UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2008

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from N/A to N/A

Commission File Number: 000-53302

SKINS, Inc.

(Name of small business issuer as specified in its charter)

Nevada		20-3464383

State of Incorporation		IRS Employer Identification No.

1 Newark Street, Suite 25A Hoboken, New Jersey 07030

(Address of principal executive offices)

(201) 377-5502

(Issuer’s telephone number)

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 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

¨ Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨

Non-accelerated filer ¨

Accelerated filer ¨

Small Business Issuer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes ¨ No x

The aggregate market value of voting stock held by non-affiliates of the registrant on December 31, 2008 was approximately $2,723,796. Solely for purposes of the foregoing calculation, all of the registrant’s directors and officers as of December 31, 2008, are deemed to be affiliates. This determination of affiliate status for this purpose does not reflect a determination that any persons are affiliates for any other purposes.

State the number of shares outstanding of each of the issuer’s classes of equity securities, as of the latest practicable date: As of April 9 2009, there were 71,634,408 shares of Common Stock, $0.001 par value per share issued.

Documents Incorporated By Reference -None

SKINS INC.

FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I

ITEM 1.	DESCRIPTION OF BUSINESS	1
ITEM 1A.	RISK FACTORS	7
ITEM 1B.	UNRESOLVED STAFF COMMENTS	20
ITEM 2.	DESCRIPTION OF PROPERTY	20
ITEM 3.	LEGAL PROCEEDINGS	21
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	21

PART II

ITEM 5.	MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES	22
ITEM 6.	SELECTED FINANCIAL DATA	24
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	33
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	34
ITEM 9A.	CONTROLS AND PROCEDURES	35
ITEM 9B.	OTHER INFORMATION	37

PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS, KEY EMPLOYEES, AND CORPORATE GOVERNANCE	37
ITEM 11.	EXECUTIVE COMPENSATION	39
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	53
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	55
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	58

PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	59

SIGNATURES		60

CERTIFICATION PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this report contains statements relating to our future business and/or results, including, without limitation, the statements under the captions “Risk Factors,” “Management's Discussion and Analysis or Plan of Operation” and “Description of Business.” These statements include certain projections and business trends that are “forward-looking.” Forward-looking statements can include statements containing a projection of revenues, income (including income loss) , earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items; a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer; a statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the SEC; any report issued by an outside reviewer retained by an issuer, to the extent that the report assesses a forward-looking statement made by the issuer; or a statement containing a projection or estimate of such other items as may be specified by rule or regulation of the SEC. You can identify these statements by the use of words like “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and variations of these words or comparable words. Forward-looking statements do not guarantee future performance and involve risks and uncertainties. Actual results will differ, and may differ materially, from projected results as a result of certain risks and uncertainties. These risks and uncertainties include, without limitation, those described under “Risk Factors” and those detailed from time to time in our filings with the SEC, and include, among others, the following:

Our limited operating history;

Our lack of profits from operations;

Our recent restatement of our financial statements;

Our ability to raise additional funds on acceptable terms or at all;

Our ability to successfully design, manufacture and commercialize our proposed product;

Our reliance on one unproven and undeveloped product type;

Rapidly changing consumer demands for footwear products;

Our unestablished brand;

The degree and nature of our competition;

Our ability to employ and retain qualified employees;

The limited trading market for our common stock;

Current market conditions; and

The other factors referenced in this report, including, without limitation, under the sections entitled “Risk Factors,” “Management's Discussion and Analysis or Plan of Operation,” and “Description of Business.”

The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. We cannot guarantee that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Except for historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements include, but are not limited to, statements regarding future events and the Company’s plans and expectations. Actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Form 10-K or incorporated herein by reference, including those set forth in Management’s Discussion and Analysis or Plan of Operation.

As used in this annual report, “we”, “us”, “our”, “Skins”, or “our company” refers to Skins, Inc. and its wholly-owned subsidiary, Skins Footwear Inc,

Overview

We are a Nevada corporation with our corporate office located in New Jersey, have designed and continue to develop a patented two-part, footwear structure consisting of an outer collapsible “Skin” and an inner orthopedic support section called the “Bone.” The design is intended to allow consumers to purchase one inner section, the Bone, and numerous outer Skins, resulting in multiple style variations from the same pair of shoes, with the same feel and fit despite which Skin is being worn. We ha5 initially designed and manufactured men's and women's footwear and distributed to a test market through a soft commercial launches during 2007 and 2008. We have made technological advances to the product, and we have updated the design of the Bone. The now updated design for the Spring/Summer 2009 season was launched in March 2009. The Bone is designed such that it can only be worn once it is inside the Skin and not on its own. The improvements to the product, rendered inventory to be obsolete at December 31, 2008.

Our corporate offices are located at 1 Newark Street, Suite 25A, Hoboken, NJ 07030.

Development Stage and Going Concern

We are still in the development stage. Since its formation the Company has not realized any revenues from its planned operations. We intend to design, manufacture and market high quality men's and women's footwear. Our primary activities since incorporation have been conducting research and development, performing business, strategic and financial planning, and raising capital.

The financial statements contained in this annual report have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern which assumes that we will realize its assets and discharge its liabilities in the ordinary course of business. As of December 31, 2008, we had no established source of revenues and had accumulated losses of $16,019,163 since our inception. Our ability to continue as a going concern is dependent upon achieving production or sale of goods, our ability to obtain the necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due and upon profitable operations. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern.

Beginning in March 2009 the Company has begun shipping its newly enhanced products embodied in the 2009 Spring/Summer Collection to selected retail stores and chains throughout the United States, and internet retailers with shipments beginning in March 2009. We have a factoring and letter of credit financing facility in place, as well as various financing arrangements , however we will need to raise additional capital through private equity placements and, or other financing means.

The Skins Product Concept

We believe that there are few, if any, methods for a consumer to change the look of their shoe other than buying multiple pairs, in multiple colors, or multiple styles. With the average price of high quality shoes ranging anywhere from $150 and up, the purchase of new shoes can be a costly proposition for consumers.

Other markets have already launched products that exploit the concept of cost and style in terms of interchangeability. Within the watch market, companies offer cost effective, fashionable watches that have interchangeable straps and faces. Within the sunglasses market, some companies have many fashion-focused models with interchangeable lenses. Even in the cellular phone market, cellular phone manufacturers offer interchangeable covers that are purely a fashion statement.

The Bi-Sectional System

We have designed and continue to develop a line of footwear products based on our patented modular shoe system built with two sections: the Bone and the Skin. The Skins products are designed to be easy to use, comfortable, and employ quality craftsmanship. The inner section - or the Bone - is made from a mold utilizing advanced light-weight and resilient synthetic material. The Bone is designed to be a consistent source of comfort and support, without regard to changing styles and fashions. The outer section - or the Skin - is expected to represent our core product. It is expected that Skins will be created with various combinations of toe shapes, materials, fabrics, leather and outsole treads. We expect to launch numerous styles per season for each targeted consumer group.

Design and Development

Our principal goal in product design is to generate new and exciting interchangeable footwear with classic contemporary and progressive styles. All of our footwear is designed with an active lifestyle in mind. We design most of our styles to be fashionable and marketable to the 18 to 35 year-old consumer, with most lines appealing to the broad cross-section of the population. Any success of the Skins product may be related to:

The unique interchangeable Skin concept,

A constant fit and feel of the bone,

Collapsibility of the Skin, allowing ease of travel,

Ease of purchase over the internet,

Catalog and other non-traditional methods of distribution,

Our ability to recognize trends in the footwear market, and

A product design that anticipates and accommodates consumers' ever-evolving preferences.

Our technology is designed to allow consumers to continually change Skins to fit their respective fashion and functional needs. We will attempt to identify, interpret and translate current and emerging lifestyle trends in the design of our footwear. We expect to obtain lifestyle trend information through various methods intended to monitor changes in the culture and society, including:

Review and analysis of modern music, television, cinema, clothing and other trend-setting media,

Travel to domestic and international fashion markets to identify and confirm current trends,

Consultation with retail customers and end-consumers for information on current retail selling trends,

Fit trials to ensure maximum comfort for consumers,

Participation in major footwear tradeshows to stay abreast of popular brands, fashions and styles, and

Subscription to various fashion and color information services.

We expect that our footwear design process will typically begin approximately nine months prior to the start of a season. Our products will be designed and developed by our in-house staff and freelance design agencies. To promote innovation and brand relevance, we expect to utilize dedicated design teams that focus on each of the men's, women's, and children's categories and report to our chief design executive, once we are able to locate and hire a person for this position. We anticipate that the design process will be collaborative whereby design staff will meet with retail and merchandising and sales and production personnel to refine the design to our perceived demand of the markets. After the designers arrive at a consensus regarding the fashion themes for the coming season, the designers then translate these themes into products. These variations will include variations in product color, material, structure and decoration, which are arrived at after close consultation with those involved in design and production.

After a design is complete, we will create prototype blueprints and specifications and forward them to our third-party manufacturers, which will then forward the design prototypes back to our design team. We plan to allow our major retail customers, if any, to review upcoming design concepts prior to release. We believe that input from these retailers could assist us in predicting consumer reaction to our latest designs and afford us an opportunity to foster collaborative relationships with our customers. Management believes that our design teams will be able to modify and refine a design based on customer input.

Business Strategy

Footwear manufacturers may expect a limited number of purchases from consumers since footwear is commonly viewed by consumers as functional attire. The Skins product concept is designed to change the consumer view of footwear from a functional requirement to a fashionable accessory. The consequence is that we may be able to market, sell and distribute in a similar manner as an apparel entity. In essence, we expect that the non-traditional concept of our footwear will be ground breaking and disruptive to lifestyle and the footwear and fashion industry specifically.

We will concentrate on our core design and development of the Skin and Bone product, while outsourcing the production requirements to third parties. We plan an initial strategy of developing our own brand. In the future, we intend to license to existing brands to maximize our market exposure and product distribution, in addition to working with the orthopedic market in supplying Bones without foot-beds to orthopedic insole manufacturers to allow for orthopedic fitted Bones for individuals with orthopedic needs. We expect to act as a wholesaler, marketing our products to specialty, department and Internet retail locations via marketing and branding efforts.

We intend to begin with both men and women's high-end footwear. We plan to introduce our product in the high-end market to mavens, trendsetters and early adopters, in an attempt to build brand equity and focus on exclusive specialty shops that sell high-fashion quality apparel and footwear. We plan on conducting promotional activities such as celebrity product placement and Skins sponsored events, in addition to fashion and business press editorial coverage to increase the brand visibility and credibility. We will be working with a fashion, footwear and accessory specific public relations firm to assist and produce these events and undertakings. After establishing our brand, we plan to broaden our distribution with more mainstream middle-market retailers, and then begin to enter the children's market and license our technology to other manufacturers.

Marketing Strategy

We expect that our marketing strategy will consist of the following elements:

Product Diversity

We expect that product diversity will be a key marketing strategy. Initially, we plan to invest only the required time and money for the design and development of our initial line of products. Following the initial stages of our market penetration, if any, we plan to expand our product line and increase the number of retail channels through which our products are sold. We believe that the strategy of continuously diversifying our products will occur as we build and develop our retail distribution channels.

Branding

We believe that a well-recognized brand is an important element for success in the footwear and apparel industry. We will attempt to position our footwear as a lifestyle brand that encompasses innovation and design while maintaining quality and a holistic fit. Our management will be directly involved in shaping our image and the conception, development and implementation of its advertising and marketing activities. We intend to aggressively promote our brand through a comprehensive marketing campaign. We hope that this campaign, which will be image-oriented and product specific, will eventually result in a high level of recognition of the Skins brand across a variety of footwear and apparel categories.

Advertising

We anticipate that our advertisements will generally seek to build and increase brand awareness by linking the Skins brand to contemporary lifestyles and attitudes, rather than exclusively marketing a particular Skins footwear product. We will market the Skins name to represent flexibility, managing the brand and product design towards evolving footwear and apparel fashions and consumer lifestyle preferences.

We intend to employ a multi-phased advertising strategy that we hope will expand with our advertising requirements and investment capabilities. Initially, we plan to utilize cost sensitive and effective means to reach our targeted customer base. We expect to use this marketing phase within our first phase of growth and expansion strategy, initially targeting the fashion centers within the US and later within Europe, and Asia/Australia.

Once, and if, we reach certain predetermined levels of sales, we plan to invest monetary and human capital to expand our advertising campaigns into a traditional portfolio marketing campaign that is based on management of our marketing and advertising portfolio.

Promotional Activities

We plan on implementing product placement with well-known celebrities, hosting events to help enhance the Skins image in the coming years, and to focus marketing efforts for our products among specific consumer groups. We anticipate that high profile and diverse appeal of celebrities may be able to assist the Skins brand to reach new markets.

Entertainment Promotions: Our promotional strategies are expected to include retail collaborations, in-store specials, product tie-ins and giveaways, and other special events.

Sourcing and Production

Outsourcing

On November 24, 2008, we entered into a Buying Agency Agreement with LJP International, LLC (“LJP”). Pursuant to the agreement, LJP will serve as our non-exclusive buying and sourcing agent and will be responsible for sourcing of raw materials, arranging manufacturing facilities, monitoring manufacturer quality, finished product inspection, and coordinating freight forwarders. We will pay LJP an amount equal to 8% of the FOB country of origin price for product ordered, shipped, and accept by us. Either party may terminate the agreement at any time upon providing the other party with 90 days written notice.

Production

In 2008, our company changed its production strategy, and with LJP’s assistance, identified a shoe manufacturing facility in Brazil. Management believes that production in Brazil will enhance the quality of our product and reduce costs over the long-term. We had previously utilized manufacturing facilities in China.

Inventory Risks

Due to the nature of our planned “high level” of style and fashion, inventory risks will be higher, since fashions can change quickly and past styles can be rapidly considered obsolete. We will attempt to reduce the risk of overstocking by:

Assessing demand for our products by soliciting input from our customers and monitoring retail sell-through processes,

Analyzing historical and current sales and market data to develop internal product quantity forecasts,

Seeking to share inventory risks with retail channels as much as possible, and

Investing in core and basics inventory that can be held for more than one season.

Growth and Expansion Strategy

We plan to expand our operations in three primary segments:

Region by Region

We will launch our operations in the United States and attempt to maintain those operations throughout the planned growth period. We expect sell direct to the consumer in addition to expanding into developed countries in Western Europe and throughout the world. This expansion process may be expedited via licensing agreements with multinational apparel brands and distributors.

Demographics

We believe that the Skins core product concept is suitable for all ages. We believe that the key advantages of the product concept will initially attract the most fashion-savvy age group - the 18 to 35 year olds. When and if the product concept becomes more widely known, we plan to expand our demographic focus of the product concept to the 5 to 55 year old market segments.

Distribution

Initially, we will market our products to specialty high end retail stores and chains in the U.S., and internet retailers. Our sales strategy includes setting sales meetings with the retail stores in which we hope to have our product carried. We will exhibit and participate in international industry tradeshows and events and establish close connections with the retailers we intend to do business with, including them at times in pre-selection and viewing of upcoming collections for the purpose of their review and comment. When and if our brand becomes more widely known and the product concept is more widely accepted, we will seek to establish licensing agreements with branded apparel companies. The third phase of distribution may include self-managed Skins concept stores in the heart of major metropolitan shopping areas acting primarily as a marketing tool and serving as examples for future licensed retail.

Pricing Strategy

Initially we will target our Skins footwear products to the purchasers of higher end lifestyle oriented and casual footwear and are aiming to the higher end of the market.

Competition

We will face intense direct and indirect competition.

Direct Competition: We will primarily offer lifestyle, athletic and dress-casual shoes. Consequently, all footwear companies that can be defined within those categories will be our competition.

Indirect Competition: In addition, due to, in managements opinion, the unique Skins product concept that involves interchangeability, we should be able to utilize the distribution patterns of the apparel market, including Internet and catalog sales, and via specialty retail distribution without the requirement of a footwear department. This opportunity widens our competition to include apparel companies that do or potentially will offer footwear products with their respective brand. These companies are defined as indirect competition, since we will target these companies as potential retail distribution points and for possible licensing agreements.

The apparel and footwear industries are extremely competitive and highly fragmented. This is most likely due to low barriers to entry. All that is required to enter the industries are clothing designs that appeal to department store and/or specialty store buyers. If a designer receives orders, he or she can contract the production of the item to a low-cost, independent manufacturer, usually outside the United States. In many areas, the barriers to entry are insignificant. These industries are characterized by simple technologies, low fixed assets per employee and ease of expansion through the use of contractors.

Although entering into the apparel and footwear industry may be relatively simple, being successful in the industry is much more difficult. The strength of large retailers is a major challenge to many designers, including us. As retailers shrink their inventories and place orders closer to the time that merchandise will be needed, designers and manufacturers are forced to assume more inventory risk.

Employees

As a development stage company, and even as we begin selling our product, we plan to rely on outside consultants and resources in an attempt to control our costs and expenses. Accordingly, as of December 31, 2008, we employed five full-time employees. None of our employees are covered by a collective bargaining agreement.

Patent and Patent Applications

We own one issued United States patent claiming the modular shoe system; this patent issued February 6, 2007 as U.S. patent number 7,171,768 (the ‘768 patent). Additionally we have two pending U.S. patent applications also claiming certain aspects of the modular shoe system: U.S. patent application serial number (USPASN) 11/638,166 filed December 13, 2006, which is a continuation of the ‘768 patent, and USPASN 11/578,741 which is a national phase application of Patent Cooperation Treaty (PCT) international application serial number PCT/US04/033446 (the '446 application). The '446 application has also been nationalized in Australia, Canada, China (PRC), Europe, Hong Kong, Israel, Japan, Korea, New Zealand and the Russian Federation.

