
      advertising or offering for sale, or accepting any orders for (i) the Envirotech
      ESI 2000 heater, (ii) any other heater, regardless of its model, using parts
      of
      the Model ESI 2000 heater, and (iii) any other heater, regardless of model
      number, utilizing in whole any part any technology embodied in the Model ESI
      2000 heater. At a hearing on May 18, 2006, the Court directed that discovery
      be
      expanded to include the technology and products of SKYE, including, specifically
      the *FORTIS* TM 
      and *Paradigm* TM 
      technologies. On July 26, 2006 Envirotech retained the Dallas, TX firm
      Hemingway, Hansen, LLP to continue the defense and prosecution of this
      litigation. At a subsequent hearing on February 28, 2007, the Court indicated
      that it would reconsider and modify the wording on the scope of the preliminary
      injunction. Additionally, the Court allowed Seitz to amend his complaint. Seitz
      filed his amended complaint attempting to expand the complaint to also cover
      Skye, Valeo and the FORTISTM  product. Skye and Valeo have filed motions to
      dismiss this amended complaint, and Envirotech has filed a ten count
      counterclaim against Seitz. Envirotech continues to aggressively defend the
      Seitz suit and will pursue this litigation to conclusion.




Unpaid
      Fees .
      Subsequent to December 31, 2003, Envirotech has been named in five separate
      lawsuits for unpaid legal and consulting fees totaling $280,000. These include
      the Myers and Jenkins Suit and the Sensor Technologies Suit discussed below.
      On
      May 3, 2004, Envirotech settled one of these suits claiming fees of $112,500.
      In
      connection with that settlement, Envirotech reimbursed the plaintiff for alleged
      out-of-pocket expenses and the Company issued 10,000 shares of common stock,
      restricted under SEC Rule 144, to the plaintiff on the basis of a loan from
      the
      Company to Envirotech. The settlement, and any settlements of the other suits,
      will be reflected as a charge in the year of the settlement. In two of the
      other
      three suits judgments have been granted in the aggregate amount of approximately
      $155,500, both of which were stayed by the bankruptcy filing discussed above.
      The fourth suit is on behalf of a law firm that served as a contract arbitrator
      in Envirotech’s dispute with the Distributor noted above. With the dismissal of
      the Chapter 11 proceedings, the Company has received notice from the plaintiff
      that it intends to resume the suit, which seeks approximately $3,500 in
      fees.




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


15


ITEM
      3.  **LEGAL
      PROCEEDINGS - continued**





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





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





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
      complaint was dismissed by the Court on May 22, 2006, but the plaintiffs were
      granted leave to re-file the complaint if certain technical deficiencies are
      corrected. The
      matter is currently pending.





Shareholder
      Derivative Action .
      In May
      2006 a small group of dissident shareholders (including the plaintiff from
      the
      Shareholder Inspection Claim) filed a lawsuit in the United States District
      Court for the District of Arizona (Case No. CV06-1291-PHX-ROS) as a derivative
      action seeking injunctive and declaratory relief. The Company was named as
      a
      nominal defendant and there are no claims for monetary damages against the
      Company. The primary claims involve the prior issuance of the Company’s common
      stock to former consultants to the Company, as well as prior issuances of stock
      to certain members of current management. Among other things the plaintiffs
      seek
      to prevent these individuals from using their stock and related voting rights
      to
      solicit proxies and notice shareholder meetings, and have demanded that they
      return the shares to the Company. The costs likely to be incurred by the Company
      in connection with such indemnities will be significant. The Company has filed
      extensive counter and cross-claims. The matter is currently pending and the
      Company is awaiting a decision of the Court after the TRO hearing on February
      21
& 22, 2007.





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








16


**ITEM
      3.****LEGAL
      PROCEEDINGS - continued**




Pending
      Arbitrations .
      The
      Company is party to two separate arbitrations. The first matter involves Skye
      and Lawrence K. White in an action first filed in Arizona State Court and later
      removed to arbitration. Mr. White seeks payment to him of fees in the amount
      of
      approximately $7,000, and punitive and other damages in an amount totalling
      approximately $100,000 in a matter related to certain accounting consulting
      services rendered to Skye in 2006. The second matter involves Skye and its
      former independent auditors, Semple & Cooper, LLP relating to unpaid audit
      and accounting fees in the amount of approximately $39,000. The Company intends
      to vigorously defend both actions and may file counterclaims in either or both
      actions. Both matters are pending and arbitrations are expected to be held
      before the end of the third quarter 2007.





Claim
      by Director William Papazian for Legal Defense and Indemnity .
      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
      arising in connection with a counterclaim filed by Skye against Mr. Papazian
      in
      connection with the Shareholder Derivative Action described above. Though filed
      by Mr. Papazian in Arizona State Court, the lawsuit has been removed to the
      jurisdiction of the Federal District Court. The Company seeks an interjudicial
      transfer of the matter to Federal Judge Roslyn O. Silver, the Judge hearing
      the
      Shareholder Derivative Action. The Company’s motion is being opposed by Mr.
      Papazian and the matter remains pending.





Quick
      & Confidential Claim .
      On
      January 23, 2007, Skye was served with a complaint filed in Arizona State Court
      by Quick & Confidential Inc. who seeks the payment of fees to it in the
      amount of approximately $13,000 in connection with legal copying services.
      The
      Company intends to seek a settlement of this matter.





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 Danial 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.





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





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





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





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


17


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




The
      Board
      has not, as of the date of this report, set a date to reconvene the postponed
      Special Shareholders Meeting, nor has the Company taken any other actions in
      the
      furtherance of such Special Shareholders’ Meeting or any other meeting of
      shareholders for any purpose.





The
      Company expects that it will cancel the Special Shareholders Meeting in lieu
      of
      a combined Annual and Special Meeting of Shareholders at a future date to be
      determined by the Board of Directors once the Company has received the decision
      of the Court in the Shareholder Derivative Action, all as more fully described
      under “Item 3 - Legal Proceedings” above.










**PART
      II**




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





**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,
              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
            
            
            0.41For
              the Fiscal Year Ending on December 31,
              2005
            
            
            High
            
            
            LowQuarter
              Ended December 31, 2005
            
            $
            1.12
            
            $
            0.62Quarter
              Ended September 30, 2005
            
            
            1.40
            
            
            0.66Quarter
              Ended June 30, 2005
            
            
            1.05
            
            
            0.57Quarter
              Ended March 31, 2005
            
            
            1.40
            
            
            0.75For
              the Fiscal Year Ending on December 31,
              2004
            
            
            High
            
            
            LowQuarter
              Ended December 31, 2004
            
            $
            0.91
            
            $
            0.88Quarter
              Ended September 30, 2004
            
            
            0.73
            
            
            0.73Quarter
              Ended June 30, 2004
            
            
            0.80
            
            
            0.65Quarter
              Ended March 31, 2004
            
            
            1.05
            
            
            1.20







18


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




**Holders
      of Common Equity**





As
      of
      December 31, 2006, there were approximately 415
      shareholders of record of the Registrant’s Common Stock and there were
      approximately 21,622,243 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.





**Equity
      Compensation Plans**





As
      of
      December 31, 2006 our equity compensation plans were as follows:





**Plan
                category**
            
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            
            
            **Weighted
                average exercise price of outstanding options, warrants and
                rights**
            
            
            **Number
                of securities remaining available for future issuance****(1******)****Equity
                compensation plans approved by security holders
            
            
            None
            
            
            N/A
            
            
            NoneEquity
                compensation plans not approved by security holders
            
            
            900,000
            
            $
            0.53
            
            
            N/ATotal
            
            
            900,000
            
            $
            0.53
            
            
            N/A


(1)
      Excluding securities reflected in column (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.
      Copies of the Option Agreements with Sundance and Digital Crossing, and
      amendments thereto, are attached as Exhibits 99.3 and 99.4, respectively, of
      the
      Company’s Form 10-KSB filed for the period ended December 31, 2005. The Company
      has also 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.





**Changes
      in Control**





The
      Company is not aware of any arrangements which may result in a change in control
      of the Company. The stipulated agreement among the parties noted in “Item 3.
      Legal Proceedings, Shareholder Derivative Action” above prevents the Company
      from implementing the terms of the shareholder consent referred to in “Item 4 -
      Submission Of Matters to a Vote Of Security Holders” above.


19


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




**Sale
      of Unregistered Securities**





Information
      on the sales of unregistered securities is noted in “Item 1. Description of
      Business, Financing” above.








**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, will be
      sold primarily through manufacturer’s representatives in the wholesale market.





**Liquidity
        and Capital Resources.**
 
 As
        of
        December 31, 2006, the Company’s only prior source of established revenue was
        from the sales of the ESI-2000 product through its subsidiary, Envirotech.
        However, the ESI-2000 product line was discontinued in 2005 and thus the
        Company
        has no establish source of revenue as at December 31, 2006 or the date of
        this
        Report. Future revenues are expected to derive from the sale of the
*FORTISTM* and *ParadigmTM* series of water heating products, and
        later, from additional consumer lifestyle products the Company expects to
        manufacture and sell. The consolidated financial statements for the Company
        disclosed that the Company has working capital deficiency of $3,185,116,
        and has
        accumulated losses of $12,527,800. 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 or cease 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. The Company has no commitments or plans for any additional funding
        at the present time. Insufficient financial resources may require the Company
        to
        delay or eliminate all or some of its development, marketing and sales plans,
        which 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.
  **Executive
      Summary**





The
      Company’s business is the design production, marketing and sale of value-added
      consumer appliances. Skye’s premier consumer product is the *FORTIS
      TM* , 
a
      new series of electric instantaneous water heater. Skye will market the *FORTIS
      TM* tankless water heater which it believes: (i) maintains a pre-determined water
      temperature (ii) conserves water (by installing the electronic tankless water
      heater close to the use point or by heating water at the tap, rather than
      drawing cold water before the hot water travels from a tank to the tap) (iii)
      conserves energy (by heating water only when it is needed) (iv) has a greater
      life span than most other water heaters (v) to be competitive with the purchase
      price of other water heaters, (vi) saves space, and (vii) is powerful and
      versatile (for example, making the heater able to heat water for an entire
      house
      in most any climate). 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 heating market. Skye
      is
      currently working to commercialize this technology into a suite of products
      that
      can be used in homes across North America.


20


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





Once *FORTISTM* (and later *ParadigmTM* )
      is
      ready for commercial production and distribution, likely during the second
      quarter of 2007, 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 March 30, 2007, the Company has contracts with twelve
      (15) U.S. manufacturers’ representative groups with operations in 28
      States. The major terms of the contracts are: (a) distributors receive a
      graduated discount based on volume with the greatest discount being 35%, and
      10%
      commissions to manufacturer’s representatives; (b) non-exclusive
      territories; (c) termination upon 30 day notice and; (d) no
      maximum purchase requirements and sales goals to be mutually agreed, or in
      default, $1,000,000 per territory. The Company is currently training all its
      U.S. distributors and manufacturers representatives in the use of its products.





**Going
      Forward**





The
      Company has expended considerable efforts in working with its contract
      manufacturer, Jabil Circuit, Inc., in order to begin the production of the *FORTISTM* line of products. As of March 30, 2007, much of the prepatory work to commence
      production has been completed and Jabil has completed the manufacturing work
      cell to commence production. The Company expects that the first *FORTISTM* units will be produced during the second quarter of 2007 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. Once the production and processes have stabilized the Company
      anticipates that it will seek to move production of the *FORTISTM* to
      a
      lower cost center in Mexico or China in order to gain additional
      margin.





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





Access
      to
      capital remains one of the most pressing considerations for the Company.
      Although we were successful in concluding a $600,000 non-brokered private
      placement in April 2006, 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 expects to be working diligently to access additional funding likely
      by
      way of further private placements of equity. We have commenced negotiations
      with
      several parties with a view to completing further private placements to fund
      our
      business strategy, but to date we have not yet concluded any such arrangement.
      Our business strategy will require us to raise in excess of $2 million over
      the
      next 12 month period in order to fully execute our current business plan. There
      can be no assurance that we will be able to raise such additional funding by
      way
      of either new debt or equity, and in the event we are unable to raise the funds
      necessary to fund our business plan it will be necessary to curtail such plans
      and this could have a detrimental impact on our business. Management believes
      that, in order to properly exploit the introduction of both the *FORTISTM* and *ParadigmTM* technologies, it will be necessary that we be positioned not only as a quality
      supplier of products, but that we also be able to supply a sufficient volume
      of
      product to meet wholesale demand. We believe that, relative to the wholesale
      market, there is a very high expectation that product be available in a timely
      fashion when ordered. In order to meet this expectation we must be capable
      of
      not only producing our products in sufficient volume, but holding quantities
      of
      product in inventory as well. These things all require capital and we must
      be
      successful in our efforts to obtain this funding if we are to be successful
      in
      the wholesale sales and distribution channel.