WHERE YOU CAN FIND MORE INFORMATION

You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.

ITEM 1A. RISK FACTORS

Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to purchase our common stock. Our business, financial condition or results of operations could be materially adversely affected by these risks if any of them actually occur. Skins Inc. is the 100% parent of Skins Footwear Inc. and Skins Inc.'s sole business operation consists of the operations of Skins Footwear Inc. The discussion below refers to the registrant, Skins Inc., and its wholly-owned subsidiary, Skins Footwear Inc, which are referred to in the discussion below as “Skins,” the “Company,” “we,” “us,” and “our.” The trading price of our common stock could decline due to any of these risks, and an investor may lose all or part of his or her investment. Some of these factors have affected our financial condition and operating results in the past or are currently affecting us. This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by our company described below and elsewhere in this report.

RISKS RELATED TO OUR BUSINESS

If we are unable to obtain additional financing, enter into a merger or acquisition, or generate revenue we may not have sufficient cash to continue operations.

In May 2007 the Company sold a total of 4,000,000 units in a private offering for aggregate proceeds of $3,000,000, and in April 2008, the Company conducted another private placement that raised approximately $2,680,645 in gross proceeds. The Company has also raised approximately $705,000 by issuing secured promissory notes entered into from December 2007 through March 2008, all of which were invested in the April 2008 private placement in lieu of repayment. In September 2008 and November 2008 the Company sold a total of 9,700,000 units in a private offering for aggregate proceeds of $485,000. In January 2009 the Company sold 1,557,500 units in a private placement for aggregate proceeds of $77,875 of which 757,500 units were purchased by Michael Rosenthal, Company chairman, for $37,875.

In November 2008 the Company closed on a one-year Revolving Loan and Security Agreement which provides for a $3 million letter of credit and accounts receivable factoring facility. Any financings under this facility are guaranteed by Mark Klein, the Company’s Chief Executive.

In March 2009 the Company entered into two separate transactions for additional funding. In the first transaction, pursuant to a Securities Purchase Agreement, an investor will purchase up to $2 million of Common Stock from the Company over an 18 month period in addition to purchasing from the Company a one-year 7% convertible debenture for $85,000. In the second transaction the Company sold two two-year 8% convertible debentures for $185,000 each.

On March 23, 2009 the Company entered into a certain Securities Purchase Agreement ("SPA") with Tangiers Investors, LP (“Tangiers”) where the Company may, at its discretion, periodically sell to Tangiers shares of the Company's common stock for a total purchase price of up to Two Million Dollars ($2,000,000) in which Tangiers will pay the Company 90% of the lowest volume weighted average price of the Company's common stock as quoted by Bloomberg, LP on the Over-the-Counter Bulletin Board or other principal market on which the Company's common stock is traded for the five days immediately following the notice date. The SPA has contains other rights and responsibilities, including the requirement to file a registration statement. In relation with the SPA, in the amount of Eighty-Five Thousand Dollars ($85,000). This transaction closed on April 1, 2009.

We anticipate raising additional funds through public or private financing, strategic relationships or other arrangements in the near future to support our business operations; however we currently do not have commitments from third parties for additional capital. We cannot be certain that any such financing will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations. Failure to secure additional financing in a timely manner and on favorable terms would have a material adverse effect on our financial performance, results of operations and stock price and require us to curtail or cease operations, sell off our assets, seek protection from our creditors through bankruptcy proceedings, or otherwise. Furthermore, additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, may require that we relinquish valuable rights.

Our independent registered public accountants indicate that they have substantial doubts that we can continue as a going concern, which may negatively affect our ability to raise additional funds and otherwise operate our business. If we fail to raise sufficient capital, we will not be able to implement our business plan, we may have to liquidate our business, and you may lose your investment.

MHM Mahoney Cohen CPAs (The New York Practice of Mayer Hoffman McCann P.C.), our independent registered public accountants, has added an explanatory paragraph to their audit opinion issued in connection with the financial statements for the year ended December 31, 2008 indicating that it has substantial doubt about our ability to continue as a going concern given our recurring losses from operations and deficiencies in working capital. This opinion could materially limit our ability to raise additional funds by issuing new debt or equity securities or otherwise. If we fail to raise sufficient capital, we will not be able to implement our business plan, we may have to liquidate our business and you may lose your investment. You should consider our independent registered public accountants' comments when determining if an investment in us is suitable.

We are a development stage company with a limited operating history on which to evaluate our business.

Our business prospects are difficult to predict because of our limited operating history, early stage of development, unproven business strategy and unproven product. We are a development stage company that has yet to generate any revenue since our inception. Since our inception in May 2004, it has been our business plan to design, develop, manufacture and distribute our sole product type--footwear with an interchangeable outer skin. Our Skins shoe product has only been introduced to selected test markets and there is no guarantee that our product will be able to generate any significant revenues. To the extent that we are able to implement our business plan, our business will be subject to all of the problems that typically affect a business with a limited operating history, such as unanticipated expenses, capital shortfalls, delays in design and manufacturing and possible cost overruns.

We have a history of losses and we anticipate that our expenses will dramatically increase as we execute our business plan. Thus, we will likely experience continued losses in the near future and may not ever achieve or maintain profitability.

We have yet to initiate sales or demonstrate that we can generate sufficient sales to become profitable. We incurred significant net losses since our inception from May 2004 through December 31, 2008 of $16,019,163 including losses of $4,621,672 and $6,612,193 for the years ended December 31, 2008 and 2007, respectively. As of December 31, 2008, we had an accumulated deficit of $15,643,305. We expect to continue to incur operating losses in the future. Further, we expect operating expenses to increase as we seek to finalize our designs, build relationships with manufacturers and a distribution channel for product introductions, continue design and development projects, and increase administrative activities to support our planned growth. The extent of our future operating losses and the timing of our profitability are highly uncertain, and we may never generate sufficient revenues to achieve or sustain profitability.

We face risks related to our accounting restatements.

In August and September 2006, we determined that we had accounting inaccuracies in previously reported financial statements and decided to restate our financial statements for the year ended December 31, 2005 and the three months and six months ended March 31, 2006 and June 30, 2006, respectively. The restatements related to our determination that we misapplied accounting principles generally accepted in the United States of America in relation to (i) options granted on October 24, 2005 that were cancelled and replaced on March 16, 2006, (ii) derivative instruments that existed at December 31, 2005, March 31, 2006 and June 30, 2006, and (iii) 122,000 fully vested common stock shares granted to two of the Company's shareholders on April 3, 2006 for consulting services to be provided over a two year term. Such restatement of our financial statements could lead to litigation claims and/or regulatory proceedings against us. The defense of any such claims or proceedings may cause the diversion of management's attention and resources, and we may be required to pay damages if any such claims or proceedings are not resolved in our favor. Any litigation or regulatory proceeding, even if resolved in our favor, could cause us to incur significant legal and other expenses. We also may have difficulty raising equity capital or obtaining other financing, such as lines of credit or otherwise. We may not be able to effectuate our current operating strategy, including our ability effect the initial launch of our product and obtain additional financing in the future. The occurrence of any of the foregoing could harm our business and reputation and cause the price of our securities to decline.

Our business is based on a single unproven and undeveloped product, and we may not be able to generate significant revenue if our product fails.

We are a development stage company. Our business and ability to generate revenue will depend on our ability to successfully develop and commercialize our only product type-the Skins and Bone shoe-which is currently in development and testing stages. We have conducted various wear, fit and abrasion testing on our product, but there is no guarantee that the product will ever be fully and successfully developed. We may experience unforeseen difficulties during our testing and development of our product, which may require us to expend a significant amount of resources in an attempt to address any faults that are discovered. Such faults may be related to comfort, durability, appearance and any other characteristics that would affect the commercial viability of the product.

Further, even if we are able to develop and release our product, there can be no assurance that it will be well-received by the market or that it will generate any substantial revenue. Accordingly, our failure to generate revenue from our sole product type will have a significant negative impact on our business and results of operation, and shareholders in our company may lose all or part of their investment.

Our management has a limited amount of senior management experience in manufacturing footwear and apparel industry and limited design experience in the industry.

Our company is new to the footwear industry and our management has limited experience conducting business with overseas manufactures. The lack of experience in footwear management and the non-traditional design of our footwear may make it difficult to compete against companies that have more senior management and are manufacturing conventional footwear designs. We expect to add additional key personnel in the near future. Our failure to attract and fully integrate our new employees into our operations or successfully manage such employees could have a material adverse effect on our business, financial condition and results of operations.

Our future success depends on our ability to respond to changing consumer demands, to identify and to interpret fashion trends and successfully to market new products.

The footwear industry is subject to rapidly changing consumer demands and fashion trends, particularly in the “high fashion” market that we intend to market our product. Accordingly, we must identify and interpret fashion trends and respond in a timely manner. Demand for and market acceptance of new products are uncertain and achieving market acceptance for new products generally requires substantial product development and marketing efforts and expenditures. If we do not meet changing consumer demands or are unable to continually develop styles that appeal to current consumer demands, our results of operations will be negatively impacted. In addition, we will have to make decisions about product designs and marketing expenditures several months in advance of the time when consumer acceptance can be determined, which makes it more difficult to appeal to current demands. If we fail to anticipate, identify or react appropriately to changes in styles and trends or are not successful in marketing our products, we could experience excess inventories, higher than normal markdowns or an inability to sell our products once and if the products are available.

Our business and the success of our products could be harmed if we are unable to establish and maintain a brand image.

We believe that establishing the Skins brand is critical to achieving acceptance of our footwear products and to establishing key strategic relationships. As a new company with a new brand, we believe that we have little to no brand recognition with the public. We may experience difficulty in establishing a brand name that is well-known and regarded, and any brand image that we may be able to create may be quickly impaired. The importance of brand recognition will increase when and if our competitors create products that are similar to our products. Even if we are able to establish a brand image and react appropriately to changes in consumer preferences, consumers may consider our brand image to be outdated or associate our brand with styles of footwear that are no longer popular. In the past, footwear companies have experienced fluctuations in revenues and sales due, at least in part, to changes in the companies' brand image. Our results of operations may be similarly affected in the future should our products even be successfully launched.

We may fail in introducing and promoting our new products to the footwear market, which will have an adverse effect on our ability to generate revenues.

Demand for and market acceptance of new products such as the Skin and Bones product type is inherently uncertain. We expect that our revenue, if and when generated, will come from the sale of our products, and our ability to sell our products will depend on various factors, including the eventual strength, if any, of our brand name, competitive conditions and our access to necessary capital. If we fail to introduce and promote our products, we may not be able to generate any significant revenues. In addition, as part of our growth strategy, we intend to expand our product offerings to introduce products in multiple categories. This strategy may however prove unsuccessful and our association with failed products could impair our brand image. Introducing and achieving market acceptance for these products will require, among other things:

·	the establishment of our brand;

·	the development and application of advanced performance technologies to our planned product introductions;

·	the establishment of key relationships with designers of and customers for our apparel products; and

·	substantial marketing and product development efforts and expenditures to create and sustain consumer demand.

When and if our products are introduced and commercially available, we expect to rely on licensees for sales outside the U.S., and our dependence on licensees may adversely impact our business and results of operations.

We expect that our sales outside the U.S., if any, will be conducted through licensees. Any dependence on licensees will subject us to a number of risks, including:

Our brand image will be dependent, in part, on the marketing efforts of our licensees and on the quality of the products that licensees distribute. If licensees or their sponsors or endorsers do not maintain our brand image or our licensees fail to adhere to our quality control standards, our brand image could suffer.

·	We expect that our licensees will likely have the exclusive right to distribute products in a particular country or region. Licensees may engage in the trans-shipment, or gray marketing, of goods to countries where they are not licensed to sell products.

·	Licensees may use manufacturers who fail to meet our human rights or product quality standards, which could harm our brand image and reputation.

·	Licensees may fail to timely and accurately report sales and licensing income to us.

·	Our reserve for unpaid licensee revenue may be insufficient.

Revenue we may receive from international licensees will subject us to the risks of doing business abroad, including, political risks, foreign currency risks, funds transfer restrictions and exposure to different legal standards, particularly with respect to intellectual property.

Our business could be harmed if we fail to maintain proper inventory levels once product is available.

We may have difficulty in determining and maintaining the proper inventory levels for our Skins shoe product and styles, and if our inventory levels are too high or low, our results of operations will suffer. We plan to market our Skins shoe product as a “high level” style and fashion product, and, as a result, we will be subject to a higher risk of having an overstocked inventory because such styles and fashions change quickly and past styles can be rapidly considered obsolete. We expect to place orders with manufacturers for most of our products prior to the time we receive customer orders. Our inventory levels that are in excess of any customer demand, if any, that may develop for our products, once available, may result in an inventory of unfashionable product styles, inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image as it is built and have a material adverse effect on our operating results and financial condition. Conversely, if we underestimate any consumer demand for our products that may develop or if our manufacturers, which are located in Brazil, fail to supply the quality products that we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships, and diminish any brand loyalty that we may be able to foster.

We expect to rely on independent contract manufacturers and, as a result, will be exposed to potential disruptions in product supply.

Our footwear products will likely be manufactured by independent contract manufacturers. We will not have long-term contracts with manufacturers and will compete with other footwear companies for production facilities. We could experience difficulties with these manufacturers, including reductions in the availability of production capacity, failure to meet our quality control standards, failure to meet production deadlines or increased manufacturing costs. This could result in future customers, if any, canceling orders, refusing to accept deliveries or demanding reductions in purchase prices, any of which could have a negative impact on our cash flow and harm our business.

We are likely to depend upon a relatively small group of customers for a large portion of our sales.

Our customers are not likely to have a contractual obligation to purchase our products once they are available and we cannot be certain that we will be able to retain major customers. We are likely to rely at all stages of our business on certain significant customers, as they may develop. Furthermore, the retail industry regularly experiences consolidation, contractions and closings. If there are further consolidations, contractions or closings in the future, we may lose future customers or be unable to collect accounts receivable of major customers in excess of amounts that we may insure. If we lose a major customer in the future, experience a significant decrease in sales to a major customer or are unable to collect the accounts receivable of a major customer in excess of amounts insured, our business could be harmed.

Any international sales and manufacturing operations we are able to develop will be subject to the risks of doing business abroad, which could affect our ability to sell or manufacture our products in international markets, obtain products from foreign suppliers or control the costs of our products.

Substantially all of any net sales we may be able to develop are likely to be derived from sales of footwear manufactured in foreign countries, which is currently Brazil. We also expect to sell our footwear products in foreign countries and plan to establish international sales efforts over time as part of our growth strategy. Foreign manufacturing and sales will be subject to a number of risks, including:

·	work stoppages;

·	natural disasters and outbreaks pandemic diseases (such as the Avian Flu);

·	changing domestic and foreign economic conditions;

·	currency exchange rate fluctuations;

·	electrical shortages;

·	transportation delays or damage to products in transit;

·	the imposition of tariffs and trade duties both international and domestically;

·	import and export controls and other non-tariff barriers;

·	exposure to different legal standards (particularly with respect to intellectual property);

·	compliance with foreign laws; and

·	changes in domestic and foreign governmental policies.

The effects of these factors could restrict our ability to manufacture or sell our shoe products in a particular country and have a negative impact on our operating results.

Our business could be harmed if our future contract manufacturers, suppliers or licensees violate labor or other laws.

Once we are able to retain them, our independent contract manufacturers, suppliers and licensees may not operate in compliance with applicable United States and foreign laws and regulations, including labor practices. If one of any of our possible future independent contract manufacturers, suppliers or licensees violates labor or other laws or diverges from those labor practices generally accepted as ethical in the United States, we could result in adverse publicity for us, damage our reputation in the United States or render our conduct of business in a particular foreign country undesirable or impractical, any of which could harm our business.

We expect that once our products are introduced and when, and if, we are able to generate revenue on our products, our quarterly revenues and operating results will fluctuate as a result of a variety of factors, including seasonal fluctuations in demand for footwear, delivery date delays and potential fluctuations in our annualized tax rate, which may result in volatility of our stock price.

Once and if established, our quarterly revenues and operating results can be expected to fluctuate due to a number of factors, many of which are beyond our control. For example, sales of footwear products have historically been seasonal in nature with the strongest sales generally occurring in the second and third quarters. Delays in scheduling or pickup of purchased products by domestic customers could negatively impact our net sales and results of operations for any given quarter. In addition, a number of companies in the footwear industry specifically, and others in the fashion and apparel industry in general, have experienced periods of growth in revenues and earnings and thereafter periods of declining sales and losses, based on the market reception of their collection of products for a particular season. Also, our annualized tax rate will be based on projections of our domestic and international operating results for the year, which we will review and revise as necessary at the end of each quarter, and we will be highly sensitive to fluctuations in projected international earnings. Any quarterly fluctuations in our annualized tax rate that may occur could have a material impact on our quarterly operating results. As a result of these specific and other general factors, our operating results will likely vary from quarter to quarter and the results for any particular quarter may not be necessarily indicative of results for the full year.

We will face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our business could be harmed.

We will face intense competition in the footwear industry from other established companies. We have no product sales, introductions, manufacturing or brand equity. All of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas will enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production and more quickly develop new products. In addition, new companies may enter the markets in which we expect to compete, further increasing competition in the footwear industry.

We believe that our ability to compete successfully will depend on a number of factors, including the style and quality of our products once marketed and the strength of our brand, once established, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products.

We depend on key personnel to manage our business effectively in a rapidly changing market, and if we are unable to retain existing personnel, our business could be harmed.

Our future success depends upon the continued services of Mark Klein, President and Chief Executive Officer. The loss of the services of Mr. Klein or any other key employee could harm us. Our future success also depends on our ability to identify, attract and retain additional qualified personnel. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel.

The disruption, expense and potential liability associated with unanticipated future litigation against us could have a material adverse effect on our business, results of operations and financial condition.

We expect to be subject to various legal proceedings and threatened legal proceedings from time to time as part of our ordinary business. We are not currently a party to any legal proceedings. However, any unanticipated litigation in the future, regardless of merits, could significantly divert management's attention from our operations and result in substantial legal fees to it. Further, there can be no assurance that any actions that have been or will be brought against us will be resolved in our favor or, if significant monetary judgments are rendered against us, that we will have the ability to pay such judgments. Such disruptions, legal fees and any losses resulting from these claims could have a material adverse effect on our business, results of operations and financial condition.

Our ability to compete will be jeopardized if we are unable to protect our intellectual property rights or if we are sued for intellectual property infringement.

We hope to use trademarks on most or all of our products and believe that having distinctive marks that are readily identifiable will be an important factor in creating a market for our goods, in identifying our and in distinguishing our products from the products of others.

We own one issued United States patent claiming the modular shoe system; this patent issued February 6, 2007 as U.S. patent number 7,171,768 (the ‘768 patent). Additionally we have two pending U.S. patent applications also claiming certain aspects of the modular shoe system: U.S. patent application serial number (USPASN) 11/638,166 filed December 13, 2006, which is a continuation of ‘768 patent, and USPASN 11/578,741 which is a national phase application of Patent Cooperation Treaty (PCT) international application serial number PCT/US04/033446 (the '446 application). The '446 application has also been nationalized in Australia, Canada, China (PRC), Europe, Hong Kong, Israel, Japan, Korea, New Zealand and the Russian Federation.

We believe that our ability to achieve success will depend primarily upon our ability to be effective in design, research and development, production and marketing rather than upon our patent position, however, we expect to establish a policy of filing applications for United States and foreign patents on designs and technologies that we deem valuable. If we fail to protect or maintain our trademarks, we may lose or damage our intellectual property rights and impair our ability to generate revenue in the future.

We may incur significant litigation expenses protecting our intellectual property or defending our use of intellectual property, which may have a material adverse effect on our cash flow and results of operations.

If our efforts to protect our intellectual property rights are inadequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the intellectual property rights of others, we could incur substantial significant legal expenses in resolving such disputes.

Our competitors may develop similar, non-infringing products that adversely affect our ability to generate revenues.

Our competitors may be able to produce a footwear product that is similar to our product without infringing on our intellectual property rights. Since we have yet to establish any significant brand recognition for our product, we could lose a substantial amount of business due to competitors developing products similar to our Skin and Bones footwear product. As a result, our future growth and ability to generate revenues from the sale of our product could suffer a material adverse effect.

Our business may be negatively impacted as a result of changes in the economy and consumer spending.

Our business will depend on the general economic environment and levels of consumer spending that affect not only the ultimate consumer, but also retailers, our likely primary direct customers. Purchases of footwear tend to decline in periods of recession or uncertainty regarding future economic prospects, when consumer spending, particularly on discretionary items, declines. During periods of recession or economic uncertainty, we may not be able to maintain or increase our sales to customers, maintain sales levels, establish international operations on a profitable basis or create earnings from operations as a percentage of net sales. As a result, our operating results may be adversely and materially affected by downward trends in the economy or the occurrence of events that adversely affect the economy in general. Our operating results and margins will be adversely impacted if we do not grow as anticipated.

We may be unable to scale our operations successfully.

Our plan is to grow our business rapidly. Our growth, if it occurs as planned, will place significant demands on our management, as well as our financial, administrative and other resources. Our success will be heavily dependent on our ability to integrate additional qualified employees that provide expertise in order to help grow the business. There is no guarantee that we will be able to locate and retain qualified personnel for such positions, which would likely hinder our ability to manage operations. Furthermore, we cannot guarantee that any of the systems, procedures and controls we put in place will be adequate to support the commercialization of our products or other operations. Our operating results will depend substantially on the ability of our officers and key employees to manage changing business conditions and to implement and improve our financial, administrative and other resources. If we are unable to respond to and manage changing business conditions, or the scale of our products, services and operations, then the quality of our services, our ability to retain key personnel and our business could be harmed.

RISKS RELATED TO OUR CAPITAL STRUCTURE

There is no assurance of an established public trading market, which would adversely affect the ability of our investors to sell their securities in the public market.

Although our common stock is listed on the OTC Bulletin Board, a regular trading market for the securities does not yet exist and may not exist or be sustained in the future. The NASD has enacted changes that limit quotations on the OTC Bulletin Board to securities of issuers that are current in their reports filed with the Securities and Exchange Commission. The effect on the OTC Bulletin Board of these rule changes and other proposed changes cannot be determined at this time. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASD's automated quotation system, or the NASDAQ Stock Market. Quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers as are those for the NASDAQ Stock Market. Therefore, prices for securities traded solely on the OTC Bulletin Board may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price. Market prices for our common stock will be influenced by a number of factors, including:

·	the issuance of new equity securities pursuant to the share exchange transaction, or a future offering;

·	changes in interest rates;

·	competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

·	variations in quarterly operating results;

·	change in financial estimates by securities analysts;

·	the depth and liquidity of the market for our common stock;

·	investor perceptions of our company and the footwear industry generally; and

·	general economic and other national conditions.

Our principal stockholders have significant influence over our company.

Mark Klein, Michael J. Rosenthal, Geoffrey Dubey and Joshua Hermelin, each of whom were principal stockholders of Skins Footwear prior to the Share Exchange Transactions, beneficially own, in the aggregate, a majority of our outstanding voting stock following the Share Exchange Transaction. Mr. Klein became our President and Chief Executive Officer and Mr. Rosenthal became director of our company upon the closing of the Share Exchange Transaction. These stockholders possess significant influence over our company, giving them the ability, among other things, to elect a majority of the Board of Directors and to approve significant corporate transactions. Such stock ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

We may not be able to achieve the benefits we expect to result from the Share Exchange Transaction.

On March 20, 2006, the Share Exchange Transaction closed, Skins Footwear Inc. became our wholly-owned subsidiary and our sole business operations became that of Skins Footwear Inc. Also, the management and directors of Skins Footwear Inc. became the management and directors of our company.

The Share Exchange Transaction was conducted for various reasons, but there is no guarantee that we will ever obtain the anticipated benefits, as follows:

·	the increased market liquidity expected to result from exchanging stock in a private company for publicly traded securities;

·	the ability to use registered securities to make acquisition of assets or businesses;

·	increased visibility in the financial community;

·	enhanced access to the capital markets;

·	improved transparency of operations; and

·	perceived credibility and enhanced corporate image of being a publicly traded company.

There can be no assurance that any of the anticipated benefits of the Share Exchange Transaction will be realized in respect to our new business operations. In addition, the attention and effort devoted to achieving the benefits of the Share Exchange Transaction and attending to the obligations of being a public company, such as reporting requirements and securities regulations, could significantly divert our management's attention from other important issues, which could materially and adversely affect our operating results or stock price in the future.

Failure To Achieve And Maintain Effective Internal Controls In Accordance With Section 404 Of The Sarbanes-Oxley Act Could Have A Material Adverse Effect On Our Business And Operating Results.

Our internal control over financial reporting or disclosure controls and procedures may have weaknesses and conditions that need to be addressed, the disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal controls over financial reporting and disclosure controls and procedures. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting or disclosure controls and procedures may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting, disclosure controls and procedures or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure controls and procedures may have an adverse impact on the price of our common stock.

As of December 31, 2008, our management, including our Chief Executive Officer, or “CEO,” who is the Principal Executive Officer, and our Chief Financial Officer, or “CFO,” who is our Principal Financial and Accounting Officer, performed an evaluation of the effectiveness and the operation of our disclosure controls and procedures and internal controls over financial reporting as defined in Rules 13a-15(e) or 15d-15(e) and Rules 13(a) -15(f) and 15d- 15(f), respectively under the Securities Exchange Act of 1934, as amended, or the “Exchange Act.

In addition, in connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses” in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines “significant deficiency” as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.

In the event that a material weakness is identified, we will employ qualified personnel and adopt and implement policies and procedures to address any material weaknesses that we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify or that we will implement and maintain adequate controls over our financial process and reporting in the future.

Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), as of December 31, 2008.

In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses at December 31, 2008:

Due to the limited number of Company personnel, a lack of segregation of duties exists. An essential part of internal control is for certain procedures to be properly segregated and the results of their performance be adequately reviewed. This is normally accomplished by assigning duties so that no one person handles a transaction from beginning to end and incompatible duties between functions are not handled by the same person.

As a result of the material weaknesses described above, management has concluded that, as of December 31, 2008, our internal control over financial reporting was not effective based on the criteria in “Internal Control-Integrated Framework” issued by COSO. We intend to initiate measures to remediate and refine our internal controls to address this identified material weakness as the Company grows and when we obtain a stronger cash position that would justify additional expenditures.

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

Our common stock is considered a “penny stock,” and is subject to additional sale and trading regulations that may make it more difficult to sell.

Our common stock is considered to be a “penny stock” since it does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Securities Exchange Act for 1934, as amended, or the Exchange Act. Our common stock is a “penny stock” because it meets one or more of the following conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on the Nasdaq Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million.

The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor's account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

Operating History And Lack Of Profits Which Could Lead To Wide Fluctuations In Our Share Price. The Price At Which You Purchase Our Common Shares May Not Be Indicative Of The Price That Will Prevail In The Trading Market. You May Be Unable To Sell Your Common Shares At Or Above Your Purchase Price, Which May Result In Substantial Losses To You. The Market Price For Our Common Shares Is Particularly Volatile Given Our Status As A Relatively Unknown Company With A Small And Thinly Traded Public Float.

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.

We do not foresee paying cash dividends in the foreseeable future.

To date, we have not declared or paid any cash dividends on our shares of common stock and currently intend to retain any future earnings for funding growth. We do not anticipate paying any dividends in the foreseeable future. As a result, you should not rely on an investment in our securities if you require dividend income. Capital appreciation, if any, of our shares may be your sole source of gain for the foreseeable future. Moreover, you may not be able to resell your shares in our company at or above the price you paid for them.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable to small business filers.

ITEM 2. DESCRIPTION OF PROPERTY.

We do not own any real property.

On September 26, 2008 the Company entered into a one year lease, beginning October 1, 2008, for new office space in Hoboken, New Jersey. The minimum monthly rental under the lease is $2,200 per month. The Company also paid a one-month security deposit. The lease is renewable for one year at a minimum rental rate of $2,200 per month.

ITEM 3. LEGAL PROCEEDINGS.

We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

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

The Company submitted no matters to a vote of its security holders during the fiscal year ended December 31, 2008.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the Over-the-Counter Bulleting Board under the trading symbol “SKNN.” Prior to April 18, 2006, our shares were listed under the symbol “LGIM.” No trading market for our common stock developed until March 20, 2006, the closing of the Share Exchange Transaction. The following table sets forth the high and low bid prices for our common stock for the periods noted, as reported by the National Daily Quotation Service and the Over-The-Counter Bulletin Board. Quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.

	2008
	High		Low
Fourth Quarter	$	0.10	$	0.04
Third Quarter	$	0.22	$	0.04
Second Quarter	$	0.69	$	0.17
First Quarter	$	0.38	$	0.16

	2007
	High		Low
Fourth Quarter	$	1.40	$	0.23
Third Quarter	$	2.29	$	1.20
Second Quarter	$	1.84	$	0.75
First Quarter	$	2.79	$	1.53

As of December 31, 2008, we had approximately 38 registered shareholders. The closing sales price of our common stock on December 31, 2008 was $0.05, as reported on the Over-the-Counter Bulletin Board.

The price of our common stock will likely fluctuate in the future. The stock market in general has experienced extreme stock price fluctuations in the past few years. In some cases, these fluctuations have been unrelated to the operating performance of the affected companies. Many companies have experienced dramatic volatility in the market prices of their common stock. We believe that a number of factors, both within and outside our control, could cause the price of our common stock to fluctuate, perhaps substantially. Factors such as the following could have a significant adverse impact on the market price of our common stock:

Our limited operating history;

Our lack of profits from operations;

Our restatement of our financial statements;

Our ability to raise additional funds on acceptable terms or at all;

Our ability to successfully design, manufacture and commercialize our proposed product;

Our reliance on one unproven and undeveloped product type;

Rapidly changing consumer demands for footwear products;

Our unestablished brand;

The degree and nature of our competition;

Our ability to employ and retain qualified employees;

The limited trading market for our common stock; and

Current market conditions

Securities Authorized for Issuance Under Equity Compensation Plans

The table below provides information regarding our securities that have been authorized for issuance under equity compensation plans as of December 31, 2008:

	# of securities to be issued upon exercise of outstanding options, warrants and rights (a)			Weighted- average exercise price of outstanding options, warrants and rights (b)		# of Common Shares			# of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
Equity compensation plans approved by security holders		3,549,092	(1)	$	$0.39					1,450,908	(2)
Equity compensation plans not approved by securities holders		150,000	(3)		1.38		1,900,000	(3)		5,950,000,	(2)
Total		3,699,092	1	$	1.02		1,900,000			7,400,908

(1)

Represents stock options outstanding under our Amended and Restated 2005 Incentive Plan (the “2005 Incentive Plan”), under which a total of 5,000,000 shares are authorized to be issued. On October 29, 2008 and February 5, 2009 the Company Board of Directors approved an increase to 13,000,000 and 30,000,000 shares, respectively, authorized under the 2005 Incentive Plan

(2)	Represents shares available for future issuance under our 2005 Incentive Plan.

(3)	Represents warrants that were issued to third parties for services.

Dividends

We may never pay any dividends to our shareholders. We did not declare any dividends for the year ended December 31, 2008. Our Board of Directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.

Transfer Agent

Our Transfer Agent and Registrar for the common stock is Nevada Agency & Trust Company, 50 West Liberty Street, Suite 880, Reno, NV 89501

ITEM 6. SELECTED FINANCIAL DATA

Not required under Regulation S-K for “smaller reporting companies”.

ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND

RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The following discussion includes forward looking statements and uncertainties, including plans, objectives, goals, strategies, financial projections as well as known and unknown uncertainties. The actual results of our future performance may differ materially from the results anticipated in these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievement. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K.

OVERVIEW

Our Company

We are a development stage company. We have not yet realized any revenues from our planned operations.

We have designed and continue to develop an innovative footwear product - a two-part footwear structure consisting of an outer collapsible “Skin” and an inner orthopedic support section called the “Bone.” This structure enables consumers to purchase one inner section and multiple outer skins - resulting in multiple style variations from the same pair of inner section, with the same feel and fit despite the type of Skin being worn. Our primary activities have been conducting research and development, performing business, strategic and financial planning, and raising capital.

We have initially designed and manufactured men's and women's footwear and distributed to a test market through soft commercial launches in 2007 and 2008. Due to technological advances in the product, we updated the design of the Bone to be launched for the Spring/Summer 2009 season. The Bone is designed such that it can only be worn once it is inside the Skin and not on its own. As a result of the product enhancements and advanced technologies all inventory was rendered obsolete at December 31, 2008.

We anticipate marketing our products via traditional footwear channels, non-traditional apparel channels, the Internet and other retail locations that traditionally do not have a footwear department. Due to the interchangeability of a Skin and a Bone, a consumer will know how the product will fit and feel once they own a Bone, allowing the customer to purchase a Skin from various venues without having to try on the product.

Our objective is to create a new attire concept that allows and encourages consumers to more frequently change their footwear - positioning the Skins concept between footwear and apparel. Our footwear will initially be designed with an active, youthful lifestyle in mind. We will initially design most of our styles to be fashionable and marketable to the 18- to 35-year old consumer, with consideration in the future to lines that will appeal to the broad cross-section of the population.

PLANNED OPERATIONS

Product Development

We have designed, outsourced manufactured and are marketing a patented quality men’s and women’s footwear. We completed a test and soft launch to limited number of select retailers during the third quarter of 2007 and the second quarter of 2008. The focus is on creating a high-end line of Skins priced at a manufacturer's suggested average retail price of $110 to $130 for women and $140 to $160 for men. Based upon test launches in 2007 and 2008, further market research conducted with our retail partners, design consultants, and practical feedback, the Bone now has no toe-box in an attempt to increase comfort and provide a better fit to a wider audience of consumers. The Bone and Skins technology, as it stands today, has now been field tested with different retailers, different consumers and is scalable and transferable. Our Skins are being designed by our in-house designer and other outsourced design firms. They collaboratively put together the collection for men's and women's Skins, the packaging and retail displays, and help in refining the creative identity of the brand.