21


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




Over
      the
      balance of the year we will continue to focus our efforts on initiating
      production of the *FORTISTM* product
      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 effort on the part of our existing staff, as well as
      new
      staff that must be hired in order to provide sales and customer service to
      the
      field. We will also focus our efforts on completing the *ParadigmTM* technology
      and we are challenged by the opportunity to introduce this powerful technology
      to the US marketplace. While *ParadigmTM* will
      require a significant investment of time and capital in order to yield a line
      of
      marketable products, we are confident that products based on this technology
      will be amongst the most efficient and technologically advanced in the market.
      Many challenges remain and Skye’s Board, Management and Staff are committed to
      the challenge.





**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, 2006 and 2005**





*Revenues.* **





Revenue
      decreased by $33,467 or 3% to $167,984 for 2006 compared to $172,424 for 2005.
      The decrease was attributable to a suspension of product sales due to the
      unavailability of product arising from both the lack of working capital, as
      well
      as the preliminary injunction granted in December 2005 prohibiting the further
      sales of the Envirotech ESI-2000 product line. Income in 2006 is attributable
      to
      the purchase by the parent company of debt of a subsidiary at substantial
      discount and the sale of its position with respect to the facilities the Company
      occupied in Chandler, Arizona.




*Cost
      of Goods Sold and Gross Margin.* **





With
      the
      discontinuance of sales of the ESI-2000, Cost of Goods Sold decreased from
      $172,651 for 2005 to $28,357 in 2006.





*General
      and Administrative Expenses.* **





Legal
      and
      Professional costs, which includes fees paid to outside consultants for
      management services, decreased significantly in 2006 to $1,772,479 as compared
      to $2,032,825 in 2005. The decrease is mostly attributable to the valuation
      accounting relative to shares paid to certain consultants for services rendered
      during 2006, and reduced expenses incurred in patent fees, but offset to some
      extent by on-going litigation costs. Advertising/Marketing Expenses
      increased to $131,323 in 2005 as compared to $44,147 in 2005. General and
      Administrative (G&A) expenses decreased by $666,410, 53%, to $586,619 in
      2006 as compared to $1,253,029 for 2005 due to a reduction in staff and the
      Company’s move from its Chandler, Arizona facility. The Company incurred
      non-cash charges in the amount of $684,127 for the value of stock grants to
      employees, key consultants and for the value of stock granted to a new
      consultant which became fully vested in 2006.





*Research
      and Development Expenses.* **





Research
      and Development (R&D) expenses decreased in 2006 to $26,,878 from $447,657
      for 2005 and $285,544 for 2004. The Company’s decrease in R&D expenses is
      attributable to the completion of most of the engineering associated with the *FORTISTM* .








22


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




*Net
      Loss.* **


Net
        loss
        decreased $1,588,583 to $(2,463,287) or $(0.12) per common share for 2006
        compared to a net loss of $(4,051,870) or $(0.27) per common share for 2005.
        This decreased loss was due primarily to the contraction of the Company’s staff
        and the elimination of rent and overhead by moving from the Chandler, Arizona
        facility, and the non-cash expense in connection with shares issued to
        consultants as prepaid services during 2006.


**Liquidity
      and Capital Resources**





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


At
        December 31, 2006 the Company had total current assets of $271,112,
        including a cash balance of $8,672, $163,062 in raw materials inventory,
        and
        $99,379 in prepaid expenses. These funds are not sufficient to meet the
        Company’s operational and liquidity needs for the next twelve months and thus
        additional debt or equity financing will be required. The Company’s working
        capital at December 31, 2006 was a negative $3,185,116. This represents a
        decrease in working capital of approximately $849,774 from a negative working
        capital of $2,335,342 at December 31, 2005.





The
      Company reported negative operating cash flows from operations of
      $2,463,287  for the twelve months ended December 31, 2006. The net
      loss of $2,284,500 was offset by non-cash charges of $684,127 which represented
      the value of stock issuances and stock options exchanged for services rendered
      and $9,870 in depreciation and amortization expenses. At December 31, 2006,
      the Company had no inventory purchase commitments.





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





23
  **ITEM
        6.****MANAGEMENT’S
        DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
        continued**
  **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, 2006 no impairment exists on any of the Company’s assets based on
      the present value of future cash flows generated from Company assets. The
      Company recognized an impairment of $39,778 related to the Envirotech Patent
      in
      2004.





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




**Critical
      Accounting Policies**





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





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





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





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





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








24


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




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








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





Risks
      Relating To Our Business and Our Marketplace





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





SKYE
      International, Inc. (“SKYE”) was organized November 23, 1993 and existed as a
      development stage company until its acquisition of Envirotech Systems Worldwide,
      Inc. (“Envirotech”), on November 7, 2003. Envirotech was organized December 9,
      1998. Envirotech has a limited history of operations. The first sales of its
      products occurred in calendar year 2000. The Company, on an operating and
      consolidated basis, has continued to incur substantial losses from operations
      since the date of acquisition. The Company did not generate significant revenue
      from sales of its discontinued ESI-2000 product line and has not generated
      any
      revenues yet from the sale of other products, including FORTISTM, developed in
      conjunction with the Company’s research and development
      initiatives.





Prior
      to
      the development of new technology, the Company was dependent upon the operations
      of Envirotech for its revenue. The Company expects that additional operating
      losses will occur until new product commences sales in the market and the
      resulting revenue is sufficient to offset the level of costs incurred for
      ongoing marketing, sales and product development. The Company is subject to
      all
      of the risks inherent in establishing a new business enterprise. Since the
      Company has a very limited record of operations, there can be no assurance
      that
      its business plan will be successful. The potential for success of the Company
      must be considered in light of the significant problems, expenses, difficulties,
      complications and delays experienced by the Company to date; and as are
      frequently encountered with the start-up of new businesses. A prospective
      investor should be aware that if the Company is not successful in achieving
      its
      goals and achieving profitability, any money invested in the Company will be
      lost. The Company’s management team believes that its success depends on the
      Company’s ability to complete product development and obtain regulatory
      approval, then in manufacturing, marketing and selling its products and, over
      the longer term, in developing new products for which larger markets are
      possible.





The
      Company has not had sufficient funds to date with which to even partially
      implement its business plans. We cannot be certain that our business strategy
      will be successful because these strategies are unproven. There can be no
      assurance that the Company will generate sufficient revenues to the extent
      necessary to render it profitable. There can be no assurance that management
      has
      accurately forecast the Company's performance or that planned operations will
      lead to profits in the future. In addition, outside of product know-how,
      intellectual property and contractual relationships, the Company has only very
      limited hard assets, the value of which is far less than the accrued payables
      of
      the Company as of the date of this Offering. If the Company is unable to develop
      marketable products, obtain customers and/or generate sufficient revenues so
      that it can profitably operate, the Company's business will not succeed. We
      will
      be particularly susceptible to the significant risks and uncertainties as
      described in these risk factors, and we will be more likely to incur the
      expenses associated with addressing such risks. Our business and prospects
      must
      be considered in light of the risks, expenses and difficulties frequently
      encountered by companies in the early stages of development. These risks are
      particularly severe among companies in new and rapidly evolving markets such
      as
      those that we expect will serve as our target markets. Accordingly, purchasers
      of Units must be in a financial position to bear the risk of loss of their
      entire investment in the Company.


25


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




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





On
      September 15, 2005 the Company received a letter from the U.S. Securities and
      Exchange Commission (“SEC”) relating to information provided by the Company in
      its financial filings for the year ended December 31, 2004 (the “2004 10KSB”),
      as well as the interim quarterly filings preceding such date. The SEC 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, 2004, 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 or cease 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. The
      Company has no commitments or plans for any additional funding at the present
      time. Insufficient financial resources may require the Company to delay or
      eliminate all or some of its development, marketing and sales plans, which
      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.





**Lack
      of Diversification.**





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


26


**ITEM
      6.****MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
      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 its primary competition will be the manufacturers of
      conventional tank water heaters, who are firmly established with the plumbing
      industry. There are a large number of manufacturers of tank water heaters,
      both
      domestic and foreign. The dominant manufacturers are five large, multinational,
      established companies with significantly more resources than the Company
      (Bradford-White, Rheem, A. O. Smith, State Industries and American Standard).
      Manufacturers of tank water heaters dominate the U.S. market, maintaining over
      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.





**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.





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


27




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




The
      new
      line of tankless water heaters designed by the Company do not, in the opinion
      of
      the Company, utilize the technology embodied in the Envirotech patent or
      technology related to the ESI-2000 product, and are constructed using parts
      and
      operational methodologies distinct from the Envirotech ESI-2000 heater. The
      Company does not intend to produce any further ESI-2000 heaters and believes
      all
      future water heaters will embody designs and technologies related to newly
      developed intellectual property of the Company’s research and design subsidiary
      Ion Tankless, Inc. There can, however, be no assurance that a third party may
      claim or continue to claim that the Company’s products infringe any of such
      third party’s patents or intellectual property. During the past year, based on
      newly developed technology, SKYE has filed several applications for patents
      with
      the United States Patent and Trademark Office, and expects that a range of
      products using this new technology will replace the products previously
      manufactured by Envirotech. In
      November 2005, the Company received notice from the USPTO that the first such
      patent request had been allowed, which was issued on May 16, 2006 as US Patent
      No. 7,046,922. On August 8, 2006, the USPTO issued a method patent (No,
      7,088,915) to ION on the modular tankless water heater technology. On
      January 16, 2007, the Company was advised that its wholly owned subsidiary,
      ION
      Tankless, Inc., received US Patent No. 7,164,851 entitled "Modular Tankless
      Water Heater Control Circuitry and Method of Operation" as issued and published
      by the United States Patent and Trademark Office. Additionally, ION
      has
      further been notified that another patent has been allowed in connection with
      its thick film on steel heating technology developed in connection with the
      Paradigm research initiative. SKYE expects that such patent will be published
      in
      due course. While
      there can be no assurances that the other patents sought will be granted or
      that
      the technology will be considered proprietary to SKYE or ION, the Company
      believes that its applications are meritorious and will be granted at least
      in
      part. It is expected that further research and development undertaken by the
      Company through its subsidiary, ION Tankless, Inc., will result in the issuance
      of more patents. However, there is no guarantee that the concepts and
      technologies we use in the future will be patentable.





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





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





**Policing
      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.


28




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




**Disaster.**





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




**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.




29


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




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




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




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




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




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




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





**Dilution
      and Board Action To Ratify Prior Share Issuances.**




As
      at
      December 31, 2006 the Company had 21,622,243 shares issued and outstanding.
      If
      the Company issues additional shares either outright or through any future
      options or warrant programs, or if it requires additional financing, further
      dilution in value and in the percentage ownership will occur and the dilutive
      effect could be significant. On February 5, 2007, the Board of Directors passed
      a resolution to reaffirm and ratify the issuance of a total of 2,250,000 common
      shares (the “Disputed Shares”) to certain officers and consultants to the
      Company. Such Disputed Shares had previously been recorded as issued and
      outstanding and so the Board action will not increase the total issued shares
      as
      at the date of the Offering. The Disputed Shares are the subject of the
      Shareholder Derivative Action (as disclosed in “Item 3 - Legal Proceedings”)
      above. The Court’s determination of the validity of the Disputed Shares has, as
      of the date hereof, not been rendered. In the event the Disputed Shares are
      deemed to have been validly issued, such Disputed Shares will immediately vest
      to the current holders thereof.





**Restrictions
      on Transfer - No Public Market.**





The
      shares of common stock of the Company are currently traded on the NASD Bulletin
      Board under the ticker symbol “SKYY”. However, the Shares included in the Units
      are restricted pursuant to SEC Rule 144 of the Securities Act of 1933 (the
      “Act”) and there is presently no public or private market for such restricted
      Shares. The Shares issuable pursuant to this Private Placement may only be
      offered or sold pursuant to registration under or an exemption from the Act.
      The
      Units offered by this Private Placement are subject to an exemption from
      registration.


30


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




The
      Units
      have not been registered under the Act, as amended, or any State securities
      laws
      and are being issued under Section 4(2) of the Act and Rule 506 of Regulation
      D
      promulgated under the Act. The Shares sold in this Private Placement may not
      be
      sold or transferred except pursuant to an exemption from registration under
      the
      Act or State securities laws, or unless registered. There is no assurance that
      the Company will be able to affect any such registration or qualification for
      registration exemption and the Company makes no representations that it will
      file any such application for registration. No assurances can be made that
      the
      Shareholder will be able to find a willing buyer at a price that will enable
      the
      Shareholder to recover his investment. Moreover, because of the restrictions
      on
      transfer, a regular trading market will not develop for the Shares until such
      restrictions shall have expired as provided in SEC Rule 144. As a result, any
      investment in the Company’s Units will be highly illiquid. Prospective investors
      should be fully aware of the long-term nature of their investment in the
      Company. Accordingly, purchasers of the Units will need to bear the economic
      risk of their investment for an indefinite period of time. For the foregoing
      reasons, among others, a public market will not develop for the purchase and
      sale of the Units, and the Units may not be readily acceptable as collateral
      for
      loans. Consequently, if as a result of changed circumstances arising from an
      event not now contemplated, an Investor wishes to transfer the Units owned
      by
      him, he may find only a limited or no ability to transfer or sell the Units
      or
      the underlying shares issuable upon conversion.