We continue to seek ways to lower costs, and explore other materials with various characteristic benefits and will always look to improve upon our product. As a result we made the decision to use a manufacturer located in Brazil and use a sourcing agent with local Brazilian shoe manufacturing expertise. We believe that the change in manufacturer will both reduce our production costs while raising the quality of our product. The Brazilian made Spring/Summer 2009 Collection (“SS 2009”) was delivered in March 2009 and shipped to retailers through April 2009. We are currently taking orders on the Brazilian made Fall/Winter 2009 Collection (“F/W 2009”).

Sourcing

On November 24, 2008 the Company entered into a Buying Agency Agreement with LJP International, LLC. Pursuant to the agreement, LJP will serve as the Company’s non-exclusive buying and sourcing agent and will be responsible for sourcing of raw materials, arranging manufacturing facilities, monitoring manufacturer quality, finished product inspection, and coordinating freight forwarders. The Company will pay LJP an amount equal to 8% of the FOB country of origin price for product ordered, shipped, and accept by the Company. Either party may terminate the agreement at any time upon providing the other party with 90 days written notice.

Planned Distribution

We plan to act as a wholesaler and market our products to specialty, department, and Internet retail locations via our marketing and branding efforts in addition to international distributors.

Our management will consider the children's market and more mainstream middle-market retailers once our brand is more established. Our management is also considering licensing our technology in the future.

We have designed, outsourced manufactured, and are now marketing quality men’s and women’s footwear with distribution to select retailers that began in March 2009. Our management is currently writing orders for the Fall/Winter 2009 retail season. The planned distribution will encompass independent specialty retailers, national retailers and department stores, E-tailers, and some International distribution.

Results of Operations and Financial Condition

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

There were no earned revenues during the years ended December 31, 2008 and 2007.

Design and development expenses were $858,261 and $1,859,238 for the years ended December 31, 2008 and 2007, respectively. The decrease of $1,000,977 was primarily attributable to a decrease in the amount of design and development costs from the prior year needed to further develop the product and bring it to market due to the lack of resources.

Selling, general and administrative expenses (SG&A) for the years ended December 31, 2008 and 2007 were $3,651,975 and $4,780,436, respectively.

The decrease in SG&A expenses of $1,128,461 are primarily attributable to increases in employee compensation and benefits of approximately $80,000 to staff the business in anticipation of bringing the product to market, increased warehouse and operating expenses of $5,000, increases in non-cash and other charges such as additional non cash fees paid to promissory note holders totaling approximately $187,000, and an increase in depreciation of approximately $190,000, which were offset by reductions in travel of approximately $274,000, marketing and advertising expenses of approximately $459,000, professional and other expenses of approximately $326,000, share-based compensation of approximately $333,000, termination expenses for a previous employee of $170,000, and non recurring income of $28,000.

Our net loss for the year ended December 31, 2008 was $4,621,672 or $0.09 per share as compared to a net loss of $6,612,193 or $0.18 per share for the year ended December 31, 2007.

Liquidity and Capital Resources

As of December 31, 2008, we had no established source of revenues and had accumulated losses of $16,019,163 since inception. Our ability to continue as a going concern is dependent upon achieving production, sales, profitability and our ability to obtain the necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. The financial statements contained in this Form 10-K do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. We anticipate that additional funding may be generated from the sale of common shares and/or debt with an equity feature and from asset based financing or factoring.

At December 31, 2008, we had $88 in cash . We earned no revenues since our inception in May 2004.

Generally, we have primarily financed operations to date through the proceeds of the private placement of equity securities, the proceeds of warrants exercised, and the issuance of promissory notes.

We received net proceeds of $2,261,462 from the private placements that were conducted in connection with the share exchange transaction during the fiscal quarter ended March 31, 2006. During the fourth quarter of fiscal 2006 and the first quarter of fiscal 2007 we received cash proceeds from warrant exercises totaling $1,680,763 and $609,462, respectively.

On May 21, 2007, we closed a financing transaction pursuant to which we sold a total of 4,000,000 units to seven investors and raised an aggregate of $3,000,000. Each unit consists of one share of our common stock and one share purchase warrant that is exercisable at an exercise price of $1.00 per share at any time upon election of the holder during the 30 months after the offering. Net proceeds from the private offering were $2,962,013 (net of issuance costs of $37,987).

From December 2007 through March 2008, we issued secured promissory notes in a total amount of $705,000 to various lenders. The notes bore interest at the rate of 5% per annum compounded annually and were secured by the grant of a security interest by us to the lenders in all of our intellectual property rights, patents, copyrights, trademarks which we now have or acquire and all proceeds and products thereof. We agreed to repay the Loan upon our completion of a financing, and in no event later than six months from each of the notes’ date of issuance. Pursuant to the notes, and in consideration of entering into the notes, the lenders received a total of 1,285,976 shares of our common stock. In addition, the lenders received piggy-back registration rights with respect to the shares. In April 2008, we conducted a private placement and the lenders invested the principal amounts due under the notes into the placement and waived interest due under the notes. As part of the consideration, we issued an additional 316,298 shares of common stock to the lenders as part of the transaction.

On April 9, 2008, we sold a total of 13,403,225 units to 27 investors and raised aggregate gross proceeds of approximately $2,680,645 in a private offering. Of the gross proceeds of $2,680,645 raised in the offering,

(i)

$1,935,000 represents cash received by the Company from investors,

(ii)

$705,000 represents an amount due under six secured promissory notes previously issued by the Company that was invested by five holders into this offering, and

(iii)

$40,645 represents amounts owed by the Company to three non-employee board members and two advisory board members in lieu of payment for fees due to them.

In addition, the Company issued 100,000 units to a financial consultant that provided services in connection with the offering in lieu of $20,000 payment in cash for such services.

Each unit was sold for $0.20 and consists of one share of common stock of the Company and one share purchase warrant, exercisable at an exercise price of $0.40 per share at any time upon election of the holder during the 24 month period following the offering.

Pursuant to a private placement offering the Company sold 4,900,000 private placement units for $245,000 in September 2008. Each Unit was sold for $0.05 and consists of one share of the Company Common stock and one purchase Warrant representing one and one-half shares of Company Common Stock, exercisable at an exercise price of $0.05 per Warrant. The Warrants expire 30 months from the date of issuance.

On November 7, 2008 and November 19, 2008 the Company sold 3,000,000 and 1,800,000 private placement units for $150,000 and $90,000, respectively, pursuant to a private placement offering. Each unit was sold for $0.05 and consisted of one share of Company Common stock and one purchase Warrant representing one and one-half shares of Company Common Stock, exercisable at an exercise price of $0.05 per share. The Warrants expire 30 months from the date of issuance.

On November 11, 2008 the Company closed on a Revolving Loan and Security Agreement (the “Loan Agreement) which included a September 12, 2008 Facility Letter signed with Ashford Finance, LLC (“Ashford”), their terms of which provide for a $3 million Letter of Credit and Accounts Receivable financing facility. The Loan Agreement terminates on November 30, 2009. All financings by Ashford are subject to Ashford’s sole discretion. All Letters of Credit funded for inventory production will be based upon purchase orders from customers acceptable to Ashford. In addition Ashford will finance up to 75% of eligible accounts receivable, as defined. This agreement is collateralized by a first priority security interest in all Company assets, as defined. In addition all borrowings under the terms of the Facility are personally guaranteed by Mark Klein, the Company’s Chief Executive Officer. To date the Company has not made any borrowings under the Loan Agreement.

Net cash used in operating activities for the year ended December 31, 2008 was $2,385,647 as compared to net cash used of $5,324,722 in the same period in 2007. The decrease in net cash used was primarily attributable to a decrease in net loss from operations during the year ended December 30, 2008 as compared to the same period in 2007, which was primarily attributable to a decrease in operating expenditures compared to the year ended December 31, 2007. Operating expenditures consisted principally of design and development, advertising and promotion, legal and accounting fees and salaries and costs to bring the product to market.

Cash used in investing activities for the year ended December 31, 2008 was $528,904, as compared to $260,023 during the same period in 2007. The increase in net cash used was primarily attributable to an increase in our purchase of molds, store displays and property and equipment.

Net cash provided by financing activities for the year ended December 31, 2008 was $2,908,453, as compared to $3,836,005 for the same period in 2007. The decrease was primarily attributable to the Company receiving $555,000 from the issuance of secured promissory notes to various lenders, the raising of $1,868,453 (net of direct costs of $66,547) from the April 9, 2008 private placement, and raising $485,000 from the September 2008 and November 2008 private placement offerings while the Company raised a net $2,962,013 in the May 21, 2007 financing transaction.

At December 31, 2008, we had 3,459,092 stock options and 27,767,592 common stock purchase warrants outstanding. The outstanding stock options have a weighted average exercise price of $0.39 per share as adjusted for the April 2, 2008 option repricing. The outstanding warrants have a weighted average exercise price of $0.36 per share. Accordingly, at December 31, 2008, the outstanding options and warrants represented a total of 36,283,867 shares issuable for a maximum of $11,478,038 if these options and warrants were exercised in full. The exercise of these options and warrants is completely at the discretion of the holders. There is no assurance that any of these options or any additional warrants will be exercised.

On June 16, 2008 the Company appointed Michael Solomon as its new Chief Financial Officer and executed an employment letter on July 9, 2008. Mr. Solomon will be paid $175,000 base salary per year which will be increased to $200,000 per year after the Company completes a financing transaction or series of financing transactions cumulatively totaling in excess of $1 million. Mr. Solomon also was granted 150,000 shares of the Company’s common stock to be issued upon his appointment and received an additional 250,000 shares of common stock three months from the commencement of his employment. On July 30, 2008, the Company and Mr. Solomon, entered into an amendment (the “Amendment”) to the employment letter agreement dated July 9, 2008. Pursuant to the terms of the Amendment, the 150,000 restricted shares of the Company’s Common Stock granted to Mr. Solomon and the 250,000 restricted shares to be to Mr. Solomon under his agreement are subject to certain additional restrictions and subject to forfeiture, as set forth in the Amendment. On October 30, 2008 the Company issued 400,000 shares of common stock to Mr. Solomon. As a result the Company recorded $92,000 of share-based compensation from this issuance.

If we are unable to obtain additional financing, enter into a merger or acquisition, or generate revenue we may not have sufficient cash to continue operations for beyond December 31, 2009. We anticipate raising additional funds through public or private financing, strategic relationships or other arrangements in the near future to support our business operations; however we currently may not have commitments from third parties for sufficient additional capital. We cannot be certain that any such financing will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations. Our ability to obtain additional funding prior to December 31, 2009, and thereafter, will determine our ability to continue as a going concern. Failure to secure additional financing in a timely manner and on favorable terms would have a material adverse effect on our financial performance, results of operations and stock price and require us to curtail or cease operations, sell off our assets, seek protection from our creditors through bankruptcy proceedings, or otherwise. Furthermore, additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, may require that we relinquish valuable rights.

RECENT EVENTS

Stock Option Issuances

On February 5, 2009 the Company Board of Directors approved the issuance of 13,418,182 stock options to Board members, Company officers, employees, and consultants. All stock options were issued at an exercise price of $0.055, fair market value on the date of grant, expire 24 months from that date, and were fully vested upon grant except for 1 million of the options which were issued to certain consultants. Of the total granted 7,168,182 stock options represented payment in lieu of $197,125 of accrued salary, board member fees, and certain consulting fees.

January 2009 Private Placement

On January 16, 2009 and January 20, 2009 the Company sold 600,000 and 200,000 private placement units, respectively, for $40,000. During January 2009 the Company sold 757,500 private placement units to Michael J. Rosenthal, the Company Chairman, for $37,875. Each unit was sold for $0.05 and consisted of one share of Company Common stock and one purchase Warrant representing one and one-half shares of Company Common Stock, exercisable at an exercise price of $0.05 per share. The Warrants expire 30 months from the date of issuance.

March 2009 Financing Agreements

a. Tangiers Investors, LP Securities Purchase Agreement and Convertible Debenture

On March 23, 2009 the Company signed with Tangiers Investors, LP, a limited partnership (“Tangiers”) a Securities Purchase Agreement (“SPA”) and a Registration Rights Agreement. (“Registration Rights Agreement”). In addition, the Company sold a one-year 7% Convertible Debenture to Tangiers for $85,000.

Under terms of the SPA Tangiers will purchase from the Company up to $2 million of Common Stock during an 18 month commitment period (“Commitment Period”) commencing with a registration statement, filed by the Company being declared effective by the Securities and Exchange Commission. Under the Registration Rights Agreement the registration statement must remain effective during the Commitment Period, and must include all shares anticipated being sold to Tangiers. Any sales of Common Stock to Tangiers will be made at the Company’s sole discretion. Any funding under the SPA will be used for general corporate purposes.

The Company may sell to Tangiers shares of Common Stock every 10 Trading Days (“Trading Days”),as defined. The purchase price of the Common Stock shall be 90% of the Market Price which is defined as the lowest daily volume weighted average price of the Common Stock during the five consecutive Trading Days after the Company gives Notice (“Notice”) to Tangiers of its intent to sell Common Shares under the SPA. The maximum total dollar amount sold to Tangiers will be equal to the average daily trading volume in dollar amount during the ten Trading Days preceding the notice of sale by the Company to Tangiers but in no case shall be more than $250,000. In addition the total number of shares of Common Stock purchased by Tangiers during the Commitment Period shall not exceed 9.9% of the then outstanding Common Stock of the Company. For at least ten days after any Notice is given to Tangiers the Company may not sell or issue Common Stock, Preferred Stock, purchase warrants, or stock options except on terms or exceptions described in the SPA. Further, the Company will not, without prior written consent of Tangiers and which shall not be unreasonably withheld, enter into any other equity line of credit financing agreement.

Upon execution of the SPA the Company will pay a $100,000 Commitment Fee (“Commitment Fee”) to Tangiers payable in shares of Common Stock which shall be determined by dividing the Commitment Fee by the lowest volume weighted average price of the Company’s Common Stock during the ten business days immediately following the execution of the SPA (March 23, 2009). The shares to be issued as payment of the Commitment Fee have no registration rights.

In addition, Tangiers purchased from the Company a 7% Convertible Debenture (“Tangiers Debenture”) for $85,000 cash. The Tangiers Debenture matures on March 23, 2010 (“Maturity Date”) and accrues interest, which is payable on the Maturity date in cash or with shares of Common Stock, at the Company’s sole discretion. The Tangiers Debenture may not be prepaid without the written consent of Tangiers. The Tangiers Debenture may be converted, in whole or in part, at any time at the sole discretion of Tangiers, at the Conversion Price (“Conversion Price”), which shall be equal to 75% of the average of the three lowest volume weighted average trading prices of the Company’s Common Stock during the five Trading Days prior to conversion. However, if the average of the three lowest volume weighted average trading prices is below $0.01 the Company can elect to prepay at a premium of 125% the portion of the Tangier Debenture which was subject to the conversion election. The Conversion Price shall be subject to adjustment as defined in the SPA and the conversion privileges shall not be effective if a conversion shall cause Tangiers to own more than 9.9% of the then outstanding Common Stock of the Company.

In the case of an Event of Default, as defined, or a Fundamental Corporate Change, as defined, the Maturity Date shall be accelerated and the principal amount due shall be increased by 150%. In the event of late payment of principal or interest the Conversion Price shall be subject to adjustment, as defined.

The Tangiers transactions closed on April 1, 2009.

b. JED Management Corp. Convertible Debentures

On March 19, 2009 and March 25, 2009 the Company sold two 8% Convertible Debentures (“the Debentures”) to JED Management Corp. (“JED”) for $185,000 each.

Principal and accrued interest on the Debentures matures on as follows: $76,000 on March 19, 2011, $109,000 on March 25, 2011 for the first of the Debentures, and $185,000 on March 25, 2011on the second of the Debentures. The Company may prepay, at its sole discretion, any portion of the principal for 125% of the amount being prepaid plus any portion of the accrued interest. JED, at its sole discretion, may convert the principal plus accrued interest into shares of Common Stock at a price of (60%) of the lowest closing bid price, determined on the then current trading market for the Company’s Common Stock, for 10 trading days prior to conversion. In addition, one of the Debenture’s, in lieu of conversion may be exchanged, including all principal and interest, for non-trade debt of $275,000.

For a period of six months from March 19, 2009 and March 25, 2009, respectively, JED shall be entitled to “piggyback” registration rights on registration statements being filed by the Company except if the registration statements are being filed for the purposes of Private Investment in Public Equity (“Pipe”)transactions.

In the case of an Event of Default, as defined, the payment of principal and accrued interest shall be immediately due and payable if JED so elects.

On March 27, 2009 JED exchanged the second of the debentures for $275,000 of payables of the Company pursuant to Assignment and Assumption Agreements (“A-A Agreements”) between JED and two of the Company’s vendors. Pursuant to the A-A Agreements JED purchased from the vendors, at a discount, payables owed to the vendors provided that the Company agrees to convert to common stock the payables, now owned by JED, at 60% of the lowest closing bid price for 10 days prior to the conversion date. All conversions of the payables into common stock are made at the sole discretion of JED. From March 27, 2009-April 9, 2009 JED converted $30,000 of payables into 559,211 shares of common stock.

April 2008 Option Repricing

On April 2, 2008, we repriced a total of 2,794,625 options that we had previously granted to certain of our employees, directors and consultants. The options, all of which had been previously issued pursuant to our Amended And Restated 2005 Incentive Plan (the “Plan”), were repriced to be $0.40 per share, which is greater than the $0.33 closing trading price of our common stock on the date the Board of Directors approved the transaction. The Board of Directors resolved that an exercise of $0.40 per share would provide an incentive to the recipients of the repriced options to continue to work in the best interests of our company. The other terms of the options, including the vesting schedules, remained unchanged as a result of the repricing. Total additional compensation expense on non vested options relating to the April 2, 2008 repricing is approximately $26,000 which will be expensed ratably over the 7 to 29 months service period that remain. Additional compensation expense on vested and unvested options relating to the April 2, 2008 repricing is $73,422 and $6,458, respectively, is included in selling, general and administrative expenses for the year ended December 31, 2008. The repriced options had originally been issued with $0.80 to $1.37 per share option exercise prices, which prices reflected the then current market prices of our stock on the dates of original grant. As a result of the sharp reduction in the Company’s stock price, the Board of Directors believed that such options no longer would properly incentivize the Company’s employees, officers and consultants who held such options to work in the best interests of the Company and its stockholders. Moreover, the Board of Directors believed that if these options were repriced, that such options would provide better incentives to such employees, officers and directors.

Critical Accounting Policies

Our financial statements reflect the selection and application of accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

Inventory and Inventory Reserves

Inventory is stated at the lower of cost or market, under the first-in, first-out method of inventory valuation. The Company will evaluate its inventory on a quarterly basis to identify excess, slow-moving and obsolete inventory and assesses reserve adequacy. When this evaluation indicates such inventory exists, the reserve is increased by a charge to operations or such inventories are written off.

Share-Based Compensation

The Company uses the fair value recognition provisions of Financial Accounting Standards No. 123R, "Share Based Payment", which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. The Company uses the Black-Sholes model to calculate the fair value of the equity instrument on the grant date.

The Company uses the provisions of FAS 123(R) and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services to account for the compensation expense associated with grants to non-employees. The Company measures the compensation associated with these grants based on the fair value of the equity instruments issued using the Black-Scholes Model. In all option grants of this kind there is no measurement date to calculate the fair value of the options at the date of grant because the performance commitment had not yet occurred (there are no sufficiently large disincentives for non-performance) and the performance by the non-employees was not complete. The Company calculates the expense at each reporting period based upon fair value of the options that vested during the reporting period using the fair value on the reporting date.

Deferred Tax Assets

In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As a result of uncertainty of achieving sufficient taxable income in the future a full valuation allowance against its deferred tax asset has been recorded. If these estimates and assumptions change in the future, the Company may be required to reverse the valuation allowance against deferred tax assets, which could result in additional income tax income.

Impairment of Long Lived Assets

The Company assesses the valuation of components of its property and equipment and other long-lived assets whenever events or circumstances dictate that the carrying value might not be recoverable. The Company bases its evaluation on indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such factors indicate that the carrying amount of an asset group may not be recoverable, the Company determines whether an impairment has occurred by analyzing an estimate of undiscounted future cash flows at the lowest level for which identifiable cash flows exist. If the estimate of the undiscounted cash flows during the estimated useful like of the asset if less than the carrying value of the asset the Company recognizes a loss for the difference between the carrying value of the asset and its estimated fair value, generally measured by the present value of the estimated cash flows.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

PART III

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item 8 is incorporated by reference to the Index to Consolidated Financial Statements beginning at page F-1 of at the end of this Form 10-K.

SKINS INC. AND SUBSIDIARY

A DEVELOPMENT STAGE COMPANY)

	Page
Report of Independent Registered Public Accounting Firm – MHM Mahoney Cohen CPAs		F-1

Report of Independent Registered Public Accounting Firm – Mahoney Cohen & Company, CPA, P.C.		F-2

Financial Statements:
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Stockholders’ Equity (Deficiency)		F-5
Consolidated Statements of Cash Flows		F-6

Notes to Consolidated Financial Statements		F-7

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Skins Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of Skins Inc. and Subsidiary (a development stage company) as of December 31, 2008, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the year then ended and for the period from May 18, 2004, date of inception, to December 31, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Skins Inc. and Subsidiary at December 31, 2008, and the results of their operations and their cash flows for the year ended December 31, 2008, and for the period from May 18, 2004, date of inception, to December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Skins, Inc. and Subsidiary will continue as a going concern. As more fully described in Note 1, at December 31, 2008, the Company has no established source of revenues, a working capital deficit of $1,462,979, and has accumulated losses of $16,019,163 since inception. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/ MHM Mahoney Cohen CPAs

(The New York Practice of Mayer Hoffman McCann P.C.)

New York, New York

April 9, 2009

F-1

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Skins Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of Skins Inc. and Subsidiary (a development stage company) as of December 31, 2007, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the year then ended and for the period from May 18, 2004, date of inception, to December 31, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Skins Inc. and Subsidiary at December 31, 2007, and the results of their operations and their cash flows for the year ended December 31, 2007, and for the period from May 18, 2004, date of inception, to December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Skins, Inc. and Subsidiary will continue as a going concern. As more fully described in Note 1, at December 31, 2007, the Company has no established source of revenues and has accumulated losses of $11,397,491 since inception. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/ Mahoney Cohen & Company, CPA, P.C.

New York, New York

April 12, 2008

F-2

SKINS INC. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2008			2007

ASSETS
Current assets:
Cash and cash equivalents	$	88		$	6,186
Prepaid expenses		56,355			251,034
Total current assets		56,443			257,220

Property and equipment, net (Note 3)		173,071			13,209
Software costs, net (Note 4)		434			16,634
Capitalized production molds (Note 5)		-			10,660
Patent costs, net (Note 6)		195,357			159,400
Other intangibles, net (Note 7)		4,198			1,378
Total Assets	$	429,503		$	458,501

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities (Note 8)	$	1,497,434		$	750,425
Liquidated damages		21,988			21,988
Notes Payable, net of discounts (Note 9)		-			95,777
Total current liabilities		1,519,422			868,190

Commitments and contingencies (Note 10)

Stockholders' Deficiency (Notes 1 and 12)
Common Stock, $.001 par value; 436,363,650 shares authorized; 68,608,471 and 40,961,294 shares issued and outstanding at December 31, 2008 and 2007, respectively		68,608			40,961
Additional paid in capital		14,484,778			10,570,983
Deficit accumulated in the development stage		(15,643,305	)		(11,021,633	)
Total stockholders' deficiency		(1,089,919	)		(409,689	)

Total Liabilities and Stockholders' Deficiency	$	429,503		$	458,501

The accompanying notes are an integral part of the consolidated financial statements.

F-3

SKINS INC. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,						Period from Inception (May 18, 2004) to December 31,
	2008			2007			2008
Operating expenses:

Design and development	$	858,261		$	1,859,238		$	3,193,105

Selling, general and administrative		3,651,975			4,780,436			11,430,675

Total operating expenses		4,510,236			6,639,674			14,623,780

Operating loss		(4,510,236	)		(6,639.674	) )		(14,616,114	)

Unrealized (loss) on derivative instruments		-			-			(1,306,754	)
Liquidated damages		-			5,290			(21,988	)
Interest income		2,235			47,705			77,810
Loss on disposal of property and equipment		(1,993	)		(22,179	)		(24,172	)
Amortization of discount on notes payable		(100,873	)		(3,130	)		(104,003	)
Interest expense		(10,805	)		(205	)		(16,276	)

Net loss	$	(4,621,672	)	$	(6,612,193	)	$	(16,019, 163	)

Basic and diluted loss per share	$	(0.09	)	$	(0.18	)

Weighted average number of common shares outstanding, basic and diluted		53,694,274			37,888,638

The accompanying notes are an integral part of the consolidated financial statements.

F-4

SKINS INC. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)

										Deficit
							Additional			Accumulated			Total
							Paid-in			In The			Stockholders'
	Common Stock						(deficit in)			Development			Equity/
	Shares			Amounts			Capital			Stage			(Deficiency)
Transfer of net liabilities from a predecessor entity - May 18, 2004				$	-		$	(32,312	)	$	-		$	(32,312	)
Shares issued on June 1, 2004		954,513			955			9,045						10,000
Shares issued on July 2, 2004		954,513			955			9,045						10,000
Shares issued on August 4, 2004		1,909,026			1,909			18,091						20,000
Shares issued on August 10, 2004		1,909,026			1,909			18,091						20,000
Shares issued on December 1, 2004		8,338,484			8,338			79,162						87,500
Shares issued on December 30, 2004		144,077			144			1,356						1,500
Shares issued on December 31, 2004		3,818,053			3,818			36,182						40,000
Net Loss		-			-			-			(152,706	)		(152,706	)
Balances at December 31, 2004		18,027,692			18,028			138,660			(152,706	)		3,982

Shares issued for services on October 20, 2005		1,376,308			1,376			(1,370	)		-			6
Net Loss January 1, 2005 to October 20, 2005											(223,152	)		(223,152	)
Recapitalization of deficit upon merger of Skins Shoes, LLC into Skin Shoes, Inc. on October 20, 2005 (Note 1)								(375,858	)		375,858			-
Net Loss Oct 21, 2005 to Dec 31, 2005					-			-			(309,162	)		(309,162	)
Balances at December 31, 2005		19,404,000			19,404			(238,568	)		(309,162	)		(528,326	)

Reclassification of Share based liability Awards to equity Awards upon the re-Adoption of the 2005 Incentive Stock Plan on March 16, 2006		-			-			241,157			-			241,157
Skins Inc. net assets assumed - March 20, 2006		14,821,434			14,821			1,693,886						1,708,707
Conversion of convertible debenture - Common Stock - March 20, 2006		178,572			179			119,821						120,000
Shares issued for consulting services on April 3, 2006		122,000			122			145,058						145,180
Share based Compensation, June 30, 2006								86,156						86,156
Share based Compensation, September 30, 2006								130,218						130,218
Reclassification of Derivative Liability as Form SB-2 became effective on October 10, 2006								1,890,600						1,890,600
Warrants Exercised December 5, 2006		30,000			30			29,970						30,000
Warrants Exercised December 8, 2006		120,000			120			119,880						120,000
Warrants Exercised December 11, 2006		320,000			320			319,680						320,000
Warrants Exercised December 12, 2006		115,715			116			115,599						115,715
Warrants Exercised December 14, 2006		119,000			119			118,881						119,000
Warrants Exercised December 15, 2006		274,000			274			273,726						274,000
Warrants Exercised December 19, 2006		363,476			363			363,113						363,476
Warrants Exercised December 21, 2006		238,572			238			238,334						238,572
Warrants Exercised December 22, 2006		100,000			100			99,900						100,000
Share based Compensation, December 31, 2006								356,240						356,240
Net Loss											(4,100,278	)		(4,100,278	)
Balances at December 31, 2006		36,206,769			36,206			6,103,651			(4,409,440	)		1,730,417

Warrants Exercised January 5, 2007		100,000			100			99,900						100,000
Warrants Exercised January 6, 2007		11,904			12			11,882						11,894
Warrants Exercised January 10, 2007		100,000			100			99,900						100,000
Warrants Exercised January 25, 2007		200,000			200			199,800						200,000
Warrants Exercised February 7, 2007		59,524			60			59,464						59,524
Warrants Exercised February 26, 2007		138,070			138			137,906			-			138,044
Repurchase of options		-			-			(30,445	)		-			(30,445	)
Share based Compensation, March 31, 2007								195,381						195,381
Shares issued on May 21, 2007 (net of issuance costs of $37,987)		4,000,000			4,000			2,958,013						2,962,013
Share based Compensation, June 30, 2007								156,138						156,138
Warrants exercised July 24, 2007		60,000			60			59,865						59,925
Warrants exercised August 7, 2007		10,000			10			9,965						9,975
Warrants exercised August 14 2007		75,000			75			75,000						75,075
Share based compensation, September 30, 2007								213,453						213,453
Shares issued on October 31, 2007 to correct prior balances		2
Discount on note payable for common stock to be issued - December 21, 2007 (Note 9)								57,353						57,353
Share based compensation for the three months ended December 31, 2007								163,757						163,757
Net Loss		-			-						(6,612,193	)		(6,612,193	)
Balances at December 31, 2007		40,961,294			40,961			10,570,983			(11,021,633	)		(409,689	)

Discount on notes payable for common stock to be issued - January 7, 2008 (Note 9)								68,382						68,382
Discount on note payable for common stock to be issued- February 11, 2008 (Note 9)								15,294						15,294
Discount on note payable for common stock to be issued- February 14, 2008 (Note 9)								50,000						50,000
Discount on note payable for common stock to be issued- February 28, 2008 (Note 9)								8,478						8,478
Shares issued on March 14, 2008 for the common stock to be issued on the December 21, 2007 note discount (Note 9)		220,588			221			(221	)					-
Shares issued on March 14, 2008 for the common stock to be issued on the January 7, 2008 note (Note 9)		220,588			221			(221	)					-
Shares issued on March 14, 2008 for the common stock to be issued on the February 11, 2008 note (Note 9)		58,824			59			(59	)					-
Shares issued on March 14, 2008 for the common stock to be issued on the February 14, 2008 note (Note 9)		185,185			185			(185	)					-
Shares issued on March 14, 2008 for the common stock to be issued on the February 28, 2008 note (Note 9)		32,609			32			(32	)					-
Discount on note payable for common stock to be issued- March 17, 2008 (Note 9)								90,909						90,909
Share based compensation for the three months ended March 31, 2008								74,454						74,454
Proceeds received on March 27, 2008 for issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								150,000						150,000
Proceeds received on March 28, 2008 for issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								160,000						160,000
Proceeds received on April 1, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								100,000						100,000
Compensation expense on repriced stock options April 2, 2008 (Note 12)								76,338						76,338
Proceeds received on April 2, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								150,000						150,000
Proceeds received on April 3, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								45,000						45,000
Proceeds received on April 4, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								215,000						215,000
Proceeds received on April 7, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								65,000						65,000
Proceeds received on April 9, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								200,000						200,000
Exchange of $705,000 of secured promissory notes, net of unamortized discount of $186,413 and accrued interest of $6,114 for private placement units on April 9, 2008 (Note 12)								524,701						524,701
Fee expense on additional shares to be issued to secured promissory note holders in lieu of principal and interest payment as of April 9, 2008 (Note 12)								186,413						186,413
Private placement units from April 9, 2008 offering to be issued to non-employee and advisory board members in lieu of payment of fees owed (Note 12)								40,645						40,645
Proceeds received on April 11, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								600,000						600,000
Proceeds received on April 12, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								220,000						220,000
Proceeds received on April 15, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								20,000						20,000
Proceeds received on April 16, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 12)								10,000						10,000
Issuance of shares on April 18, 2008 in relation to March 17, 2008 promissory note (Note 12)		568,182			569			(569	)					-
Shares issued on May 28, 2008 related to private placement cash proceeds received in March and April 2008, less direct costs of $66,547 (Note 12)		9,675,000			9,675			(76,222	)					(66,547	)
Shares issued on May 28, 2008 related to exchange of promissory notes in April 9, 2008 private placement (Note 12)		3,525,000			3,525			(3,525	)					-
Shares issued on May 28, 2008 for Fee Expense in relation to additional shares on exchange of promissory notes (Note 12)		316,298			316			(316	)					-
Shares issued on May 28, 2008 in relation to April 9, 2008 private placement for payment of fees due to non-employee board and advisory board members (Note 12)		203,225			203			(203	)					-
Shares issued on May 28, 2008 to consultant in relation to the April 9, 2008 private placement (Note 12)		100,000			100			(100	)					-
Share-based compensation for the three months ended June 30, 2008								76,102						76,102
Proceeds received on September 4, 2008 for the issuance of common stock in relation to the September 2008 private placement (Note 12)								125,000						125,000
Proceeds received on September 5, 2008 for the issuance of common stock in relation to the September 2008 private placement (Note 12)								50,000						50,000
Proceeds received on September 10, 2008 for the issuance of common stock in relation to the September 2008 private placement (Note 12)								20,000						20,000
Proceeds received on September 18, 2008 for the issuance of common stock in relation to the September 2008 private placement (Note 12)								50,000						50,000
Share-based compensation for the three months ended September 30, 2008								114,418						114,418
Escrow Shares returned and canceled on September 20, 2008 pursuant to terms of March 20, 2006 Exchange Transaction (Note 2)		(72,689	)		(73	)		73						-
Shares issued on October 30, 2008 to the Company’s Chief Financial Officer pursuant to employment letter (Note 12)		400,000			400			91,600						92,000
Shares issued on October 30, 2008 to the Consultant pursuant to July 30, 2008 letter agreement (Note 12		200,000			200			9,800						10,000
Proceeds received on November 7, 2008 for the issuance of common stock in relation to the September 2008 private placement (Note 12)								150,000						150,000
Shares issued on November 18, 2008 to consultants in lieu of payment for services (Note 12)		1,900,000			1,900			121,100						123,000
Proceeds received on November 19, 2008 for the issuance of common stock in relation to the September 2008 private placement (Note 12)								80,000						80,000
Proceeds received on November 26, 2008 for the issuance of common stock in relation to the September 2008 private placement (Note 12)								10,000						10,000
Shares issued on December 19, 2008 related to private placement cash proceeds received in September and November 2008 (Note 12)		9,700,000			9,700			(9,700	)					-
Shares issued on December 19, 2008 related to units from September 2008 offering issued to a former non-employee Board member and two former Advisory board members in lieu of payment of fees owed (Note 12)		414,367			414			20,304						20,718
Share-based compensation for the three months ended December 31, 2008								16,137						16,137

Net loss											(4,621,672	)		(4,621,672	)
Balances at December 31, 2008		68,608,471		$	68,608		$	14,484,778		$	(15,643,305	)	$	(1,089,919	)

The accompanying notes are an integral part of the consolidated financial statements.