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





We
      expect
      to incur losses for the foreseeable future **** and
      we
      may never become profitable. Although our current revenue model contemplates
      revenues from sale of products sufficient to break-even within 12 to 24 months
      from the date of this Private Placement Memorandum, there is no assurance that
      these revenues will occur. Because technology companies, even if successful,
      typically generate significant losses while they grow, we do not expect to
      generate profits for the foreseeable future, and we may never generate profits.
      In addition, we expect our expenses to increase significantly as we develop
      the
      infrastructure necessary to implement our business strategy. Our expenses will
      continue to increase as we:  hire
      additional employees; pursue research and development; expand our information
      technology systems; and lease and purchase more space to accommodate our
      operations.





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





In
      2002,
      Envirotech was named as a Defendant in a law suit filed in the U.S. District
      Court for the Southern District of Texas, Houston, Texas (Civil Action No.
      H-02-4782, David Seitz and Microtherm, Inc., vs. Envirotech Systems Worldwide,
      Inc., and Envirotech of Texas, Inc., the “Seitz Suit”). The Company is not
      directly affiliated with Envirotech of Texas, Inc., which was a distributor
      of
      Envirotech’s products. The suit alleges that Envirotech infringed patent rights
      of others and seeks damages and an order to cease and desist. Management
      believes the suit is without merit. The suit was stayed pending the disposition
      of the Chapter 11 Bankruptcy Petition filed by Envirotech in August 2004. On
      September 30, 2005, however, the Bankruptcy Court allowed the plaintiff to
      re-open the Seitz Suit and he has done so. The suit is in the discovery stage
      and the Company is vigorously engaged in the discovery process. On December
      5,
      2005, the Houston Court issued an injunction against Envirotech and its
      affiliated entities, including SKYE, enjoining them from further marketing,
      advertising or offering for sale, or accepting any orders for (i) the Envirotech
      ESI 2000 heater, (ii) any other heater, regardless of its model, using parts
      of
      the Model ESI 2000 heater, and (iii) any other heater, regardless of model
      number, utilizing in whole any part any technology embodied in the Model ESI
      2000 heater. At a hearing on May 18, 2006, the Court directed that discovery
      be
      expanded to include the technology and products of SKYE, including, specifically
      the *FORTIS* TM 
      and *Paradigm* TM 
      technologies. On July 26, 2006 Envirotech retained the Dallas, TX firm
      Hemingway, Hansen, LLP to continue the defense and prosecution of this
      litigation. At a subsequent hearing on February 28, 2007, the Court indicated
      that it would reconsider and modify the wording on the scope of the preliminary
      injunction. Additionally, the Court allowed Seitz to amend his complaint. Seitz
      filed his amended complaint attempting to expand the complaint to also cover
      Skye, Valeo and the FORTISTM  product. Skye and Valeo have filed motions to
      dismiss this amended complaint, and Envirotech has filed a ten count
      counterclaim against Seitz. Envirotech continues to aggressively defend the
      Seitz suit and will pursue this litigation to conclusion.





Except
      as
      described above, neither SKYE nor Envirotech is the subject of any other
      dispute, claim or lawsuit or threatened law suit alleging the violation of
      intellectual property rights of a third party. To the extent that the Company
      is
      alleged, or may in the future be alleged to have violated a patent or other
      intellectual property right of a third party, it may be prevented from operating
      its business as planned, and it may be required to pay damages, to obtain a
      license, if available, to use the patent or other right or to use a
      non-infringing method, if possible, to accomplish
      its objectives. Any of these claims, with or without merit, could subject the
      Company to costly litigation and the diversion of the Company’s technical and
      management personnel. If the Company incurs costly litigation and its personnel
      are not effectively deployed, the resulting expenses and management time losses
      will likely result in a significant impairment of the Company’s ability to
      achieve its business plan or achieve profitability from
      operations.


31




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




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





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





**Reliance
      on Management.**





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





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





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





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





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





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





·
            rapidly
                improve, upgrade and expand its business
                infrastructures;


·
            deliver
                products and services on a timely
                basis;


·
            maintain
                levels of service expected by clients and
                customers;


·
            maintain
                appropriate levels of staffing;


·
            maintain
                adequate levels of liquidity; and


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





Our
      business will suffer and may ultimately fail if the Company is unable to
      successfully manage its growth.  32


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




**Regulatory
      Factors.**





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





**Effects
      of Amortization Charges.** ****





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




**Dividend
      Policy.**





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





**Conflicts
      of Interest.**





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







**Tax
      Risks.**





There
      may
      be tax considerations, risks and uncertainties associated with an investment
      in
      the Company’s Shares. Prospective investors should consult their own tax
      advisors with respect to the tax considerations of making an investment in
      the
      Company.


33


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




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





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





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





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





**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.











34


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




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





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





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





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





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





At
      December 31, 2006, our accumulated deficit was in excess of $12 million. We
      have
      not been able to generate enough sales to cover our expenses and have survived
      only by raising funds through the sale of debt and equity securities. We must
      continue to raise funds in the near future to 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.





**Our
      future existence remains uncertain and the report of our auditors on our
      December 31, 2004; 2005 and 2006 financial statements contain a “going concern”
qualification.**





The
      report of the independent auditors on our financial statements for the years
      ended December 31, 2004 and 2005, includes an explanatory paragraph relating
      to
      our ability to continue as a going concern. We have suffered substantial losses
      from operations, require additional financing, 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. Management
      anticipates that financial statements for the year ended December 31, 2006
      will
      also contain a “going concern” qualification.





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





Financial
      statements as of and for the year ended December 31, 2006, and for the year
      ended December 31, 2005 are presented in a separate section of this report
      following Part IV.






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





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


35


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




On
      February 24, 2006, the registrant engaged Semple & Cooper, LLP to serve as
      the Company’s independent registered public accountants for the fiscal year
      ending December 31, 2005. The Company’s Board of Directors approved the
      engagement of Semple & Cooper.





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, 2005. 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.





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, 2004 and December 31, 2003 contained a separate paragraph
      stating: “The accompanying financial statements have been prepared assuming that
      the company will continue as a going concern. The Company has experienced losses
      since inception. This raises substantial doubt about the Company’s ability to
      continue as a going concern. The financial statements do not include any
      adjustments that might result from this uncertainty.” There were no other
      adverse opinions, disclaimers of opinions, or qualifications or modifications
      as
      to uncertainty, audit scope, or accounting principles.





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





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


36


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




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 and the subsequent interim period ending June 6,
      2006.






**ITEM
      8A.****CONTROLS
      AND PROCEDURES**





**Evaluation
      of disclosure controls and procedures**





Management,
      with the participation of our Chief Executive Officer and the Chief Financial
      Officer, carried out an evaluation of the effectiveness of our “disclosure
      controls and procedures” (as defined
      in the Exchange Act, Rules 13a-15(e) and 15-d-15(e)) as of the end of each
      of
      the periods covered by this report (the “Evaluation Date”). Based upon that
      evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
      concluded that, as of December 31, 2004, our disclosure controls and procedures
      were ineffective to ensure that the information we were required to disclose
      in
      reports that we file or submit under the Securities and Exchange Act of 1934
      is
      recorded, processed, summarized and reported within the time periods specified
      in Securities and Exchange Commission rules and forms. More specifically, the
      company identified a material weakness due to a lack of sufficient personnel
      with appropriate knowledge in U.S. GAAP and lack of sufficient analysis and
      documentation of the application of U.S. GAAP to transactions, including but
      not
      limited to equity transactions. During either of the years ended December 31,
      2005 and December 31, 2006, 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.





**Internal
      Control over Financial Reporting**





Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting for the Company. Management used the framework
      of conducting an extensive review of existing documentation and transactions
      to
      make that evaluation. As of December 31, 2004, the Company had a deficiency
      in
      internal controls over the application of current US GAAP principles.
      Specifically, an effective review of the Balance Sheet was not performed. As
      a
      result of the ineffective review, errors in the year-end 2004 were not detected
      prior to the issuance of the annual 2004 consolidated financial statements.
      This
      control deficiency resulted in the restatement of our annual 2004 consolidated
      financial statements as set forth in Form 10-KSB/A filed June 14, 2006.
      Management has concluded that this control deficiency constituted a material
      weakness that continued throughout 2005. There
      were changes in our internal controls implemented during the first quarter
      of
      2006, including, specifically, a process to review the balance sheet of the
      company by persons with significant experience with US GAAP principles.
      Additionally, internal controls were adopted to separate accounting tasks within
      the company so as to ensure the separation of duties between those persons
      who
      approve and issue payment from those persons who are responsible to record
      and
      reconcile such transactions within the Company’s accounting system. Such
      internal controls were implemented during the first quarter period ending March
      31, 2006, and ,accordingly, a s
      of the
      end of the first quarter 2006, management found the internal control over
      financial reporting to be effective ,
      with no
      material weaknesses. There were no changes in our internal control over
      financial reporting that occurred during our most recent fiscal quarter that
      have materially affected, or are reasonably likely to materially affect,
      internal control over financial reporting.





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




**ITEM
      8B.**  **OTHER
      INFORMATION**





None.








37


**PART
      III**





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





**Executive
      Officers and Directors**





As
      of the
      date of this filing, the Skye Board of Directors consists of the following
      members:





Mark
      D.
      Chester, Chairman.


Barry
      M.
      Goldwater, Jr., Director


Perry
      D.
      Logan, Director


Thadeus
      (Ted) F. Marek, Director


William
      S. Papazian, Director


Wesley
      G.
      Sprunk, Director





Mr.
      Ronald O. Abernathy serves as Skye’s Chief Executive Officer ,
      Treasurer and Chief Financial Officer. He
      has
      held his respective positions since November 17, 2006 when he succeeded Thomas
      Kreitzer who previously held these positions since 2001. Mark Chester became
      a
      director on September 19, 2005. William
      Papazian became a Director on February 13, 2006. Wesley
      Sprunk became a Director on May 11, 2006. Barry
      M.
      Goldwater, Jr. was appointed as a Director on July 12, 2006. Perry
      Logan and Ted Marek became Directors on January 30, 2007. The Board of Directors
      is currently fixed at seven members; however, as of the date of this report,
      only six persons comprise the current Board of Directors.





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.





The
      names, ages, and respective positions of the directors and executive officers
      of the Company as of January 31, 2007 are set forth below:




Ronald O.
              Abernathy
            62
            Chief Executive Officer,
              President, Treasurer, and Chief Accounting Officerof
              SKYEMark D. Chester,
              Esq.
            45
            Chairman and Director of
              SKYEGregg C. Johnson
            42
            Director of Valeo, ION
              and
              Envirotech; President, Chief Executive
              Officer and Secretary of Envirotech, Valeo and ION; and Executive VP
              and
              Secretary of SKYEWesley G. Sprunk
            70
            Director of SKYEBarry M. Goldwater, Jr.
            68
            Director of SKYEThadeus (Ted) F. Marek
            65
            Director of SKYEPerry D. Logan
            78
            Director of
              SKYE







38


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




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




Mark
      Chester, age 45, is a licensed attorney in the State of Arizona and former
      Chairman of the State Bar’s Securities Regulation Section and its Executive
      Council. He practices in Scottsdale at the law firm of Chester & Shein,
      P.C., which focuses on business and real estate transactions and litigation.
      Mr.
      Chester was formerly a shareholder at the Phoenix law firm of Gallagher and
      Kennedy where he represented local businesses, broker-dealers and homebuilders
      in arbitration, state and federal court, and administrative agency cases. He
      was
      a member of the Board of Arbitrators for the National Association of Securities
      Dealers and has served on numerous arbitration panels in a variety of securities
      industry disputes. Mr. Chester has had has matters before the SEC, NASD, the
      Arizona Securities Division and the NYSE. 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 resides in Scottsdale, Arizona and is President of Tire Service Equipment
      Mfg., Inc. and Saf-Tee Siping & Grooving, Inc. The main office for these
      companies is in Phoenix, Arizona with manufacturing plants in Alamogordo, New
      Mexico and Monticello, Minnesota. Tire Service Equipment Mfg., Inc./Saf-Tee
      Siping & Grooving, Inc. manufactures automotive wheel service equipment and
      recycling equipment. It markets these products in the U.S. and foreign countries
      and presently has 300+ distributors. Wes Sprunk is also a Board member with
      Amerityre Corporation, a NASDAQ public company (Nasdaq: AMTY) located in Boulder
      City, Nevada. Amerityre specializes in urethane polycomposites and the company’s
      mission is to replace rubber in most applications, including tires. Wes Sprunk
      is married to Jody Ann Zadra, and has three children.