F-5

SKINS INC. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,						Period from Inception (May 18, 2004) to December 31,
	2008			2007			2008
Cash flows used in operating activities:
Net loss	$	(4,621,672	)	$	(6,612,193	)	$	(16,019,163	)

A Adjustments to reconcile net loss from operations to net cash used in operating activities:
Depreciation		200,022			15,623			219,991
Amortization		26,330			21,670			55,663
Issuance of common stock for services		397,273			72,590			499,402
Share based compensation expense		357,449			728,729			1,924,866
Loss on write down of molds		128,780			114,376			243,156
Loss on disposal of property and equipment		1,993			22,179			24,172
Amortization on discount of note payable		100,873			3,130			104,003
Unrealized loss on derivative instruments		-			-			1,306,754
Changes in operating assets and liabilities:
Prepaid expenses		198,819			(158,366	)		(32,984	)
Accounts payable and accrued liabilities		824,486			472,830			1,559,094
Liquidated Damages		-			5,290			21,988
Net cash used in operating activities		(2,385,647	)		(5,324,722	)		(10,093,058	)

Cash flows used in investing activities:
Purchases of molds		(118,120	)		(125,036	)		(243,156	)
Software costs		-			(31,551	)		(31,551	)
Purchase of property and equipment		(361,877	)		(44,756	)		(415,256	)
Patent Costs		(45,708	)		(57,290	)		(211,061	)
Other intangibles		(3,199	)		(1,390	)		(4,589	)
Cash used in investing activities		(528,904	)		(260,023	)		(905,613	)

Cash flows provided by financing activities:
Cash assumed in connection with Recapitalization		-			-			2,261,462
Related-party payments		-			-			(26,924	)
Proceeds from issuance of Common Stock (net of issuance costs)		2,353,453			3,716,450			7,939,666
Proceeds from notes payable		555,000			150,000			855,000
Repurchase of options (Note 11)		-			(30,445	)		(30,445	)
Net cash provided by financing activities		2,908,453			3,836,005			10,998,759

Net increase (decrease) in cash and cash equivalents		(6,098	)		(1,748,740	)		88
Cash and cash equivalents at beginning of year		6,186			1,754,926			-
Cash and cash equivalents at end of year	$	88		$	6,186		$	88
Supplemental Disclosure of Cash Flow Information
Cash paid during this year for:
Interest	$	4,896		$	-		$	10,162

Supplemental Schedule of Non-Cash Investing and Financing Activities:
On May 18, 2004 the Company received Net Liabilities from a predecessor entity totaling		-			-			32,312
Net liabilities assumed from reverse acquisition on March 20, 2006, net of cash of $2,261,462		-			-			552,755
Conversion of convertible debenture, assumed from reverse acquisition, to common stock		-			-			120,000
Conversion of convertible debenture, assumed from reverse acquisition, to warrant liability		-			-			30,000
Transfer of deficit due to merger of Skin Shoes, LLC into Skin Shoes, Inc. on October 20, 2005		-			-			375,568
Issuance of Common Stock to consultants on April 3, 2006 for services to be provided for a two year term		-			-			145,180
Reclassification of share based liability awards to equity awards upon the re-adoption of the 2005 Incentive Stock Plan on March 16, 2006		-			-			241,157
Reclassification of derivative liability to equity upon the declaration of the SB-2 registration statement as effective.		-			-			1,890,600
Exchange of $705,000 of secured promissory notes, net of unamortized discount of $186,413 and accrued interest of $6,114, for private placement units on April 9, 2008		524,701			-			524,701
Discounts on notes payable for common stock to be issued December 31, 2007, January 7, February 11, February 24, February 28, March 17, 2008 (Note 9)		233,063			57,353			290,416

617,592 shares of common stock issued to non-employee and Advisory Board members for payment of fees due	$	61,363		$	-		$	61,363

Issuance of Common Stock to a consultant on November 18, 2008 for services to be provided over a three month term	$	60,000		–			$	60,000

Issuance of Common Stock on October 30, 2008 for a payable to a consultant	$	10,000		–			$	10,000

Issuance of Common Stock to Consultants on March 3, 2006 for services to be provided for a two year term	$	-		-			$	127,030

The accompanying notes are an integral part of the consolidated financial statements.

F-6

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 1: DESCRIPTION OF BUSINESS

Overview

Skins Inc. and subsidiary (“Company”), a Nevada corporation with its corporate office located in Hoboken, New Jersey, has designed and continues to develop a patented two-part, footwear structure consisting of an outer collapsible “Skin” and an inner orthopedic support section called the “Bone.” The design is intended to allow consumers to purchase one inner section, the Bone, and numerous outer Skins, resulting in multiple style variations from the same pair of shoes, with the same feel and fit despite which Skin is being worn.

Basis of presentation, organization and other matters

On March 20, 2006, the Company, as Logicom Inc. (“Logicom”), acquired all of the outstanding capital stock of Skins Footwear Inc. (formerly known as Skin Shoes, Inc.) (“Skins Footwear”). Skins Footwear thereupon became a wholly owned subsidiary of Logicom, and the former shareholders of Skins Footwear became shareholders of the Company. The business of Skins Footwear became the only business of Logicom.

Logicom was incorporated in the State of Nevada on January 23, 2004. Logicom was in the development stage since its formation and it had not realized any revenues from its planned operations. Logicom entered into a share exchange agreement with all of the shareholders of Skins Footwear, a privately held development stage footwear company, on November 2, 2005.

Skins Footwear was originally organized on May 18, 2004 as a New Jersey limited liability company under the name Skin Shoes, LLC. On October 11, 2005, Skins Shoes, LLC created a Delaware corporation under the name Skin Shoes, Inc. as a wholly owned subsidiary and merged with and into Skin Shoes, Inc. on October 20, 2005, resulting in Skins Shoes, Inc. becoming the surviving Delaware corporation and the limited liability company ceasing to exist. The merger on October 20, 2005 was a conversion of a non-taxable entity to a taxable corporation. The deficit accumulated in the development stage on October 20, 2005 was treated as a return of capital to the members of Skin Shoes, LLC, which was then contributed to Skin Shoes, Inc., and as a result the accumulated deficit was reclassified to additional paid in capital at October 20, 2005 in the consolidated statements of stockholders' equity.

On April 10, 2006, Logicom changed its corporate name to Skins Inc. and Skins Shoes, Inc. changed its corporate name to Skins Footwear Inc.

The acquisition of Skins Footwear by the Company on March 20, 2006 was accounted for as a recapitalization by the Company. The recapitalization was the merger of a private operating company (Skins Footwear) into a non-operating public shell corporation (the Company) with nominal net assets and as such is treated as a capital transaction, rather than a business combination. As a result no Goodwill is recorded. The transaction is the equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation. The pre acquisition financial statements of Skins Footwear are treated as the historical financial statements of the consolidated companies. The financial statements presented reflect the change in capitalization for all periods presented, therefore the capital structure of the consolidated enterprise, being the capital structure of the legal parent, is different from that appearing in the financial statements of Skins Shoes, LLC and Skins Shoes, Inc. in earlier periods due to the recapitalization.

F-7

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 1: DESCRIPTION OF BUSINESS (continued)

Development Stage

The Company is in the development stage. Since its formation the Company has not realized any revenues from its planned operations. The Company intends to design, manufacture and market high quality men's and women's footwear. The Company's primary activities since incorporation have been conducting research and development, performing business, strategic and financial planning, and raising capital. The deficit accumulated in the development stage presented on the consolidated balance sheet on December 31, 2008 will not agree with the total loss from May 18, 2004 (inception date) to December 31, 2008 due to the treatment of the merger of the non-taxable entity to a taxable corporation on October 20, 2005 described in paragraph three of Note 1, basis of presentation, organization and other matters.

Going Concern

The financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. As of December 31, 2008, the Company has no established source of revenues, a working capital deficit of approximately $1,500,000, and has accumulated losses of $16,019,163 since its inception. Its ability to continue as a going concern is dependent upon achieving production and sale of goods, the ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due and upon profitable operations. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that the Company will be able to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

The Company intends to overcome the circumstances that impact its ability to remain a going concern through a combination of the commencement of revenues, with interim cash flow deficiencies being addressed through additional equity and debt financing. The Company anticipates raising additional funds through public or private financing, strategic relationships or other arrangements in the near future to support its business operations; however the Company may not have commitments from third parties for a sufficient amount of additional capital. The Company cannot be certain that any such financing will be available on acceptable terms, or at all, and its failure to raise capital when needed could limit its ability to continue its operations. The Company’s ability to obtain additional funding will determine its ability to continue as a going concern. Failure to secure additional financing in a timely manner and on favorable terms would have a material adverse effect on the Company’s financial performance, results of operations and stock price and require it to curtail or cease operations, sell off its assets, seek protection from its creditors through bankruptcy proceedings, or otherwise. Furthermore, additional equity financing may be dilutive to the holders of the Company’s common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, may require that the Company relinquish valuable rights.

F-8

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Skins Footwear. All significant inter-company transactions and balances have been eliminated in consolidation.

Concentration of Credit Risk

The Company maintains cash balances at one financial institution. At various times throughout the years, the Company's cash balances exceeded FDIC insurance limits.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents.

Property and Equipment

Equipment is stated at cost, less accumulated depreciation, which is calculated using the straight-line method over the estimated useful lives of the respective assets, ranging between one and five years.

F-9

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Software Costs

In accordance with Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, the Company capitalized software costs related to the design up to the point when the software was operating. Software costs are being amortized by the straight-line method over estimated useful life of 18 months. Subsequent maintenance and modification costs are charged to operations as incurred.

Impairment of Long Lived Assets

The Company assesses the valuation of components of its property and equipment and other long-lived assets whenever events or circumstance dictate that the carrying value might not be recoverable. The Company bases its evaluation on indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such factors indicate that the carrying amount of an asset group may not be recoverable, the Company determines whether an impairment has occurred by analyzing an estimate of undiscounted future cash flows at the lowest level for which identifiable cash flows exist. If the estimate of the undiscounted cash flows during the estimated useful like of the asset if less than the carrying value of the asset the Company recognizes a loss for the difference between the carrying value of the asset and its estimated fair value, generally measured by the present value of the estimated cash flows.

Production Molds

Production molds to be used in production of inventory are stated at cost.

Patent Costs

Costs associated with the development and filing of patent applications are capitalized and amortized over the useful life of 20 years, using the straight-line method.

Design and Development

Costs to develop the Company's products are expensed as incurred in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 2, “Accounting for Research and Development Costs.” These costs include research, related overhead expenses, including salaries and other personnel related expenses, travel costs, supplies and depreciation of equipment.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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 could differ from those estimates.

F-10

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Estimated Fair Value of Financial Instruments

The Company's financial instruments include cash, accounts payable and liquidated damages payable. Management believes the estimated fair value of cash, accounts payable and liquidated damages payable at December 31, 2008 approximate their carrying value as reflected in the balance sheets due to the short-term nature of these instruments

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. At December 31, 2008 and 2007, the Company had a full valuation allowance against its deferred tax assets.

The Company files an income tax return in the U.S. federal jurisdiction, New York, and New Jersey. Tax returns for the years 2005 through 2007 remain open for examination in various tax jurisdictions in which it operates. The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, and at December 31, 2008 and 2007, there were no unrecognized tax benefits. Interest and penalties related to uncertain tax positions will be recognized in income tax expense. As of December 31, 2008 and 2007, no interest and penalties related to uncertain tax positions had been accrued.

Stock Options

The Company has elected to adopt the intrinsic-value method of accounting for liability awards and the fair value (calculated) method for equity awards issued to employees under SFAS No. 123 (R), “Share Based Payment” (SFAS No. 123(R)”) that were granted prior to the Company becoming a public company. The Company uses the fair value method for all liability and equity awards after it became a public company.

The Company accounts for its stock-based employee compensation arrangements under SFAS No. 123R, which requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements.

F-11

SKINS INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Derivative Instruments

In accordance with the Emerging Issues Task Force (EITF) 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock, the Company records a liability for the derivative instrument that results due to the number of potential common stock shares plus outstanding shares that exceed the number of authorized common stock shares. At each balance sheet date, the liability for these potential excess shares is adjusted to fair value with the change being recorded as a gain or loss on the statement of operations. At December 31, 2005, the Company had 1,000 common authorized shares and had 515,725 of outstanding shares plus potential shares from the exercise of options that had vested. The 514,725 excess potential shares were attributed to the option grants that had vested. The Company calculated the fair value of these potential shares using the Black-Scholes model and recorded a derivative liability of $22,191 at December 31, 2005. The liability booked was net of the derivative recorded for the options granted to non-employees where services were provided (Note 2) because the options used in that calculation are also part of the derivative calculation for the shares and potential shares over the authorized share amount. On March 16, 2006 the Company increased its authorization of common stock and cured this liability. At March 16, 2006, the Company reversed out the liability through a charge to unrealized gains on derivative instruments.

In accordance with EITF 00-19, the Company recorded a liability for the derivative instruments that result from the liquidated damages provision it had with stockholders who also held warrants to purchase common stock in accordance with the Share Exchange Agreement. At each balance sheet date after the March 20, 2006 Share Exchange Close, a liability was calculated for 3,000,000 warrants subject to the liquidated damages provision. On March 20, 2006, 2,821,428 of the 3,000,000 warrants were granted upon the close of the private placement which occurred immediately prior to the close of the share exchange transaction (Note 12). The Company assumed a derivative liability of $553,846 which was reflected in the net assets assumed on the Company's Statement of Shareholder Equity (Deficit). The change in the value of the derivative liability from March 20, 2006 to October 10, 2006 was recorded in the Statement of Operations. The remaining 178,572 warrants were granted in conjunction with the conversion of the convertible debenture. The Company calculated a fair value of $30,000 for the 178,572 warrants issued upon conversion of the convertible debenture in accordance with EITF 00-27 and treated these warrants as a liability in accordance with EITF 00-19. The change in fair value of the derivative liability from the conversion date, March 20, 2006, to October 10, 2006 was recorded in the Statement of Operations. The provision required the Company to have its Registration Statement declared effective (to register the common stock and common stock equivalents issued in relation to the Share Exchange Agreement (Note 12) by the middle of August 2006. If the Registration Statement was not declared effective before the effectiveness date, the Company was required to pay liquidated damages to each Share Exchange Common Stock holder equal to 0.025% for each day after the effectiveness date until the Registration Statement is declared effective by the United States Securities and Exchange Commission. At December 31, 2006 The Company accrued approximately $27,000 for the potential liquidated damages payable. During the year ended December 31, 2007, waivers and releases were obtained from shareholders of approximately $5,000.

On October 10, 2006 the registration statement was declared effective by the United States Securities and Exchange Commission. As a result the Company reclassified its derivative liability at October 10, 2006 to additional paid in capital in accordance with paragraph 10 of EITF 00-19.

F-12

SKINS INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Net Loss per Common Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period For the years ended December 31, 2008 and 2007 the Company had 1,404,000 common shares held in escrow through September 20, 2008 and zero held in escrow thereafter. . The shares held in escrow were excluded from the weighted average common share calculation at each date because all the necessary conditions for the release of the escrow shares had not been satisfied at that time.

Diluted net loss per share is computed by dividing the net loss by the weighted average number of common and common equivalent shares outstanding during the period. Basic and diluted net loss per share are the same.

	Years ended December 31,
	2008			2007
Numerator:
Net loss - basic and diluted	$	(4,621,672	)	$	(6,612,193	)

Denominator:
Weighted average shares – basic		53,694,274			37,888,638

Effect of dilutive stock options and warrants		-			-

Denominator for diluted earnings per share		53,694,274			37,888,638
Loss per share
Basic	$	(0.09	)	$	(0.18	)

Diluted	$	(0.09	)	$	(0.18	)

At December 31, 2008 and 2007 the Company stock options outstanding totaled 3,459,092 and 3,336,500, respectively. In addition, at December 31, 2008 and 2007, the Company’s warrants outstanding represented 32,824,775 and 4,714,714 common shares, respectively. Inclusion of the Company’s options and warrants in diluted loss per share for the years ended December 31, 2008 and 2007 have an anti-dilutive effect because the Company incurred a loss from operations.

F-13

SKINS INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently Adopted and Issued Accounting Pronouncements

Effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157; “Fair Value Measurements” (“SFAS 157”), which did not have a material impact on the Company’s consolidated financial statements. SFAS 157 establishes a common definition for fair value, a framework for measuring fair value under generally accepted accounting principles in the United States, and enhances disclosures about fair value measurements. In February 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. 157-2, which delays the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The Company is evaluating the expected impact of SFAS 157 for nonfinancial assets and nonfinancial liabilities on its consolidated financial position and results of operations.

In October 2008 the FASB issued FSP FAS No. 157-3 (“FSP FAS 157-3”), “Determining Fair Value of a Financial Asset When the Market for That Asset is Not Active.” FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in FASB Statement No. 154, “Accounting Changes and Error Corrections.” FSP 157-3 is effective for the financial statements included in the Company’s annual report for the year ended December 31, 2008 and application of FSP FAS 157-3 had no impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued Statement No. 160, "Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 (Consolidated Financial Statements)" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. In addition, SFAS 160 requires certain consolidation procedures for consistency with the requirements of SFAS 141(R) "Business Combinations." SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 with earlier adoption prohibited. The Company is currently evaluating the impact adoption of SFAS 160 may have on the financial statements.

In December 2007, the FASB issued Statement No. 141(R), "Business Combinations” (“SFAS 141(R)”). SFAS 141(R) expands the definition of transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at the fair value determined on the acquisition date and changes thereafter reflected in revenue, not goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. Adoption of SFAS 141(R) is required for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption and retroactive application of SFAS 141(R) to fiscal years preceding the effective date are not permitted. The Company is currently evaluating the impact adoption of SFAS 141(R) may have on the financial statements.

F-14

SKINS INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133 (Summary - On March 19, 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133. Statement 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities and (c) derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Specifically, Statement 161 requires:

Disclosure of the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation;

Disclosure of the fair values of derivative instruments and their gains and losses in a tabular format;

Disclosure of information about credit-risk-related contingent features; and

Cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed.

Statement 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. The Company is currently evaluating the impact that adoption of SFAS 161 may have on the financial statements.

In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS 69 has been criticized because it is directed to the auditor rather than the entity. SFAS 162 addresses these issues by establishing that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.

SFAS 162 is effective November 15, 2008 and is only effective for nongovernmental entities; therefore, the GAAP hierarchy will remain in SAS 69 for state and local governmental entities and federal governmental entities. Adoption of SFAS 162 did not have a material impact on the Company’s consolidated financial statements.

In May 2008, the financial accounting standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertible debt instruments may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants.” Management is currently evaluating the impact the adoption FSP APB-14-1 may have on the consolidated financial statements.

F-15

SKINS INC. AND SUBSIDIARY

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In June 2008 the FAB issued FSP Emerging Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF-03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions of FSP EITF 03-6-1. Management is currently evaluating the requirements of FSP EITF 03-6-1 and has not yet determined the impact on the Company’s consolidated financial statements.

NOTE 3: PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	December 31, 2008		December 31, 2007
Sewing equipment	$	1,882	$	1,882
Computer equipment		18,623		19,652
Store displays		360,343		-
		380,848		21,534
Less accumulated depreciation		207,777		8,325
	$	173,071	$	13,209

The Company determined that $419 of office equipment and $21,760 of displays to be obsolete for the year ended December 31, 2007.

Depreciation expense related to property and equipment was $200,022 and $15,623 for the years ended December 31, 2008 and 2007, respectively.

F-16

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 4: SOFTWARE COSTS

Software costs, net consist of the following:

	December 31, 2008		December 31, 2007
Website design costs	$	31,551	$	31,551
Less accumulated amortization		31,117		14,917
	$	434	$	16,634

Amortization expense related to software costs was $16,200 and $14,917 for the years ended December 31, 2008 and 2007, respectively.

NOTE 5: CAPITALIZED PRODUCTION MOLDS

During the year ended December 31, 2008, and 2007, respectively, the Company purchased $118,120 and $125,036, respectively of production molds. The Company periodically evaluates the value of its assets and will write off the unamortized value if it is determined that the asset will not be recovered in the ordinary course of business. During the years ended December 31, 2008, and 2007 the Company determined that capitalized molds of $128,780 and $114,376, respectively, to be obsolete. The Company’s capitalized production molds are $0 and $10,660 at December 31, 2008 and 2007, respectively.

No amortization of production molds is included in the December 31, 2008 and 2007 consolidated statement of operations as they were not placed in service.

NOTE 6: PATENT COSTS

The Company periodically evaluates the recoverability of unamortized patents and will write off the unamortized value if it is determined they no longer have value. Patent costs consists of:

	December 31, 2008		December 31, 2007
Patent costs	$	219,512	$	173,804

Less accumulated amortization		24,155		14,404

	$	195,357	$	159,400

Amortization expense related to patents was $9,751 and $6,741 for the years ended December 31, 2008 and 2007, respectively. The estimated aggregate amortization expense for the next five years is estimated to be approximately $10,900 for each year.

F-17

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 7: OTHER INTANGIBLES

The Company’s capitalized internet brand name was $4,589 and $1,390 at December 31, 2008 and 2007, respectively, and is being amortized using the straight line method over an estimated useful life of 10 years. Accumulated amortization at December 31, 2008 and 2007 is $391 and $12, respectively. Amortization expense related to other intangibles was $379 and $12 for the years ended December 31, 2008 and 2007, respectively.

NOTE 8: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

	December 31, 2008		December 31, 2007

Trade payables	$	828,078	$	590,556
Professional fees		320,084		87,943
Commissions payable		30,000		28,000
Board Fees and Director Fees		92,500		18,750
Payroll and payroll taxes payable		212,965		-
Other accrued liabilities		13,807		25,176
	$	1,497,434	$	750,425

NOTE 9: NOTES PAYABLE

On December 21, 2007, January 7, 2008, February 11, 2008, February 24, 2008, February 28, 2008 and March 17, 2008, the Company issued Secured Promissory Notes totaling $705,000 to various lenders (the “Notes”). The Notes bore interest at a rate of 5% per annum compounded annually and were secured by the grant of a security interests by the Company to the lenders in all of its intellectual property rights, patents, copyrights, trademarks which the Company now has or acquires and all proceeds and products thereof. The Company agreed to repay the loans upon the Company’s completion of a financing, and in no event later than six months from the Notes’ respective date of issuance. Pursuant to the Notes, and in consideration of entering into the Notes, the lenders collectively received a total of 1,285,976 shares of the Company’s common stock (the “Shares”). In addition, the lenders received piggy-back registration rights with respect to the Shares.

A total discount of $290,416 was taken on the Notes for the fair value of the shares of common stock issuable upon each note's issuance date. At December 31, 2007 Notes Payable was $150,000, net of $54,223 unamortized discount . The Company amortized the discount using the effective interest rate method over the term of the Notes.

The Company issued 717,794 and 568,182 common shares on March 14 and April 18, 2008, respectively, related to the issuance of the notes.

F-18

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 9: NOTES PAYABLE (continued)

Amortization of discounts was $100,873 and $3,130 for the years ended December 31, 2008 and 2007, respectively.

On April 9, 2008, the Company conducted a private placement and all the lenders invested their principal amount due under the Notes of $705,000 net of amortized discount of $186,413 into the placement and waived interest due under the Notes of $6,114 for 3,525,000 shares of common stock. As part of the consideration, the Company issued an additional 316,298 shares of common stock to the lenders as part of the transaction (Note 12).

NOTE 10: COMMITMENTS AND CONTINGENCIES

On September 28, 2007, the Company and Mark Klein executed an Amended and Restated Employment Agreement (the “Agreement”) in connection with the continued employment of Mr. Klein as the Company's Chief Executive Officer and President. The Agreement supersedes, amends and restates the prior employment agreement entered into by Mr. Klein and the Company when Mr. Klein was initially appointed Chief Executive Officer and President on March 20, 2006. Pursuant to the terms of the Agreement, the Company will continue to employ Mr. Klein for a period of three years with successive one-year automatic renewals unless either party provides 180-days advance notice of intent not to renew the Company will pay Mr. Klein an annual base salary of $250,000 with a bonus of up to 50% of the base salary at the discretion of the Board of Directors. Mr. Klein is also eligible to receive paid vacation and other benefits made available by the Company to its executives, including a Company-owned or leased automobile. If Mr. Klein's employment is terminated with cause, as defined in the Agreement, Mr. Klein will receive that portion of any unpaid base salary that has been earned through the termination date and any accrued but unpaid vacation pay as well as any expense reimbursements due and owing to him. If Mr. Klein is terminated without cause, resigns with good reason or is terminated upon a change of control, he will receive, in addition to his accrued base salary, bonus compensation, vested deferred compensation, any benefits under any plans of the Company in which he is a participant to the full extent of his rights under such plan, and accrued vacation benefits prorated through the termination date, 12 months of his base salary along with health benefits, to be paid out proportionally, on the Company's usual paydays, over a 12 month period. Mr. Klein has agreed not to compete with the Company during his employment or in the 12 months that severance payments are made.

On November 7, 2006 the Company entered into a factoring agreement with FCC, LLC (“First Capital”) through October 31, 2008. The agreement provided for the Company to sell its credit-approved accounts receivable to First Capital without recourse as to bad debts but with recourse as to all future customer claims. First Capital was to provide cash advances to the Company in an amount equal to 85% of the value of the assigned accounts receivable, as defined. In addition the First Capital will make cash advances to the Company against the value of the Company’s future finished goods inventory, up to a maximum of $500,000. Unpaid advances were to bear interest at the greater of 6% or 1% above the prime rate. Upon commencement of factoring, the Company’s obligation to First Capital will be secured by all of its tangible and intangible assets. This agreement expired on October 31, 2008. The Company settled the minimum fees due under the First Capital agreement for $35,000 of which $30,000 remains outstanding as of December 31, 2008.

F-19

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 10: COMMITMENTS AND CONTINGENCIES (continued)

On June 16, 2008 the Company appointed Michael Solomon as its new Chief Financial Officer and executed an employment letter on July 9, 2008. Pursuant to the terms of the employment letter Mr. Solomon will be paid $175,000 base salary per year which will be increased to $200,000 per year after the Company completes a financing transaction or series of financing transactions cumulatively totaling in excess of $1 million.

On November 11, 2008 the Company closed on a Revolving Loan and Security Agreement (the “Loan Agreement) which included a September 12, 2008 Facility Letter signed with Ashford Finance, LLC (“Ashford”), the terms of which provide for a $3 million Letter of Credit and Accounts Receivable financing facility. The Loan Agreement terminates on November 30, 2009. All financings by Ashford are subject to Ashford’s sole discretion. All Letters of Credit funded for inventory production will be based upon purchase orders from customers acceptable to Ashford. In addition Ashford will finance up to 75% of eligible accounts receivable, as defined. This agreement is collateralized by a first priority security interest in all Company assets, as defined. In addition all borrowings under the terms of the Facility are personally guaranteed by Mark Klein, the Company’s Chief Executive Officer. As of December 31, 2008 the Company has not made any borrowings under the Loan Agreement.

Further, Ashford will only finance Letters of Credit or accounts receivable for transactions involving customers for whom the Company has obtained credit insurance. Accordingly, on September 15, 2008 the Company obtained a one-year $500,000 credit insurance policy on certain customers for a total cost of $13,080 which represents the annual insurance premium plus expenses which is being amortized on a straight-line basis over the policy term. For the year ended December 31, 2008 the Company recorded insurance expense of $3,834 which is included in selling, general and administrative expenses.

All financings by Ashford will be charged interest at a rate of Prime plus 3%, as defined. Ashford will also charge an account management fee between 2.25% and 3% per month on the face value of each Letter of Credit issued, the fee depending upon total volume of Letters of Credit issued. Accounts receivable financing will be charged an account management fee ranging from 1.75%-2.5% per month depending on the total volume of accounts receivable financed. On any default, as defined, both the interest rate and the account management fees will be increased by an additional 4% per annum.

On November 24, 2008 the Company entered into a Buying Agency Agreement with LJP International, LLC (“LJP”). Pursuant to the agreement, LJP will serve as the Company’s non-exclusive buying and sourcing agent and will be responsible for sourcing of raw materials, arranging manufacturing facilities, monitoring manufacturer quality, finished product inspection, and coordinating freight forwarders. The Company will pay LJP an amount equal to 8% of the FOB country of origin price for product ordered, shipped, and accepted by the Company. Either party may terminate the agreement at any time upon providing the other party with 90 days written notice. There were no amounts due under this agreement for the year ended December 31, 2008.

The Company entered into an agreement with SLAM (Sportie LA Media) in March 2007 to obtain SLAM’s advertising, marketing, promoting and consulting services. The agreement between the Company and SLAM has an effective date of March 1, 2007 and expired on February 29, 2008.

On February 9, 2008, the Company and Dennis Walker executed an Employment Agreement (the “Agreement”) in connection with the employment of Mr. Walker as the Company’s Senior Vice President of Sales. Pursuant to the terms of the Agreement, the Company will employ Mr. Walker for a period of three years with successive one-year automatic renewals unless either party provides 180-days’ advance notice of intent not to renew. The Company will pay Mr. Walker an annual base salary of $200,000 with a bonus of up to 40% of the base salary at the discretion of the Board of Directors or its Compensation Committee. Mr. Walker is also eligible to receive paid vacation and other benefits made available by the Company to its executives, including a monthly automobile allowance. The Company also agreed to grant Mr. Walker 50,000 options exercisable at fair market value on the date of grant under the Company’s Amended and Restated 2005 Incentive Plan. In the event Mr. Walker is terminated without cause or he resigns with good reason, as defined in the agreement, he will be entitled to severance pay from the Company. The amount of the severance pay will be an amount equal to (i) ten months of his base pay if the termination of his employment occurs during the first year of employment under the Agreement, (ii) eleven months of his base pay if termination of his employment occurs during the second year of employment under the Agreement, or (iii) twelve months of his base pay if the termination occurs during the third year of employment under the Agreement. The severance pay would be paid in accordance with the Company’s usual paydays during the applicable severance period.

F-20

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 10: COMMITMENTS AND CONTINGENCIES (continued)

On March 27, 2008, the Company received the resignation from its then Chief Operating Officer (“COO”), from his position with the Company effective immediately. On April 8, 2008, the Company entered into a separation agreement and release (“Separation Agreement”) with its COO in connection with his resignation as COO of the Company. Pursuant to the Separation Agreement, the COO agreed that he was not entitled to any further payments or benefits, including any annual incentive/performance bonus, under his employment agreement with the Company. The COO also agreed to release the Company from any and all claims and rights that the COO may have against the Company, including, but not limited to, any claims arising out of or relating to the employment agreement, those claims of which the COO is not aware, and all claims for attorney’s fees, costs, and interest. In exchange, the Company agreed to amend the COO’s stock option agreement to permit the vesting of 250,000 options, permit participation of such options in the option repricing, and permit the options to be exercisable for one year from the date of the termination of its COO’s employment.

On May 27, 2008, the Company amended its agreement with TLD Asian Pacific Ltd (“TLD”) with an effective date of August 10, 2007 for a period of twelve months from the effective date. According to the amended agreement the Company agreed to pay TLD $9,000 monthly totaling $108,000 over the twelve month period pursuant to which TLD will continue to be responsible for conceptualization, development, commercialization, product and consulting on the engineering and further development of Skins and Bones on a non-exclusive basis. Prior to the signing of the agreement the Company was paying TLD $9,600 monthly. TLD agreed to payback retroactively to August 10, 2007, $6,000 of previously paid fees. The contracted expired on August 10, 2008.

On July 31, 2008 the Company signed a one year agreement with a Consultant for, among other things, introductions to institutional financing sources. For any non-equity financing received from funding sources introduced by the Consultant the Consultant shall be paid a cash fee of 2% of the gross proceeds of the funding and an equal amount in Warrants to purchase Company stock. For any equity financing received from sources introduced by the Consultant the Consultant shall be paid a finders fee of 2% in cash and 3% in Warrants to purchase Company stock. The Warrants will be issued at the closing bid price on the day the financing is procured, receive Piggy Back Registration Rights, and shall expire one year from the date of issuance. There was no amounts due under this agreement for the year ended December 31, 2008.

F-21

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 11: STOCK OPTIONS

In October 2005, Skins Footwear's Board of Directors approved the 2005 Incentive Plan (the “2005 Plan”). The 2005 Plan provides that the following types of awards may be granted under the 2005 Plan: stock appreciation rights (“SARs”); incentive stock options (“ISOs”); non-qualified stock options (“NQSOs”); restricted stock awards; unrestricted stock awards; and performance share awards which entitle recipients to acquire shares upon the attainment of specified performance goals, stock units and other stock-based awards, short-term cash incentive awards or any other award. Under the 2005 Plan, awards may be granted with respect to a maximum of 3,375,000 shares of Skins Footwear's common stock, subject to adjustment in connection with certain events such as a stock split, merger or other recapitalization of the Company. On September 28, 2007, the Company held its annual meeting of stockholders at which an amendment of our 2005 Incentive Plan was approved to increase the authorized number of shares that are available for issuance under the 2005 Incentive Plan by 1,625,000 shares, to a total of 5,000,000 shares.

On October 29, 2008 the Company’s Board of Directors approved an increase in the number of shares authorized to be issued under the Company’s 2005 Incentive Plan from 5,000,000 to 13,000,000. The Directors also approved the registering of the shares authorized under the plan on Form S-8 with the Securities and Exchange Commission, which the Company filed on November 12, 2008.

On February 5, 2009 the Company Board of Directors approved an increase in the number of shares authorized to be issued under the Company’s 2005 Incentive Plan from 13,000,000 to 30,000,000.

On October 24, 2005 Skins Footwear granted the following individuals options under the 2005 Plan:

Two board members were granted 421,875 options each at an exercise price of $0.80 that vest ratably over a 36-month period.

Two consultants were granted 421,875 options each at an exercise price of $0.80 a share that vests ratably over a 36-month period.

One consultant was granted 421,875 options at an exercise price of $0.80 that vested immediately for finder fee services.

As part of the Share Exchange Agreement dated November 2, 2005, the Company assumed Skins Footwear’s 2005 Incentive Plan.

The awards granted to the two board members were treated as liability awards upon the grant on October 24, 2005. The treatment of the awards as liability was due to an insufficient number of authorized shares at the time of issuance. The Company used the intrinsic value method to determine compensation on these liability awards.