*Perry
      D. Logan, Director and Member of Audit and Corporate Governance
      Committee*




Perry
      Logan, of Las Vegas, Nevada, is one of the original investors in Skye and is,
      at
      present, one of the Company's largest individual investors. His business career
      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. Mr. Logan is a substantial investor in several high technology
      ventures, in addition to Skye, and is well informed about the research and
      development programs of Skye and the new FORTIS product line it hopes to market
      this year. His vast business experience is considered a tremendous addition
      to
      Skye's already experienced Board of Directors.





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




Ted
      Marek, is the Principal and Designated Broker of Ted Marek Real Estate Co.,
      Inc.
      He is an active investor in Skye and other emerging companies. Ted has been
      active in the Phoenix market for over 30 years, all along building his
      reputation as a very knowledgeable and successful commercial real estate broker.
      He maintained this same stellar reputation in Chicago for over 10 years prior
      to
      moving to the Valley. To date most of the company's client base has been grown
      and generated from referrals. In addition to his vast experience and knowledge
      of land area sales, he is recognized nationally by many professionals in the
      automotive real estate industry as someone who really understands this unique
      market. He has been very instrumental in the movement and placement of
      automotive dealerships, site selection, sales and acquisition in the Phoenix
      Metro area. In 1975 Ted was employed by Del Webb Realty & Management Corp in
      Phoenix as a real estate broker and in 1983 he resigned from the position of
      Vice President and Designated Broker. Prior to his affiliation with Del Webb,
      Ted was active in the automotive industry in both the Phoenix and Chicago
      markets.





*Barry
      M. Goldwater, Jr., Director - Member of Corporate Governance
      Committee*





The
      Goldwaters are legendary in Arizona. Barry's great-grandfather, Mike Goldwater,
      emigrated from Poland to the United States in the 1840s, landing in San
      Francisco. In 1850 he began a mercantile business traveling by wagon throughout
      mining camps in California, Nevada, and Arizona. He settled that year in
      Prescott, Arizona, where he opened his first dry goods store, which through
      the
      efforts of his sons Baron and Morris and grandsons, Bob and Barry, would expand
      into a tremendously successful clothing business. Like his father before him,
      Barry, Jr. worked in the family business, planning to accede to management.
      However, about the time he graduated from Arizona State University with a
      bachelor of science in marketing and management, the stores were sold, leaving
      Barry with a decision to make about his future.




39


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




Barry
      moved to Los Angeles and became a stockbroker, and eventually a partner, in
      the
      Los Angeles securities firm of Noble Cook, Inc. (now Wedbush Securities), where
      he developed an institutional customer base and traded securities on all stock
      exchanges. It was here he developed his selling skills and eventually landing
      some of the country's largest financial banks and insurance companies as
      clients. He also became knowledgeable in financial planning, securities law,
      and
      underwriting.




The
      year
      1964 found Barry, Jr. crisscrossing the country campaigning for his father,
      Senator Barry Goldwater, to become President of the United States. The outcome
      of that effort is well known, but its impact on Barry is not. It set the pattern
      of public service that he would soon undertake.




Already
      involved in local civic activities such as the Boys Club, Big Brothers, the
      Boy
      Scouts of America, and the president of a local Lions Club, Barry at the age
      of
      30 ran for Congress and won. He not only won that election but seven more,
      serving 14 years in Washington, D.C., representing half a million constituents
      of northern Los Angeles County. He and his father were unique, representing
      one
      of the few instances in U.S. history when both father and son were serving
      in
      Congress at the same time.




Barry's
      14 years in Washington (1969-1984) left an imprint on him and on the nation.
      He
      served on a number of committees, including Committee on Science and Technology,
      Committee on Public Works and Transportation, and the Joint Committee on Energy.
      His areas of expertise included energy, the space program, aviation and defense,
      and government procurement. He was on the committee that reviewed the disaster
      involving the space shuttle "Challenger”. Barry authored and saw the Privacy Act
      of 1974 signed into law. He served on the privacy Commission that looked into
      privacy issues affecting the private and corporate sectors. This issue remains
      a
      matter of his concern as we move into a global electronic network and
      information systems. He was very instrumental in all facets of energy policy
      and
      research and development including authoring the Solar Photovoltaic Act. He
      has
      also been involved with organizations as diverse as the National Aeronautic
      Association, the National Wildlife Federation, and the Veterans of Foreign
      Wars
      of the United States. He is a Life Member of the American Numismatic
      Association. He is also looked upon as an expert concerning transportation
      matters.




Congressman
      Barry Goldwater, Jr. retired from politics in 1983 and in1984 entered business
      in Beverly Hills, Los Angeles, New York and Phoenix where he currently lives
      with his wife Sylvia Goldwater and near his son Barry M. Goldwater III. For
      the
      past 23 years Barry has held responsible positions involving finance and
      management, including eight years as a member of the New York Stock Exchange.
      He
      has used his government experience and knowledge like a knife to pry open and
      get to the heart of a problem effecting business impacted by regulation or
      law.
      His love of business is only surpassed by his humanitarian interests which
      have
      landed him awards such as the Leadership Award from the President's Commission
      on Employment of the Handicapped and an Achievement Award from the National
      Academy of Television Arts and Sciences. His business career has not diminished
      his compassion for the people and his commitment to making this a better and
      safer world in which we live.





*William
      S. Papazian, Director and Member of Audit Committee*





William
      Papazian has been practicing law since 1986, specifically in the areas of
      corporate securities, regulatory and transactional work. In addition, since
      2001, he has been the President, Chief Executive Officer and General Counsel
      of
      Spinelli Corporation, a privately-held litigation support and investigative
      firm
      located in Scottsdale, Arizona. Prior to that, he spent seven years as a Board
      Director, Executive Vice President and General Counsel of a public company
      that
      developed and managed projects in the hospitality and gaming sectors. Mr.
      Papazian received his Juris Doctor degree from McGeorge School of Law,
      University of Pacific in 1986 and his Bachelor of Arts degree from New York
      University in 1983. He has been backgrounded and licensed by several federal
      and
      state regulatory agencies.





*Ronald
      O. Abernathy, President & CEO, Treasurer and Chief Accounting
      Officer*




Mr.
      Abernathy is a seasoned entrepreneur and businessman who gained a wealth of
      business experience from his international transactional practice over the
      past
      30 years. From his beginnings as a pointman in the 173 rd airborne
      brigade where he received a Gold Star for military merit, to a position with
      the
      United Nations in New York, Mr. Abernathy later began his international business
      career as a free-lance entrepreneur completing a series of brokered transactions
      in Switzerland, and around the globe. In 1993 Mr. Abernathy became the President
      and CEO of Scottsdale, Arizona based U.S. Machinery, and in a joint venture
      with
      McDonald-Douglas, completed various international off-set trade programs valued
      in excess of $1 billion.


40


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




Mr.
      Abernathy is currently the President and CEO of Abernathy, Warburg & Hall, a
      Business Consulting and Marketing Strategies firm, a position he has held for
      over 10 years. Amongst his other business ventures, Mr. Abernathy is currently
      working with G.E. Capital to acquire a Major League BaseballTM  team, a
      project that has been on-going for more than one year. In 2001 Mr. Abernathy
      was
      the first American ever elected as President of the International Nigerian
      Chamber of Commerce, a position he held until 2003.





Outside
      of his business ventures, Mr. Abernathy is engaged in philanthropic pursuits
      through his appointment to the Board of Directors of the World Children’s Fund,
      a charitable foundation formed by Arizona based law firm of Lodmell &
Lodmell. Mr. Abernathy has had many years of political involvement, and he
      was
      recently nominated as Republican of the Year for the State of Arizona by the
      Bush Administration. Mr. Abernathy is also a member of the Republican Governors
      Association’s Team 1000 - a group of Republican business leaders committed to
      creating business and economic opportunities in the United States.





*Gregg
      C. Johnson, Executive Vice President, Secretary and Interim General
      Counsel*





Gregg
      Johnson is a lawyer (not admitted in AZ) with extensive experience in management
      of entrepreneurial companies. He received his law degree in 1988 from Osgoode
      Hall Law School in Toronto, Canada and was admitted as a lawyer in Alberta
      in
      1989. His extensive legal career has included private practice in Tokyo, Japan
      with Aoki, Christensen & Nomoto (now Baker & McKenzie), where his
      practice focused on Japanese securities regulation and international debt
      instruments, and in Jeddah, Saudi Arabia, with the Law Offices of Dr. Mujahid
      M.
      Al-Sawwaf, where he acted as Outside Middle East Counsel to many fortune 500
      companies. His career has included experience in corporate finance and venture
      capital for emerging growth companies across Canada and the United States.
      He
      was instrumental in building and growing many successful companies and he has
      been an officer and director of numerous Canadian and U.S. public companies
      over
      his career. Additionally Mr. Johnson was elected as a Councilor and later as
      Reeve (Mayor) of Red Deer County, AB from October 1998 to October 2004. In
      October 2004 Mr. Johnson was appointed as an Appeals Commissioner
      (Administrative Law Judge) with the Alberta Appeals Comission. His appointment
      as an Appeals Commissioner expires April 30, 2007.





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





Section
      16(a) of the Securities Exchange Act of 1934 requires executive officers and
      directors, and persons who beneficially own more than 10% of any class of the
      Registrant’s equity securities to file initial reports of ownership and reports
      of changes in ownership with the Securities and Exchange Commission (“SEC”).
      Executive officers, directors and beneficial owners of more than 10% of any
      class of the Registrant’s equity securities are required by SEC regulations to
      furnish the Registrant with copies of all Section 16(a) forms they
      file.





Based
      solely on a review of the copies of such forms furnished to the Registrant
      during or with respect to fiscal 2006, and certain written representations
      from
      executive officers and directors, the Registrant is aware that Messrs
      Chester and
      Papazian inadvertently failed to file a Form 3 at the time of their election to the
      Board. They are in the process of preparing those forms and obtaining the
      required EDGAR ID’s.





**Code
      of Ethics**





The
      Company maintains a Code of Ethics that was filed with its Annual Report on
      Form
      10-KSB for 2003 filed on April 22, 2004. That code applies to the chief
      executive, financial and accounting officers, controller and persons performing
      similar functions. If the Company amends the code or grants a waive from the
      code with respect to the foregoing persons, it will post that amendment or
      waiver on its website, www.skye-betterliving.com .





**Audit
      Committee**





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


41


**ITEM
      10.****EXECUTIVE
      COMPENSATION**





The
      following table sets forth information about the remuneration of the Company’s
      officers.





**SUMMARY
      COMPENSATION TABLE**


**Name
                and Principal Position**
            **Annual
                Compensation**
            **Long
                Term Compensation**
            **All
                Other Compensa-tion($)****Awards**
            **Payouts****Fiscal**
              **Year**
            **Salary
                ($)**
            **Bonus
                ($)**
            **Other
                Annual Compensation ($)**
            **Restricted
                Stock Award(s)**
              **($)**
            **Securities
                Under-lying Options/**
              **SARs
                (#)**
            **LTIP**
              **Payouts**
              **($)**Thomas
                Kreitzer,
              Chief
                Executive Officer, Treasurer and
              Chief
                Financial Officer
            2005
              2006
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            $17,500
              $-0-
            -0-
              -0-
            -0-
              -0-
            $6,000
              $10,800David Kreitzer,
              President
            2005
              2006
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            $7,000
              -0-
            -0-
              -0-
            -0-
              -0-
            $6,000
              -0-Gregg
              Johnson,
              Exec
                VP & Secretary
            2005
              2006
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            $80,000
              $15,000
            -0-
              -0-
            -0-
              -0-
            $48,150
              $88,496
                (2)Kenneth
              Pinckard,
              Vice
                President, Valeo(1)
            2005
              2006
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            $109,900
                (1)
              $100,500
                (1)
            -0-
              -0-
            -0-
              -0-
            $72,000
                (1)
              $-0-
                (1)Ronald
                Abernathy, President
            2005
              2006
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-


(1)
      Kenneth Pinckard became a vice president of Valeo in February 2005 and served
      in
      such capacity until February 2006. He was not compensated directly as an
      executive. All payments reflected in this table were made to Digital Crossing,
      LLC, pursuant to a consulting agreement. Kenneth Pinckard is an employee or
      consultant of Digital Crossing. The Company has no information concerning how
      much compensation Mr. Pinckard received from Digital Crossing relating to the
      services rendered by him to the Company. Excludes amounts owing to Digital
      Crossing but unpaid at Decemebr 31, 2006.





(2)  Excludes
      $16, 504 in accrued but unpaid compensation at December 31, 2006.








42


**ITEM
      10.****EXECUTIVE
      COMPENSATION** - **continued**




**Employment** **and Consulting** **Agreements**





The
      Company has entered into consulting agreements with Sundance Financial Corp.,
      Digital Crossing, LLC, and Gregg C. Johnson. Copies of those agreements,
      together with any amendments thereto, are attached as Exhibits 10.5, 10.6 and
      10.9, respectively, to the Company’s Form 10-KSB filed for the FYE December 31,
      2005.





The
      consulting agreements with Sundance and Digital Crossing commenced February
      1,
      2004 and will terminate on January 31, 2008. As amended, each provides for
      payments in the amount of $10,000 per month, with the Company having the option
      to pay any fee in excess of $5,000 per month, in the form of common stock of
      the
      Company. In addition, each of the agreements provides for the issuance of shares
      of common stock as additional compensation, including 750,000 shares issued
      pursuant to amendments dated September 6, 2005, and grants options to purchase
      300,000 shares of common stock at any time prior to February 11, 2014 at a
      price
      of $0.55 (See Exhibits 10.7 and 10.8 attached to the Company’s Form 10-KSB for
      the FYE December 31, 2005). At December 31, 2006, the Company was delinquent
      with respect to payments owing under these agreements and has accrued the
      following amounts: Sundance, $208,900; Digital Crossing, $169,336.





The
      consulting agreement with Gregg C. Johnson, who is secretary and Executive
      Vice
      President for the Company, provides for the payment of a monthly fee in the
      amount of $10,000. As additional compensation, Mr. Johnson has been issued
      750,000 shares of common stock of the Company. The agreement with Mr. Johnson
      commenced August 2004 and continues until July 31, 2007 (See Exhibit 10.9 to
      the
      Company’s Form 10-KSB filed for theFYE Decemebr 31, 2005). As of December 31,
      2006 the Company was delinquent in the payment of $16,504 in salary and fees
      to
      Mr. Johnson. Effective March 15, 2007, the Company has entered into a short-term
      Memorandum of Understanding with Mr. Johnson that specifies an annual Salary
      of
      $120,000 pending commencement of production and sales of the FORTISTM 
product line (See Exhibit 10.13 attached to this Report). Upon the commencement
      of FORTISTM  product sales the Company expects it will enter into a longer
      term employment agreement to retain Mr. Johnson.





The
      plaintiffs in the Shareholder Derivative Action (see Item 3, Legal Proceedings
      above) contest, among other things, the validity of the consulting agreements
      discussed above.





**Compensation
      of Directors and Officers**





Each
      Director is entitled to receive 10,000 restricted common shares for each quarter
      year of service to the Company. Additionally,  the
      Company grants options on an annual basis to directors. Directors are currently
      entitled to receive 50,000 options for each year of service to the Company.
      Options issued in 2006 are valid for a period of 5 years and entitle the holder
      to purchase common shares at $0.50. The Board of Directors has not yet
      determined the pricing of options to be issued in 2007. From time to time the
      Board of Directors also grant options to officers and consultants that provide
      services to the Company. Typically such options are valid for a period of three
      to five years and are priced at or above the market.





From
      time
      to time the Company may grant stock, options or stock appreciation rights (SARs)
      to certain persons in connection with services provided to or for the benefit
      of
      the Company. In most cases such equity grants are dilutive to the interests
      of
      shareholders and such dilution may be substantial. The Board of Directors of
      the
      Company has absolute discretion in the issuance of such equity grants and
      therefore your interests as a shareholder are subject to the business judgment
      of the Board of Directors of the Company in making such discretionary
      grants.





43




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




The
      following table sets forth certain information, as of March 30, 2007, 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)**Sundance
                Financial Corp.
              13470
                N. 85th Place
              Scottsdale,
                AZ 85260
            1,350,000
                (3) direct
            6.24%Digital
                Crossing, LLC
              13835
                N. Tatum Blvd., Ste. 9-170
              Phoenix,
                AZ 85032
            1,347,000
                (4) direct
            6.23%Mark
                D. Chester
              8777
                N. Gainey Center Dr., Suite 191
              Scottsdale,
                AZ 85258
            540,000
                (5,6)
              direct
            2.50%Ronald
                O. Abernathy
              7650
                E, Evans Rd.
              Suite
                C
              Scottsdale,
                AZ 85260
            50,000
              (6)
                direct
            0.23%Barry
                M. Goldwater, Jr.
              3104
                E. Camelback, #274
              Phoenix,
                AZ 85016
            70,000
              (6)
                direct
            0.32%Gregg
                C. Johnson
              6081
                West Park Ave.
              Chandler,
                AZ 85226
            878,857
                direct
            4.06%William
                S. Papazian
              4901
                E. Calle Del Medio
              Phoenix,
                AZ 85018
            90,000
              (6)
                direct
            0.42%Perry
                D. Logan
              PO
                Box 35080.
              Las
                Vegas, NV 89144
            1,322,666
              (6)
                direct
            6.12%Ted
                F. Marek
              2425
                E. Camelback Rd.,
              Suite
                1060.
              Phoenix,
                AZ 85016
            370,000
              (6)
                direct
            1.71%Wesley
                G. Sprunk
              3451
                S. 40thSt.
              Phoenix,
                AZ 85040
            222,855
                (5)(6) direct
            1.03%**Officers
                and Directors as a group (8 persons)**
            **3,544,378**
            **16.39%**




44




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




(1)
            To
                the Company’s knowledge, except as set forth in the footnotes to this
                table and subject to applicable community property laws, each person
                named
                in the table has sole voting and investment power with respect to
                the
                shares set forth opposite the person’s name.




(2)
            This
                table is based on21,622,243shares
                of Common Stock outstanding as of December 31, 2006. If a person
                listed on
                this table has the right to obtain additional shares of Common Stock
                within ninety (90) days from December 31, 2006, the additional shares
                are
                deemed to be outstanding for the purpose of computing the percentage
                of
                class owned by that person, but are not deemed to be outstanding
                for the
                purpose of computing the percentage of any other
                person.




(3)
            Sundance
                Financial Corp., and affiliated persons own 1,080,000 shares of Common
                Stock of the Company. Lawrence G. Ryckman is a director of Sundance
                Financial Corp. Sundance has the right to acquire up to 300,000 shares
                of
                common stock pursuant to Options granted February 2004 at any time
                prior
                to February 11, 2009, at an exercise price of $0.55 per
                share.




(4)
            Digital
                Crossing LLC, a Delaware limited liability company, owns 1,047,000
                shares
                of Common Stock of the Company. Digital Crossing has the right to
                acquire
                up to 300,000 shares of common stock pursuant to Options granted
                February
                2004 at any time prior to February 11, 2009, at an exercise price
                of $0.55
                per share.




(5)
            Including
                140,000 common shares and 200,000 options to purchase common shares
                at
                $0.50 per share that have been approved by the Board but unissued
                as at
                the date of this Report.




(6)
            Includes
                50,000 options to purchase common shares at $0.50 per share and 10,000
                restricted common shares granted for each quarter of service as a
                Director; includes option to Ronald Abernathy to purchase 50,000
                shares at
                $0.50 per share.









**Section
      16(A) beneficial ownership reporting compliance**




Section
      16(a) of the Securities Exchange Act of 1934 requires the company's directors,
      executive officers and persons who own beneficially more than ten percent of
      our
      common stock, to file reports of ownership and changes of ownership with the
      SEC. Based solely on the reports received by the company and on written
      representations from certain reporting persons, we believe that the directors,
      executive officers and greater than ten percent beneficial owners have complied
      with all applicable filing requirements.




Information
      on Equity Compensation Plans is noted in “Item 5. Equity Compensation Plans”
above.





45





**ITEM
      12.****CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




Other
      than as disclosed below, none of the Company’s present directors, officers or
      principal shareholders, nor any family member of the foregoing, nor, to the
      best
      of the Company’s information and belief, any of its former directors, senior
      officers or principal shareholders, nor any family member of such former
      directors, officers or principal shareholders, has or had any material interest,
      direct or indirect, in any transaction, or in any proposed transaction which
      has
      materially affected or will materially affect the Company.




**Accrued
      Salaries and other Expenses to Officers and Directors**







During
      the year ended December 31, 2006 and 2005, the Company had incurred the
      following charges with directors and officers of the Company or companies with
      common directors:





2005
            
            
            2004General
                and Administrative
            
            
            
            
            $
            $AccountingConsulting
            
            
            255,800
                (1
            )
            
            260,950
                (1
            )RentSalaries$
            255,800
            
            $
            260,950


______________


(1)
                Includes payments made or owing to Digital Crossing, LLC, pursuant
                to
                consulting agreement. Kenneth Pinckard is an employee or consultant
                of
                Digital Crossing. The Company has no information concerning how much
                compensation Mr. Pinckard received from Digital Crossing relating
                to the
                services rendered by him to the
                Company.





These
      charges were measured by the exchange amount, which is the amount agreed upon
      by
      the transacting parties and include amounts paid to persons who were officers
      or
      directors of the Company or any of its affiliates at any time during the
      respective fiscal years, even amounts paid prior to the time when they may
      have
      taken office.








**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.


46


**ITEM
      13.****EXHIBITS.**







**Regulation**


**S-B
      Number**  **Exhibit**





2.1
            Agreement
                of Share Exchange and Plan of Reorganization dated November 4, 2003
                (1)


3.1
            Articles
                of Incorporation of Amexan, Inc (2)


3.2
            Articles
                of Amendment of Articles of Incorporation of Amexan, Inc.
                (2)


3.3
            Articles
                of Amendment of Articles of Incorporation of Nostalgia Motors, Inc.
                (3)


3.4
            Articles
                of Amendment of Articles of Incorporation of Elution Technologies,
                Inc.
                (4)


3.5
            Articles
                of Amendment of Articles of Incorporation of Tankless Systems Worldwide,
                Inc.


3.6
            Bylaws,
                as Amended (5)


4.1
            Form
                of Notes issued in 2004 and 2005 Private Placement Offerings


10.1
            2003
                Stock Incentive Plan (6)


10.2
            2003
                Stock Incentive Plan #2 (7)


10.3
            2005
                Stock Incentive Plan (8)


10.4
            Manufacturing
                Services Agreement between Jabil Circuit, Inc., and Skye International,
                Inc. (9)


10.5
            Consulting
                Agreement between Skye International, Inc., and Sundance Financial
                Corp,
                including amendments


10.6
            Consulting
                Agreement between Skye International, Inc., and Digital Crossing,
                LLC,
                including amendments


10.7
            Stock
                Option Agreement between Skye International, Inc., and Sundance Financial
                Corp., including amendments


10.8
            Stock
                Option Agreement between Skye International, Inc., and Digital Crossing,
                LLC, including amendments


10.9
            Personal
                Services Consulting Agreement between Skye International, Inc., and
                Gregg
                C. Johnson #


10.10
            Employment
                Agreement between Eric Stebbins and Skye International, Inc.


10.11
            Separation
                Agreement between Michael Stebbins and Skye International, Inc.


10.12
            Patent
                Issued May 16, 2006, by the United States Patent and Trademark Office
                relating to a design of a “Modular Tankless Water Heater” as Patent No.
                7,046,922. (10)


10.13
            Memorandum
                of Understanding between Skye and Gregg C.
                Johnson*#


10.14
            Patent
                Issued August 8, 2006, by the United States Patent and Trademark
                Office
                relating to a method for a “Modular Tankless Water Heater” as Patent No.
                7,088,915. (11)


10.15
            Patent
                Issued January 16, 2007, by the United States Patent and Trademark
                Office
                entitled "Modular Tankless Water Heater Control Circuitry and Method
                of
                Operation" as Patent No. 7,164,851
                (12)


10.16


10.17


14.1
            Code
                of Ethics (13)


16.1
            Letter
                from Shelley International, CPA
                (14)


16.2
            Letter
                from Semple & Cooper, CPA (15)


21.1
            Subsidiaries
                of Skye International, Inc.


23.1
            Consents
                of Moore and Associates, Chartered
                *


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


32.1
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 of Chief Executive Officer and Chief
                Financial Officer *





*
      Filed
      with this Annual Report


#
      Relates
      to executive compensation




47




**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-QSB, filed October 5, 1999.


(3)
            Incorporated
                by reference to the exhibits to the registrant’s annual report on Form
                10-KSB for the fiscal year ended December 31, 2002, filed May 15,
                2003


(4)
            Incorporated
                by reference to the exhibits to the registrant’s quarterly report on Form
                10-QSB for the fiscal quarter ended June 30, 2003, filed August 21,
                2003.


(5)
            Incorporated
                by reference to the exhibits to the registrant’s annual report on Form
                10-KSB for the fiscal year ended December 31,
                2002.


(5)
            Incorporated
                by reference to the exhibits to the registrant’s current report on Form
                8-K, filed February 24, 2006.


(6)
            Incorporated
                by reference to the exhibits to the registrant’s registration statement on
                Form S-8, file number 333-108728, filed September 12,
                2003.


(7)
            Incorporated
                by reference to the exhibits to the registrant’s registration statement on
                Form S-8, file number 333-111348, filed December 19,
                2003.


(8)
            Incorporated
                by reference to the exhibits to the registrant’s registration statement on
                Form S-8, file number 333-123663, filed March 30,
                2005.


(9)
            Incorporated
                by reference to the exhibits to the registrant’s current report on Form
                8-K, filed February 23, 2006


(10)
            Incorporated
                by reference to the exhibits to the registrant’s current report on Form
                8-K, filed May 30, 2006


(11)
            Incorporated
                by reference to the exhibits to the registrant’s current report on Form
                8-K, filed August 10, 2006


(12)
            Incorporated
                by reference to the exhibits to the registrant’s current report on Form
                8-K, filed January 17, 2007


(13)
            Incorporated
                by reference to the exhibits to the registrant’s annual report on Form
                10-KSB for the fiscal year ended December 31, 2003, filed April 22,
                2004.


(14)
            Incorporated
                by reference to the exhibits to the registrant’s current report on Form
                8-K/A, filed March 7, 2006.


(15)
            Incorporated
                by reference to the exhibits to the registrant’s current report on Form
                8-K, filed July 23, 2006.





**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.**





On
      February 24, 2006, Shelley International, CPA (“Shelley”) withdrew as the
      registrant’s independent registered public accounting firm, since the firm’s
      principal retired. Shelley had audited the Company’s financial statements for
      the fiscal years ended December 31, 2004 and 2003. On February 24, 2006, Semple
      & Cooper, LLP was engaged to serve as the Company’s independent public
      accountants for the fiscal year ending December 31, 2005. On June 2, 2006,
      Semple and Cooper, LLP, withdrew as auditor for the Company and Moore and
      Associates, Chartered was engaged to serve as the Company’s independent public
      accountants for the fiscal year ended December 31, 2005 and with respect to
      the
      restatement of financial statements for the fiscal year ended December 31,
      2004.





**Audit
      Fees**





Moore
      and
      Associates, Chartered, is expected to bill $7,500 for the audit of the 2006
      annual financial statement. For the fiscal year ended December 31, 2005, Moore
      and Associates, Chartered billed $7,500 for the 2005 annual audit and $7,500
      for
      the review of the 1 st ,
      2 nd and
      3 rd quarter
      financial statements. Shelley international billed $10,000 for the audit of
      the
      annual financial statements for the fiscal year ended December 31, 2004 and
      $18,000 for the review of Form 10-QSB filings during the 2004 period; and $5,200
      in connection with the restatement of the financial statements for the fiscal
      year ended December 31, 2004.





**Audit-Related
      Fees**





There
      were no fees billed for services reasonably related to the performance of the
      audit or review of our financial statements outside of those fees disclosed
      above under “Audit Fees” for fiscal years 2005 and 2004.




**Tax
      Fees**





There
      were no fees billed for tax compliance, tax advice, and tax planning services
      for the fiscal years ended December 31, 2006 and 2005.





**All
      Other Fees**





There
      were no fees billed for other services for the fiscal years ended December
      31,
      2006 and 2005.





**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.


48


**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
              2, 2007
            By:
            /s/ Ronald
              O.
              AbernathyRonald
              O. AbernathyTitle 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/
                Ronald O. Abernathy
            
            Chief
                Executive Officer, Treasurer and Chief Financial Officer
            
            April
                2, 2007Ronald
                O. Abernathy/s/ Mark
              D. Chester
            
            Director
                and Chairman
            
            April
              2, 2007Mark
                D. Chester/s/ Perry
              D. Logan
            
            Director
            
            April
              2, 2007Perry D. Logan/s/ Thadeus
              (Ted) F. Marek
            
            Director
            
            April
              2, 2007Thadeus (Ted) F. Marek/s/ Wesley
              G. Sprunk
            
            Director
            
            April
              2, 2007Wesley G. Sprunk/s/ Barry
              M. Goldwater, Jr.
            
            Director
            
            April
              2, 2007Barry M. Goldwater, Jr.






49


**ANNEX
      A**





**SKYE
      INTERNATIONAL, INC., AND SUBSIDIARIES**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Page No.**REPORTS OF INDEPENDENT
              REGISTERED PUBLIC ACCOUNTING FIRMS
            F-2, F-3CONSOLIDATED FINANCIAL
              STATEMENTS:CONSOLIDATED BALANCE SHEETS
            F-4CONSOLIDATED STATEMENTS OF
              OPERATIONS
            F-5CONSOLIDATED STATEMENTS OF STOCKHOLDER
              DEFICIT
            F-6CONSOLIDATED STATEMENTS OF CASH
              FLOW
            F-7NOTES TO CONSOLIDATED FINANCIAL
              STATEMENTS
            F-8-
              F-18






























F-1


**MOORE
          & ASSOCIATES, CHARTERED**
 ****** ***ACCOUNTANTS
          AND ADVISORS***
 ***PCAOB
          REGISTERED***
 
 
 
 
 
 **CONSENT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 
 We
          consent to the use, in the statement on Form 10KSB of Skye International
          Inc and
          Subsidiaries, of our report dated April 6, 2007 on our audit of the financial
          statements of Skye International Inc and Subsidiaries as of December 31,
          2006
          and 2005 ,
          and the
          related statements of operations, stockholders’ equity and cash flows for the
          years then ended ,
          and the
          reference to us under the caption “Experts.”
 
 
 
 
 
 
 
 
 ***/s/
          Moore & Associates, Chartered***
 Moore
          & Associates Chartered
 Las
          Vegas, Nevada
 April
          6,
          2007
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 *2675
          S. Jones Blvd. Suite 109, Las Vegas, NV 89146 (702)253-7511 Fax (702)253-7501*




F-2




**MOORE
        & ASSOCIATES, CHARTERED**
 ** *ACCOUNTANTS
        AND ADVISORS*
 *PCAOB
        REGISTERED*
 
 
 REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
        the
        Board of Directors
 Skye
        International Inc
 Las
        Vegas, Nevada
 
 We
        have
        audited the accompanying balance sheets of Skye International Inc as of December
        31, 2006, and the related statements of operations, stockholders’ equity and
        cash flows for the year then ended. These financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these financial statements based on our audits.
 
 We
        conducted our audits in accordance with standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Skye International Inc as of
        December 31, 2006 and the results of its operations and its cash flows for
        the
        year then ended, in conformity with accounting principles generally accepted
        in
        the United States of America.
 
 The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note 7 to the financial
        statements, the Company’s net losses and accumulated deficit of $ 12,527,800 as of
        December 31, 2006 and working capital deficit of $ 3,185,115 as of
        December 31, 2006 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
        6,
        2007
 
 
 
 *2675
        S. Jones Blvd. Suite 109, Las Vegas, NV 89146 (702) 253-7511 Fax (702)
        253-7501*




F-3


**Skye
                      International, Inc. and Subsidiaries****CONSOLIDATED
                      BALANCE SHEETS**December
                      31,
                  
                  
                  December
                      312006
                  
                  
                  2005**ASSETS**CURRENT
                      ASSETSCash
                  
                  $
                  8,672
                  
                  $
                  2,711Accounts
                      Receivable, net
                  
                  
                  -
                  
                  
                  2,773Inventory
                  
                  
                  163,062
                  
                  
                  25,069Prepaid
                      Expenses
                  
                  
                  99,379
                  
                  
                  757Total
                      Current Assets
                  
                  
                  271,113
                  
                  
                  31,310EQUIPMENT,
                      NET
                  
                  
                  43,921
                  
                  
                  56,626OTHER
                      ASSETSDeposits
                  
                  
                  -
                  
                  
                  20,000Total
                      Other Assets
                  
                  
                  -
                  
                  
                  20,000Total
                      Assets
                  
                  $
                  315,034
                  
                  $
                  107,936**LIABILITIES
                      AND STOCKHOLDERS' EQUITY (DEFICIT)**LIABILITIESAccounts
                      Payable
                  
                  $
                  2,160,624
                  
                  $
                  234,557Accrued
                      Expenses
                  
                  
                  31,132
                  
                  
                  870,914Notes
                      Payable
                  
                  
                  1,053,615
                  
                  
                  1,118,241Accrued
                      Interest Payable
                  
                  
                  72,917
                  
                  
                  81,626Warranty
                      Accrual
                  
                  
                  34,570
                  
                  
                  34,570Customer
                      Deposits
                  
                  
                  103,371
                  
                  
                  103,3713,456,228
                  
                  
                  2,443,279Total
                      Liabilities
                  
                  
                  3,456,228
                  
                  
                  2,443,279STOCKHOLDERS'
                      EQUITYCommon
                        Stock: 100,000,000 shares authorized
                        at $0.001par value;Issued
                      and outstanding 21,622,243 and 17,838,231 shares,
                      respectively
                  
                  
                  21,622
                  
                  
                  17,838Common
                      Stock Subscribed
                  
                  
                  108,675
                  
                  
                  275,000Paid
                      in Capital
                  
                  
                  9,256,308
                  
                  
                  7,436,333Accumulated
                      Deficit
                  
                  
                  (12,527,800
                  )
                  
                  (10,064,513
                  )Total
                      Stockholders' Equity (Deficit)
                  
                  
                  (3,141,194
                  )
                  
                  (2,335,342
                  )TOTAL
                        LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
                  
                  $
                  315,034
                  
                  $
                  107,937The
                      accompanying notes are an integral part of these
                      statements.


F-4




**Skye
                  International, Inc. and Subsidiaries****CONSOLIDATED
                  STATEMENTS OF OPERATIONS**Years
                  Ended December 31,2006
              
              
              2005REVENUESProduct
                   Sales
              
              $
              2,071
              
              $
              172,169Other
                  Income
              
              
              194,269
              
              
              255Total
                  Revenues
              
              
              196,341
              
              
              172,424Cost
                  of Goods Sold
              
              
              28,357
              
              
              172,651Gross
                  Profit
              
              
              167,984
              
              
              (226
              )EXPENSESLegal
                  and Professional
              
              
              1,772,479
              
              
              2,083,975General
                  and Administrative
              
              
              586,582
              
              
              1,253,029Research
                  and Development
              
              
              26,878
              
              
              447,657Advertising
                  and Marketing
              
              
              190,906
              
              
              44,147Depreciation
              
              
              9,870
              
              
              33,755Total
                  Expenses
              
              
              2,586,716
              
              
              3,862,563Net
                  (Loss) from Operations
              
              
              (2,418,732
              )
              
              (3,862,789
              )OTHER
                  INCOME AND (EXPENSE)Loss
                  on Disposal of Assets
              
              
              -
              
              
              17,253Interest
                  Expense
              
              
              44,518
              
              
              171,828Total
                  Other Income (Expense)
              
              
              44,518
              
              
              189,081Net
                  (Loss) before Income Taxes
              
              
              (2,463,249
              )
              
              (4,051,870
              )Income
                  Tax Expense
              
              
              -
              
              
              -NET
                  (LOSS)
              
              $
              (2,463,249
              )
              $
              (4,051,870
              )Basic
                  and diluted (loss) per share
              
              $
              (0.12
              )
              $
              (0.27
              )Weighted
                    Average Number of CommonShares Outstanding
              
              
              20,312,973
              
              
              14,814,630




The
        accompanying notes are an integral part of these statements.


F-5


**Skye
                    International, Inc., and Subsidiaries****CONSOLIDATED
                    STATEMENTS OF STOCKHOLDER'S EQUITY
                    (DEFICIT)**Common
                    Stock
                
                
                Common
                    Stock
                
                
                Paid
                    in
                
                
                Accumulated
                
                
                TotalShares
                
                
                Amount
                
                
                Subscribed
                
                
                Capital
                
                
                Deficit
                
                
                Deficit**Balance
                    December 31, 2004**
                
                
                13,125,977
                
                $
                13,125
                
                $
                -
                
                $
                3,369,057
                
                $
                (6,012,643
                )
                $
                (2,630,460
                )Common
                    stock subscribed for services
                
                
                
                
                
                
                
                
                275,000
                
                
                
                
                
                
                
                
                275,000Contributed
                    capital
                
                
                
                
                
                
                
                
                
                
                
                945,000
                
                
                
                
                
                945,000Common
                    stock issued for consulting services
                
                
                260,525
                
                
                261
                
                
                
                
                
                237,162
                
                
                
                
                
                237,423Common
                    stock issued for related party services
                
                
                391,832
                
                
                392
                
                
                
                
                
                414,129
                
                
                
                
                
                414,521Common
                    stock issued for employee services
                
                
                524,500
                
                
                525
                
                
                
                
                
                535,646
                
                
                
                
                
                536,170Common
                    stock issued for debt
                
                
                128,067
                
                
                128
                
                
                
                
                
                64,716
                
                
                
                
                
                64,844Common
                    stock issued for convertible bridge notes
                
                
                842,511
                
                
                843
                
                
                
                
                
                462,539
                
                
                
                
                
                463,382Common
                    stock issued for cash
                
                
                2,564,819
                
                
                2,565
                
                
                
                
                
                1,408,085
                
                
                
                
                
                1,410,650Net
                    (Loss)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,051,870
                )
                
                (4,051,870
                )**Balance
                    December 31, 2005**
                
                
                17,838,231
                
                
                17,838
                
                
                275,000
                
                
                7,436,333
                
                
                (10,064,513
                )
                
                (2,335,340
                )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
                
                $
                21,622
                
                $
                108,675
                
                $
                9,256,308
                
                $
                (12,527,800
                )
                $
                (3,141,194
                )


The
        accompanying notes are an integral part of these
        statements.


F-6





**Skye
                  international, Inc. and Subsidiaries****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**Years
                  Ended December 31,2006
              
              
              2005Operating
                  ActivitiesNet
                  (Loss)
              
              $
              (2,284,500
              )
              $
              (4,051,870
              )Depreciation
                  Expense.
              
              
              9,870
              
              
              33,755Changes
                  in assets and liabilities:Inventory
              
              
              (137,993
              )
              
              29,468Accounts
                  Receivable
              
              
              2,773
              
              
              (2,663
              )Prepaid
                  Expense
              
              
              (277,408
              )
              
              114,243Deposits
              
              
              20,000
              
              
              (20,000
              )Accrued
                  Interest Payable
              
              
              (8,709
              )
              
              (6,001
              )Accounts
                  Payable
              
              
              1,086,285
              
              
              375,344Notes
                  Payable
              
              
              (64,626
              )
              
              (895,883
              )Customer
                  Deposits
              
              
              -
              
              
              103,371Net
                  Cash (Used) by Operating Activities
              
              
              (1,654,309
              )
              
              (4,320,236
              )Investing
                  Activities(Purchase)
                  Disposal of Assets
              
              
              2,836
              
              
              (42,733
              )Net
                  Cash Provided (Used) by Investing Activities
              
              
              2,836
              
              
              (42,733
              )Financing
                  ActivitiesShares
                  issued for services rendered.
              
              
              684,127
              
              
              2,408,114Shares
                  issued to retire debt and interest.
              
              
              226,493
              
              
              528,226Stock
                  Subscriptions
              
              
              43,675
              
              
              -Proceeds
                  from sale of Common Stock
              
              
              655,000
              
              
              1,410,650Discount
                  on Convertible Debt
              
              
              15,922
              
              
              -Stock
                  Options Granted
              
              
              32,216
              
              
              -Net
                  Cash Provided by Financing Activities
              
              
              1,657,433
              
              
              4,346,990Net
                  Increase/(Decrease) in Cash
              
              
              5,961
              
              
              (15,979
              )Cash,
                  Beginning of Year
              
              
              2,711
              
              
              18,690Cash,
                  End of Year
              
              $
              8,672
              
              $
              2,711Supplemental
                  Information:Taxes
              
              $
              -
              
              $
              -Interest
                  Expense
              
              $
              44,517
              
              $
              182,659
  The
      accompanying notes are an integral part of these statements.





F-7
 **SKYE
            INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
            TO FINANCIAL STATEMENTS**
 **December
            31, 2006 and December 31, 2005**




**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.
 
 
 
 
 
  F-8
 
 **SKYE
            INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
            31, 2006 and December 31, 2005**
  **Note
          1.****THE
          COMPANY - continued**
  Basis
          of Presentation
 
 The
          Consolidated Financial Statements of Skye International include all of
          its
          wholly owed subsidiaries.
 
 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 and December 31, 2005 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.
 
 The
          accompanying comparative Consolidated Financial Statement for the year
          ended
          December 31, 2005 has been restated to reflect the Company’s withdrawal of its
          bankruptcy court petition.
 
 Recently
          Issued Accounting Standards
 
 Below
          is
          a listing of the most recent accounting standards and their effect on the
          Company.
 
 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.
 
 In
          June
          2006, the Financial Accounting Standards Board issued FASB Interpretation
          No.
          48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
          Statement No. 109”, which prescribes a recognition threshold and measurement
          attribute for the financial statement recognition and measurement of a
          tax
          position taken or expected to be taken in a tax return. FIN 48 also provides
          guidance on de-recognition, classification, interest and penalties, accounting
          in interim periods, disclosure and transition. FIN 48 is effective for
          fiscal
          years beginning after December 15, 2006. The Company does not expect the
          adoption of FIN 48 to have a material impact on its financial reporting,
          and the
          Company is currently evaluating the impact, if any, the adoption of FIN
          48 will
          have on its disclosure requirements.
 
 
  F-9
 
 **SKYE
            INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
            31, 2006 and December 31, 2005**
  **Note
          1.****THE
          COMPANY - continued**
  In
          March
          2006, the Financial Accounting Standards Board issued Statement of Financial
          Accounting Standards No. 156, “Accounting for Servicing of Financial Assets—an
          amendment of FASB Statement No. 140.” This statement requires an entity to
          recognize a servicing asset or servicing liability each time it undertakes
          an
          obligation to service a financial asset by entering into a servicing contract
          in
          any of the following situations: a transfer of the servicer’s financial assets
          that meets the requirements for sale accounting; a transfer of the servicer’s
          financial assets to a qualifying special-purpose entity in a guaranteed
          mortgage
          securitization in which the transferor retains all of the resulting securities
          and classifies them as either available-for-sale securities or trading
          securities; or an acquisition or assumption of an obligation to service
          a
          financial asset that does not relate to financial assets of the servicer
          or its
          consolidated affiliates. The statement also requires all separately recognized
          servicing assets and servicing liabilities to be initially measured at
          fair
          value, if practicable, and permits an entity to choose either the amortization
          or fair value method for subsequent measurement of each class of servicing
          assets and liabilities. The statement further permits, at its initial adoption,
          a one-time reclassification of available for sale securities to trading
          securities by entities with recognized servicing rights, without calling
          into
          question the treatment of other available for sale securities under Statement
          115, provided that the available for sale securities are identified in
          some
          manner as offsetting the entity’s exposure to changes in fair value of servicing
          assets or servicing liabilities that a servicer elects to subsequently
          measure
          at fair value and requires separate presentation of servicing assets and
          servicing liabilities subsequently measured at fair value in the statement
          of
          financial position and additional disclosures for all separately recognized
          servicing assets and servicing liabilities. This statement is effective
          for
          fiscal years beginning after September 15, 2006, with early adoption permitted
          as of the beginning of an entity’s fiscal year. Management believes the adoption
          of this statement will have no immediate impact on the Company’s financial
          condition or results of operations.
  **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, 2006
          and December 31, 2005 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.
  F-10
 
 **SKYE
            INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
            31, 2006 and December 31, 2005**
  Note
          2.  **SIGNIFICANT
          ACCOUNTING POLICIES  - continued**
  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. In 2005, substantially all of the
          Company’s gross revenues of $172,169 were generated by the Valeo subsidiary and
          were generated through sales of the ESI-2000 unit to individuals over the
          internet, the majority of whom paid in advance by credit card payments.
          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 2006.
 
 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,
                
                
                2006
                
                
                2005Accounts Receivable
                
                $
                -0-
                
                $
                4,056Less:
                    Allowance for Doubtful Accounts
                
                
                (-0-
                )
                
                (1,283
                )Net
                    Accounts Receivable
                
                $
                -0-
                
                $
                $2,773
 
 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, 2006 and 2005, was $131,323 and $44,147 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.
    F-11
 
 Note
          2.  **SIGNIFICANT
          ACCOUNTING POLICIES  - continued**
 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
                
                
                2005Property,
                    Equipment, furniture and Fixtures
                
                $
                61,622
                
                $
                64,457Less:
                    Accumulated Depreciation
                
                
                (17,701
                )
                
                (7,831
                )Net
                    Fixed Assets
                
                $
                43,921
                
                $
                56,626
 
 
 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.
 
 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 $100,000 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, 2006 a total of $34,570 in refunds and warranty allowances
          were
          recorded against Product Sales.
 
 F-12
  **Note
          2.****SIGNIFICANT
          ACCOUNTING POLICIES  - continued**
  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
                
                $
                0Total
                    Warranty Accrual as of December 31, 2006
                
                $
                34,570
 
 
 **Note
          3**  **NOTES
          PAYABLE AND CAPITAL LEASE OBLIGATIONS**
 
 In
          the
          third quarter of 2006 the Company received $100,000 of subscription funds
          in
          exchange for the issuance of $100,000 of principal 12% convertible debentures
          (the “Debentures”). The Debentures, together with accrued interest thereon are
          convertible at the option of the holder any time during the 12 months from
          issuance thereof into restricted common stock of the Company at a price
          equal to
          a 30% discount to the then current 10-day moving average of the Company’s common
          stock. Additionally, the investor received one (1) share of the Company’s
          restricted common stock for each One Dollar ($1.00) amount of debentures
          purchased. At the date of this report the Debenture shares had not yet
          been
          issued from treasury. When issued 100,000 shares will be delivered to investors.
 
 Notes
          payable and capital lease obligations consist of the following:
 Year Ended December 31,
                
                
                2006
                
                
                2005Convertible
                    Notes, Unsecured, Matured March2001
                    bear 12.5% Interest, principle and interestconvertible
                    into one common share and onewarrant
                    at 75% of the average closing price overthe
                    10-day period prior to conversion.  Warrantshave
                    expired and notes have not beenconverted
                    and are in default.
                
                $
                70,000
                
                $
                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:
                
                $
                15,000
                
                $
                215,000Demand
                    Note with Attorneys, 6% Interest, All Assets ofSubsidiary,
                    Envirotech, pledged as Collateral; Note is indefault.
                    Note has been acquired by Envirotech’s parent, Skye
                
                $
                194,895
                
                $
                194,895Demand
                    Note with Former Distributor of Subsidiary,Envirotech,
                    in Settlement and Repurchase ofDistributorship
                    Territory, 7% Interest; Note is in default
                
                $
                519,074
                
                $
                519,074Demand
                    Note Made by Subsidiary, Envirotech,10%
                    Interest, Payable Monthly; Note is in default
                
                $
                11,880
                
                $
                11,880Demand
                    Note Made by Subsidiary, Envirotech,6%
                    Interest; Note is in 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;
                
                $
                13,000
                
                $
                13,000Demand
                    Note Made by Skye in favor of related party;
                
                $
                65,000
                
                $
                65,000Convertible
                    Notes, Unsecured, Issued March 2006,Matured
                    March2007,bear 5%
                    Interest, principle and interestconvertible
                    into one common share $0.55 per share. Notes have
                    not been converted.
                
                $
                75,000
                
                $
                -Demand
                    Note Made by SKYE in favor of consultants;Note
                    is in default
                
                $
                10,000
                
                $
                -
 
 
 F-13
  **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, 2006 and December 31, 2005, the
          Company
          has issued 462,541 and 252,357 shares respectively under the 2005 Stock
          Incentive Plan. As of December 31, 2006, 37,459 shares remain unissued
          under
          this Plan.
 
 The
          Company was initially capitalized on November 30, 1993 with the issue of
          500,000
          shares for $5,000. During 2005 the Company issued 652,357 shares for $651,943
          in
          consulting services; 524,500 shares at $536,170 for employee stock awards;
          78,067 shares for $54,647 in debt reduction; 842,511 shares to retire $881,536
          in convertible notes; and 2,564,819 shares for $, 296,483 in cash in private
          placements. 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, 2006 is 21,622,243 , shares.
 
 Warrants
 
 No
          warrants are outstanding.
 
 Stock
            Options
 
 In
            connection with the acquisition of Envirotech Systems Worldwide, Inc.,
            the
            Company issued immediately vested stock options on October 29, 2003 to
            one of
            the principal shareholders of Envirotech. He was granted the right to
            purchase
            300,000 restricted common shares at $0.55 per share until October 29,
            2004 which
            was extended to December 31, 2004. This option expired without exercise
            on
            December 31, 2005.
 
 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, 2006 and December 31, 2005, none of
            the
            options have been exercised.
 In
            October 2005, the Company granted an option to its website developer
            to purchase
            100,000 shares of common stock at a variable price based on market price,
            exercisable within one year. This option expired without having 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, 2006, none of the options have been exercised.
 
 Outstanding
            stock options are as follows:
 
 SharesBalance,
                      December 31, 2004
                  700,000Granted,
                      2005
                  0Expired,
                      2005
                  (100,000)Balance,
                      December 31, 2005
                  600,000Granted,
                      2006
                  300,000Expired,
                      2006
                  0Balance,
                      December 31, 2006
                  900,000
 F-14
 
 **SKYE
              INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
              31, 2006 and December 31, 2005**
 **Note
          5.**  **INCOME
          TAXES**
 
 The
          Company provides for income taxes under Statement of Financial Accounting
          Standards No. 109, *Accounting
          for Income Taxes* .
          SFAS
          No. 109. Under SFAS No. 109, deferred tax assets and liabilities are recognized
          based on temporary differences between the financial statement and tax
          basis of
          assets and liabilities using enacted tax rates in effect in the years in
          which
          the differences are expected to reverse. SFAS No. 109 requires current
          recognition of net deferred tax assets to the extent that it is more likely
          than
          not such net assets will be realized. To the extent that the Company believes
          that its net deferred tax assets will not be realized, a valuation allowance
          must be recorded against those assets.
 
 SFAS
          No.
          109 requires the reduction of deferred tax assets by a valuation allowance
          if,
          based on the weight of available evidence, it is more likely than not that
          some
          or all of the deferred tax assets will not be realized. In the Company’s
          opinion, it is uncertain whether they will generate sufficient taxable
          income in
          the future to fully utilize the net deferred tax asset. Accordingly, a
          valuation
          allowance equal to the deferred tax asset has been recorded. The total
          deferred
          tax asset is calculated by multiplying a 35% estimated tax rate by the
          cumulative Net Operating Loss of $12,527,800. The total valuation allowance
          is
          equal to the total deferred tax asset.
 
 
 Yr.
                    Ended
                
                
                Yr.
                    Ended2006
                
                
                2005Deferred
                    Tax Asset
                
                $
                4,384,730
                
                $
                3,522,580Valuation
                    Allowance
                
                $
                (4,384,730
                )
                $
                (3,522,580
                )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
                
                
                2026Total
                
                $
                12,527,800
 
 
 **Note
          6.**  **LEASES
          AND OTHER COMMITMENTS**
 
 The
          Company uses space provided at no cost by officers and directors.
 
 **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 $12,527,800 as of December 31,
          2006.
          The Company has not generated meaningful revenues in the last 2 years.
          The
          Company has a working capital deficit of $3,185,115 as of December 31,
          2006.
          These factors, among others, raise substantial doubt about the Company’s ability
          to continue as a going concern.
 
 Management’s
          Plans
 
 The
          Company has expended considerable efforts in working with its contract
          manufacturer in order to begin the production of its new line of products.
          The
          Company expects that the first units will be produced in 2007 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 *ParadigmTM* technology.
          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 a sales
          and
          distribution network.
  F-15
 
 **SKYE
            INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
            31, 2006 and December 31, 2005**
  **Note
          7.****GOING
          CONCERN - continued**
  The
          Company is negotiating with several broker-dealers with a view to completing
          further private placements to fund our business strategy, but to date the
          Company has not yet concluded any such arrangement. The Company’s business
          strategy requires it to raise in excess of $3 million over the next 12
          month
          period in order to fully execute its business plan. Management believes
          that, in
          order to properly exploit the introduction of its products, it will be
          necessary
          to be positioned not only as a quality supplier of products, but also able
          to
          supply a sufficient volume of product to meet wholesale demand.
  **Note
          8.**  **PENDING
          LITIGATION**
 
 Distributor
          Suit .
          Prior
          to the acquisition of Envirotech, by the Company, Envirotech was the defendant
          in a lawsuit filed by a former distributor alleging a breach of a Distributor
          Agreement entered into with Envirotech in May, 1998. On August 13, 2003,
          Envirotech entered into a Settlement Agreement and Release pursuant to
          which
          Envirotech agreed to pay the distributor the sum of $520,500 in installments
          over a period of ten years. The obligations under this Settlement Agreement
          are
          secured by a Security Agreement covering all assets of 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 filed
          of
          record so long as no default existed. On May 3, 2004, the distributor claimed
          a
          breach and filed the Stipulated Judgment. Management believes no default
          existed
          to warrant the filing of the judgment. With the filing of the Bankruptcy
          Petition by Envirotech (see below), this action was stayed. However, with
          the
          dismissal of the Chapter 11 Proceedings on February 28, 2006, this judgment
          is
          once again a claim against the assets of Envirotech, subject, however,
          to the
          claims and rights of the Senior Secured Creditor.
 
 Seitz
          Suit .
          In
          2002, Envirotech was named as a Defendant in a law suit filed in the U.S.
          District Court for the Southern District of Texas, Houston, Texas (Civil
          Action
          No. H-02-4782, David Seitz and Microtherm, Inc., vs. Envirotech Systems
          Worldwide, Inc., and Envirotech of Texas, Inc. (the “Seitz Suit”). The Company
          is not affiliated with Envirotech of Texas, Inc. The suit alleges that
          Envirotech has infringed upon patent rights of others and seeks damages
          and an
          order to cease and desist. Management believes the suit is without merit.
          The
          suit was stayed pending the disposition of the Chapter 11 Bankruptcy Petition
          filed by Envirotech in August 2004. On September 30, 2005, however, the
          Bankruptcy Court allowed the plaintiff to re-open the Seitz Suit and he
          has done
          so. The suit is in the discovery stage and the Company is vigorously engaged
          in
          the process. On December 5, 2005, the Houston Court issued an injunction
          against
          Envirotech and its affiliated entities, including Skye, enjoining them
          from
          further marketing, advertising or offering for sale, or accepting any orders
          for
          (i) the Envirotech ESI 2000 heater, (ii) any other heater, regardless of
          its
          model, using parts of the Model ESI 2000 heater, and (iii) any other heater,
          regardless of model number, utilizing in whole any part any technology
          embodied
          in the Model ESI 2000 heater. On July 26, 2006 Envirotech retained the
          Dallas,
          TX firm Hemingway, Hansen, LLP to continue the defense and prosecution
          of this
          litigation. At a subsequent hearing on February 28, 2007, the Court indicated
          that it would reconsider and modify the wording on the scope of the preliminary
          injunction. Additionally, the Court allowed Seitz to amend his complaint.
          Seitz
          filed his amended complaint attempting to expand the complaint to also
          cover
          Skye, Valeo and the FORTISTM product. Skye and Valeo have filed motions to
          dismiss this amended complaint, and Envirotech has filed a ten count
          counterclaim against Seitz. Envirotech continues to aggressively defend
          the
          Seitz suit and will pursue this litigation to conclusion.
 
 Unpaid
          Legal Fees .
          Subsequent to December 31, 2003, Envirotech has been named in five separate
          lawsuits for unpaid legal and consulting fees totaling $280,000. These
          include
          the Myers and Jenkins Suit and the Sensor Technologies Suit discussed below.
          On
          May 3, 2004, Envirotech settled one of these suits claiming fees of $112,500.
          In
          connection with that settlement, Envirotech reimbursed the plaintiff for
          alleged
          out-of-pocket expenses and the Company issued 10,000 shares of common stock,
          restricted under SEC Rule 144, to the plaintiff on the basis of a loan
          from the
          Company to Envirotech. The settlement, and any settlements of the other
          suits,
          will be reflected as a charge in the year of the settlement. In two of
          the other
          three suits judgments have been granted in the aggregate amount of approximately
          $155,500, both of which were stayed by the bankruptcy filing discussed
          above.
          The fourth suit is on behalf of a law firm that served as a contract arbitrator
          in Envirotech’s dispute with the Distributor noted above. With the dismissal of
          the Chapter 11 proceedings, the Company has received notice from the plaintiff
          that it intends to resume the suit, which seeks approximately $3,500 in
          fees.
  F-16
 **SKYE
              INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
              31, 2006 and December 31, 2005**
  **Note
          8.****PENDING
          LITIGATION - continued**
  Myers
          and Jenkins Suit .
          On May
          24, 2006, Envirotech was served with a Motion for Entry of Default in connection
          with an action filed in Arizona Superior Court, case number CV-2006-003671
          by
          Envirotech’s prior legal counsel, Myers and Jenkins. The motion seeks judgment
          for the payment of the principal sum of $103,830, together with interest
          and
          costs. Envirotech has not defended the action.
 
 Sensor
          Technologies Suit .
          On May
          24, 2006, Envirotech was served with an Application for Entry of Default
          in
          connection with an action filed in the Arizona Superior Court, case number
          CV-2006-0060632, by Sensor Technologies & Systems, Inc., an engineering firm
          that provided engineering consulting services in connection with Envirotech’s
          ESI-2000 product. The application seeks judgment for the payment of $72,391,
          together with interest and costs. Envirotech has not defended the action.
 
 Bankruptcy
          Proceedings .
          On
          August 6, 2004, Envirotech filed a Voluntary Petition for protection under
          Chapter 11 of the United States Bankruptcy Code in Phoenix, Arizona. The
          filing
          of this Petition with the Bankruptcy Court stayed all existing litigation,
          judgments and efforts to collect on the judgments. Envirotech was acquired
          by
          the Company in November 2003 in a stock-for-stock transaction and has been
          held
          and operated by the Company as an operating subsidiary. With the exception
          of a
          guarantee to one critical supplier in the current amount of approximately
          $42,500, Skye has not assumed any liability for the obligations of Envirotech.
          As of the date of the filing of the Chapter 11 Bankruptcy Petition, Envirotech
          had liabilities of approximately $1.6 million. Several creditors, not related
          to
          the supply of parts or the assembly of products, have obtained judgments
          against
          Envirotech and an action was pending in the U.S. District Court, Southern
          District of Texas, alleging patent infringement (see above). All claims
          of
          creditors, including the above-mentioned judgments, and efforts to collect
          same,
          together with the litigation pending in the U.S. District Court in Houston,
          were
          stayed during the pendency of the Bankruptcy Proceedings. Envirotech filed
          a
          Disclosure Statement and Plan of Reorganization on November 7, 2004 and
          the
          Court approved its request to submit the plan to the creditors for approval.
          The
          Plan, however, did not receive approval of the Court and Envirotech subsequently
          filed a Motion to Dismiss the Chapter 11 proceedings which was granted,
          with
          prejudice, on February 28, 2006. As a result of this dismissal, all claims
          and
          judgments of creditors of Envirotech may be renewed.
 
 Shareholder
          Inspection Claim .
          In
          April 2006 a shareholder purporting to have obtained consent from at least
          15%
          of the Company’s shareholders filed a lawsuit in the United States District
          Court for the District of Nevada (Case No. 2:06-CV-0541-RLH-GWF) seeking
          inspection of the Company’s books and records pursuant to Nevada corporate law.
          The Court denied plaintiff’s initial request. The Company has asserted several
          counterclaims against the plaintiff for tortious conduct and for abuse
          of the
          legal process in connection with the lawsuit. The matter is currently pending.
 
 Shareholder
          Derivative Action .
          In May
          2006 a small group of dissident shareholders (including the plaintiff from
          the
          Shareholder Inspection Claim) filed a lawsuit in the United States District
          Court for the District of Arizona (Case No. CV06-1291-PHX-ROS) as a derivative
          action seeking injunctive and declaratory relief. The Company was named
          as a
          nominal defendant and there are no claims for monetary damages against
          the
          Company. The primary claims involve the prior issuance of the Company’s common
          stock to former consultants to the Company, as well as prior issuances of stock
          to certain members of current management. Among other things the plaintiffs
          seek
          to prevent these individuals from using their stock and related voting
          rights to
          solicit proxies and notice shareholder meetings, and have demanded that
          they
          return the shares to the Company. The costs likely to be incurred by the
          Company
          in connection with such indemnities will be significant. The Company has
          filed
          extensive counter and cross-claims. The matter is currently pending and
          the
          Company is awaiting a decision of the Court after the TRO hearing on February
          21
          and 22, 2007.
 
 Berry-Shino
          Claim .
          The
          Company has on several occasions during the past three years utilized the
          services of Berry-Shino Securities, Inc., Scottsdale, Arizona, in raising
          various forms of financing to further its business plan and operations.
          In the
          course of each of these engagements, the Company has paid Berry-Shino various
          fees and expenses and has issued a certain number of shares of its Common
          Stock
          to Berry-Shino. The Company has recently received correspondence from
          Berry-Shino stating that it believes it is entitled to be issued an additional
          456,500 shares of Common Stock as additional consideration for its services.
          The
          Company has reviewed the validity of the entitlement and a proposed settlement
          of this claim has been proffered subject to the approval of the Board of
          Directors of the Company at its next meeting.
  F-17
 
 **SKYE
            INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
            31, 2006 and December 31, 2005**
  Note
          8.  **PENDING
          LITIGATION - continued**
 
 Pending
          Arbitrations .
          The
          Company is party to two separate arbitrations. The first matter involves
          Skye
          and Lawrence K. White in an action first filed in Arizona State Court and
          later
          removed to arbitration. Mr. White seeks payment to him of fees in the amount
          of
          approximately $7,000, and punitive and other damages in an amount totalling
          approximately $100,000 in a matter related to certain accounting consulting
          services rendered to Skye in 2006. The second matter involves Skye and
          its
          former independent auditors, Semple & Cooper, LLP relating to unpaid audit
          and accounting fees in the amount of approximately $39,000. The Company
          intends
          to vigorously defend both actions and may file counterclaims in either
          or both
          actions. Both matters are pending and arbitrations are expected to be held
          before the end of the third quarter 2007.
 
 Claim
          by Director William Papazian for Legal Defense and Indemnity .
          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
          arising in connection with a counterclaim filed by Skye against Mr. Papazian
          in
          connection with the Shareholder Derivative Action described above. Though
          filed
          by Mr. Papazian in Arizona State Court, the lawsuit has been removed to
          the
          jurisdiction of the Federal District Court. The Company seeks an interjudicial
          transfer of the matter to Federal Judge Roslyn O. Silver, the Judge hearing
          the
          Shareholder Derivative Action. The Company’s motion is being opposed by Mr.
          Papazian and the matter remains pending.
 
 Quick
          & Confidential Claim .
          On
          January 23, 2007, Skye was served with a complaint filed in Arizona State
          Court
          by Quick & Confidential Inc. who seeks the payment of fees to it in the
          amount of approximately $13,000 in connection with legal copying services.
          The
          Company intends to seek a settlement of this matter.
 
 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-18