March 16, 2006 Replacement Option Grants

On March 16, 2006 as a result of the granting of options in excess of the authorized shares allowed, Skins Footwear canceled and re-adopted its 2005 Incentive Stock Plan. In connection thereof, Skins Footwear increased its authorized shares to 4,000,000. Additionally, all options granted under the original plan were canceled and re-granted in accordance with the terms of the re-adopted 2005 Incentive Stock Option Plan.

F-22

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 11: STOCK OPTIONS (continued)

The replacement options to the two board members were treated as replacement equity awards. On the date of replacement the Company calculated the fair value (calculated method) of the replacement options using a Black-Scholes option valuation model that uses the assumptions noted in the following table. At the time of the replacement of the options the Company was non-public and calculated its expected volatility based on the calculated method using the Dow Jones US Footwear Index. The Company elected to use the calculated method because it did not have a trading history for its stock and it was a development stage company. The Company chose the Dow Jones US Footwear Index because it represents an industry index closest to which the Company operates. The Company estimates option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Expected volatility	17.30	%

Expected dividends	0

Expected Term (Years)	3

Risk free interest rate	4.70	%

The total incremental compensation expense from the cancellation and replacement of the awards was $196,763, which is expected to be recognized over a period of 32 months from March 16, 2006. For the years ended December 31, 2008 and 2007, the Company recorded compensation expense of $21,977 and $66,102, respectively related to the replacement option grants to the board members. On October 19, 2007, one of the board members that was granted 421,875 replacement options resigned. Any non vested portion of the option expired immediately and the vested portion of the option was exercisable for a period of 90 days following optionee’s termination. As of January 19, 2008, the former board member did not exercise any of the vested options; subsequently all options have been forfeited.

On July 25, 2008 Steve Reimer, a member of the Company’s board of directors resigned his board seat, effective on July 31, 2008. As a result of his resignation, Mr. Reimer forfeited 39,551 options originally granted to him on March 16, 2006. The Company recorded compensation expense of $9,732 in July 2008 based on Mr. Reimer's fully vested options on July 31, 2008.

The 421,875 options granted to two-consultants that vest over a 36-month period were granted for services not yet rendered. The Company used the provisions of FAS 123(R) and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services to account for the compensation expense associated with these grants. The Company measured the compensation associated with these grants based on the fair value of the equity instruments issued. There is no measurement date to calculate the fair value of the options at the date of grant because the performance commitment had not yet occurred (there are no sufficiently large disincentives for non-performance) and the performance by the two consultants was not complete. The Company calculated the expense at each reporting period based upon fair value of the options that vested during the reporting period using the fair value on the reporting date. Fair value was calculated using the Black-Scholes model. The options were treated as liability awards upon the original grant because the Company did not have a sufficient number of authorized shares. The options became equity awards on the date they were cancelled and re-granted. For the years ended December 31, 2008 and 2007, the Company recorded compensation expense of $21,655 and $256,059, respectively.

F-23

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 11: STOCK OPTIONS (continued)

The remaining 421,875 options were granted to a non-employee for services that had already been provided. The Company used the provisions of EITF-00-19 to account for these options. At the grant date and at December 31, 2005, the Company treated the option grant as a liability award because it did not have enough authorized shares to settle the contract in equity. Therefore, these options were recorded at fair value as a liability at December 31, 2005. The fair value of the options was calculated using the Black-Scholes model at December 31, 2005. On March 16, 2006 the Company increased its authorization of Common Stock therefore alleviating the potential liability. The Company recorded the fair value of the options using a Black-Scholes model as of March 16, 2006 and reclassified the total remaining liability from these awards to additional paid in capital.

The fair value of the options granted to consultants was calculated using the Black-Scholes option valuation model with the following assumptions at the applicable dates noted:

	March 16, 2006			December 31, 2008			December 31, 2007
Expected volatility		17.30	%		159.89	%		111.71	%
Expected dividends	None			None			None
Expected term (in years)		4.6			2			2.82
Risk-free interest rate		4.7	%		1.57	%		3.25	%

2006 Option Grants

On May 15, 2006 the Company granted 150,000 options to the Vice President of Sales.. The options vest quarterly beginning three months after the grant date at 12,500 per quarter and have an exercise price of $1.10. The options expire on May 15, 2011.

On June 19, 2006 the Company granted 150,000 options to the Vice President of Finance and Operations. The options vest quarterly beginning three months after the grant date at 12,500 per quarter and have an exercise price of $1.19. In March 2007 the Company cancelled all of these options in exchange for a cash payment to this Vice President of $88,500.

For the year ended December 31, 2007, the Company recorded a total compensation expense of $67,190 related to the Former Vice President's June 19, 2006 option grant. Total compensation was made up of the $9,135 service period expense and $58,055 from the unrecognized compensation that effectively vests upon repurchase of the options. The $30,445 cost in excess of the repurchase amount is the difference between the $88,500 and the cash paid less the unrecognized cost of $58,055 and is recognized as a charge to additional paid in capital.

The total compensation expense related to the non-vested options on 2006 awards at December 31, 2008 is $11,433. For the years ended December 31, 2008 and 2007 the Company recorded compensation expense of $30,456 and $39,434, respectively related to the two grants above.

F-24

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 11: STOCK OPTIONS (continued)

On May 9, 2006 the Company granted 300,000 options to a consultant at a per share exercise price of $1.06. The options vest quarterly beginning three months from the date of the agreement and expire 30 days after the related investor relations agreement is terminated. The Company used the provisions of FAS 123(R) and EITF 96-18 to account for the compensation expense associated with this grant. The Company measured the compensation associated with this grant based on the fair value of the equity instrument. There is no measurement date to calculate the fair value of this grant at the date of grant because the performance commitment had not yet occurred and the performance by the consultant was not complete. The Company calculated the expense at each reporting period based on the fair value of the options that vested during the reporting period. For the years ended December 31, 2008 and 2007, the Company recorded compensation expense of $35 and $153,441, respectively.

On October 12, 2006 the Company granted 375,000 options to a consultant. 175,000 options vest immediately with the remaining 175,000 vesting annually over a three-year period with the first vesting occurring one year after the year of grant. In addition, the Company granted three other consultants a total of 80,000 options that vest annually over a three-year period with the first vesting occurring one year after the year of grant. The 455,000 options were granted for services not yet occurred. The Company used the provisions of FAS 123(R) and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services to account for the compensation expense associated with these grants. The Company measured the compensation associated with these grants based on the fair value of the equity instruments issued. There is no measurement date to calculate the fair value of the options at the date of grant because the performance commitment had not yet occurred (there are no sufficiently large disincentives for non-performance) and the performance by the consultants were not complete. The Company will calculate the expense at each reporting period based upon fair value of the options that vested during the reporting period using the fair value on the reporting date. Fair value was calculated using the Black-Scholes model. For the years ended December 31, 2008 and 2007, the Company recorded compensation expense of $3,485, and $62,748, respectively for these options.

The fair value of the options granted to a consultants on May 9, 2006 and October 12, 2006 was calculated using the Black-Scholes option valuation model with the following assumptions:

	October, 12, 2006			May 9, 2006
	Grant			Consultant Grant
	(Vest 2008)			(Vest 2008)
Expected Volatility		156.13	%			114.58	%
Expected dividends	None				None
Expected Term (Years)		3				.25
Risk Free Interest Rate		2.06	%			2.31	%

2007 Option Grants

On March 14, 2007 the Company granted 20,000 options to an employee of the Company. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $1.63. The options expire on March 14, 2011. On November 8, 2007, the employee resigned and the options were forfeited.

F-25

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 11: STOCK OPTIONS (continued)

On April 13, 2007 the Company granted 500,000 options to its Chief Operating Officer. The options vest in six semi-annual installments from the date of grant over three years, and have a per share exercise price of $1.25. The options expire on April 13, 2012.

On March 27, 2008, the Company received the resignation of its Chief Operating Officer (“COO”), from his position with the Company effective immediately. On April 8, 2008, the Company entered into a separation agreement and release (“Separation Agreement”) with its COO in connection with his resignation as COO of the Company. Pursuant to the Separation Agreement, the COO agreed that he was not entitled to any further payments or benefits, including any annual incentive/performance bonus, under his employment agreement with the Company. The COO also agreed to release the Company from any and all claims and rights that the COO may have against the Company, including, but not limited to, any claims arising out of or relating to the employment agreement, those claims of which the COO is not aware, and all claims for attorney’s fees, costs, and interest. In exchange, the Company agreed to amend the COO’s stock option agreement to permit the vesting of 250,000 options, permit participation of such options in the option repricing on April 2, 2008, and permit the options to be exercisable for one year from the date of the termination of its COO’s employment.

On July 3, 2007, the Company granted 200,000 options to its Chief Financial Officer. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $1.29. The options expire on July 3, 2011. On the same date, the Company granted 25,000 options to the Vice President of Sales. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $1.29. The options expire on July 3, 2011. The stock options as of the date of the grant shall be expensed as compensation in the Company's consolidated statement of operations ratably over a 36 month service period.

On May 22, 2008, effective immediately, Deborah A. Gargiulo tendered her resignation as Chief Financial Officer of the Company. As of the date of her resignation, 200,000 options were forfeited, which resulted in the reversal of unvested cumulative compensation of $41,679 and the reversal of $11,300 of additional compensation related to the non-vested options that were repriced dated April 2, 2008.

On August 27, 2007, the Company granted 20,000 options to an employee of the Company. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $1.37. The options expire on August 27, 2012. On March 14, 2008 the employee resigned and the options were forfeited.

On August 27, 2007, the Company granted 150,000 options to a Director of the Company’s Board of Directors (the “Appointment Date”). The options vest on an annual basis from January 9, 2007, the date the Director was appointed to the Company, and vest over three years, with the first one-third vesting to occur one year from the Appointment Date. The grant has a per share exercise price of $1.37. The options expire on August 27, 2012. The stock options as of the date of the grant shall be expensed as compensation in the Company's consolidated statement of operations ratably over a 36 month service period.

F-26

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 11: STOCK OPTIONS (continued)

On September 28, 2007, the Company granted warrants to a consultant to purchase up to 150,000 shares of common stock from the Company at an exercise price of $1.38 per share. The warrants were granted to the consultant in accordance with an Investor Relations Agreement dated May 9, 2006, as amended by the First Addendum dated September 19, 2007, entered into by the Company and the consultant. The vesting schedule of the consultant warrants are contingent upon the number of shares issued upon the exercise of investor warrants sold by the Company in a private placement in May 2007. A total of 4,000,000 warrants were issued in that private placement. The warrants become exercisable, subject to terms and conditions of the investor relations agreement, as follows: the first one-third of the consultant’s warrants vest upon the exercise of 1,217,200 investor warrants, the second one-third of the consultant’s warrants vest upon the exercise of 2,434,400 investor warrants, and the final one-third of the consultant’s warrants vest upon the exercise of 3,651,600 investor warrants. The Company used the provisions of FAS 123(R) and EITF 96-18 to account for the compensation expense associated with this warrant issuance. The Company measures the compensation associated with this issuance based on the fair value of the equity instrument. There was no measurement date to calculate the fair value of this issuance at the date of grant because the performance commitment had not yet occurred and the performance by the consultant was not complete. The Company calculates the expense at each reporting period based on the fair value of the warrants that will vest during the reporting period. At December 31, 2008 no warrants under this issuance had vested, therefore no expense had been incurred.

On November 12, 2007, the Company granted 24,000 options to a consultant. The first one-third of the options vest on December 1, 2007, and the second and final one-third of the options vest on December 1, 2008 and 2009, respectively. The grant has an exercise price of $0.78 per share. The options expire on April 7, 2012. The Company will use the provisions of FAS 123(R) and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services to account for the compensation expense associated with this grant. The Company will measure the compensation associated with these grants based on the fair value of the equity instruments. For the years ended December 31, 2008 and 2007 the Company recorded compensation expense of $346 and $1,193, respectively.

The total compensation expense related to the non-vested options on 2007 awards to employees at December 31, 2008 is $92,999. For the years ended December 31, 2008 and 2007 the Company recorded compensation expense of $125,409 and $149,752, respectively.

The fair value of the options granted to consultants on November 12, 2007 were calculated using the Black-Scholes option valuation model with the following assumptions:

F-27

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 11: STOCK OPTIONS (continued)

	November 12, 2007 Option Grant (Vest 2008)
Expected volatility		165.64	%
Expected dividends		None
Expected term (in years)		4
Risk-free interest rate		1.71	%

2008 Option Grants

On February 29, 2008, the Company granted 50,000 options to its Senior Vice President of Sales. On the same date, the Company granted 50,000 options to an employee. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $0.24. The options expire on February 29, 2012 and February 28, 2013, respectively. The stock options as of the date of the grant have a fair value of $18,956, which shall be expensed as compensation in the Company’s consolidated statement of operations ratably over a 36 month service period.

On November 19, 2008 the Company received a resignation from an employee effective immediately. As of the date of his resignation 50,000 options were forfeited.

On March 26, 2008, the Company granted 50,000 options to an employee. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and

have a per share exercise price of $0.31. The options expire on March 26, 2013. The stock options as of the date of the grant have a fair value of $13,175, which shall be expensed as compensation in the Company’s consolidated statement of operations ratably over a 36 month service period.

On April 9, 2008, the Company granted 125,000 options to an employee. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $0.59. The options expire on April 9, 2012. The stock options as of the date of the grant have a fair value of $60,216, which shall be expensed as compensation in the Company’s consolidated statement of operations ratably over a 36 month service period.

On June 10, 2008, in accordance with a May 27, 2008 revised agreement with TLD Asian Pacific Ltd (“TLD”), the Company granted a designee of TLD 257,143 options with an exercise price of $0.28 a share. The 257,143 options were calculated dividing $72,000 by the closing price of the Company’s common stock on the date of grant or $0.28 per share. The options have a term of five years from the date of grant and have the following vesting schedule: 214,290 options vested upon grant, 21,427 options vest on July 10, 2008, and 21,426 options vest on August 10, 2008. During the year ended December 31, 2008 the Company recognized $72,000 of expense relating to this grant.

The total compensation expense related to the non-vested options on 2008 awards to employees at December 31, 2008 is $6,620. For the years ended December 31, 2008 and 2007, the Company recorded compensation expense of $2,552 and $0, respectively.

The fair value of the options granted to employees on February 29, 2008, March 26, 2008, and April 9, 2008 were calculated using the Black-Scholes option valuation model with the following assumptions:

F-28

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 11: STOCK OPTIONS (continued)

	February 29, 2008 Option Grants			March 26, 2008 Option Grant		April 9, 2008 Option Grant
Expected volatility		115.51	%	125.74	%	130.89	%
Expected dividends		None		None		None
Expected term (in years)		4-5		5		4
Risk-free interest rate		2.50	%	2.55	%	2.59	%

On April 2, 2008, the Board of Directors of the Company acted to reprice a total of 2,794,625 options that it had previously granted to certain employees, directors and consultants of the Company. The options, all of which had been previously issued pursuant to the Amended And Restated 2005 Incentive Plan (the “Plan”), were repriced to be $0.40 per share, which is greater than the $0.33 closing trading price of the

Company’s common stock on the date of approval by the Board of Directors. The Board of Directors resolved that an exercise of $0.40 per share would provide an incentive to the recipients of the repriced options to continue to work in the best interests of the Company. The other terms of the options, including the vesting schedules, remained unchanged as a result of the repricing. Total additional compensation expense on non-vested options relating to the April 2, 2008 repricing is approximately $26,000 which will be expensed ratably over the 7 to 29 months service periods that remain. Additional compensation expense on vested and unvested options relating to the April 2, 2008 repricing is $73,422 and $6,458, respectively, is included in selling, general and administrative expenses for the year ended December 31, 2008.

The repriced options had originally been issued with $0.80 to $1.37 per share option exercise prices, which prices reflected the then current market prices of the Company’s stock on the dates of original grant. As a result of the sharp reduction in the Company’s stock price, the Board of Directors believed that such options no longer would properly incentivize the Company’s employees, officers and consultants who held such options to work in the best interests of the Company and its stockholders. Moreover, the Board of Directors believed that if these options were repriced, that such options would provide better incentives to such employees, officers and directors.

A summary of option activity under the 2005 Plan as of December 31, 2008 and 2007 and changes during the year then ended is presented below:

F-29

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 11: STOCK OPTIONS (continued)

	Shares		Weighted Average Exercise Price		Weighted - Average Remaining Contractual Term	Aggregate Intrinsic Value

Options
Outstanding, January 1, 2007	3,139,375		$	.91	3.79
Granted	939,000			1.28
Cancelled	(591,875	)		.99
Outstanding, December 31, 2007	3,486,500		$	1.00	3.21	$	-

Granted	532,143		.35
Cancelled	(559,551)		.39

Outstanding, December 31, 2008	3,459,092	$	.39	2.36	$

Exercisable, December 31, 2008	2,999,426	$	.39	2.27	$

A summary of the status of the Company's non-vested shares as of December 31, 2008, and changes during the year ended December 31, 2008, is presented below:

	Shares			Weighted- Average Grant-Date Fair Value
Non-vested Shares
Non-vested, January 1, 2008		1,461,225		$	.72
Granted		532,143			.35
Cancelled		(559,551	)		.96
Vested		(974,151	)		.55
Non-vested, December 31, 2008		459,666		$	.51

NOTE 12: STOCKHOLDERS’ DEFICIENCY

On April 9, 2008, the Company sold a total of 13,403,225 units to 27 investors and raised aggregate gross proceeds of approximately $2,680,645 in a private offering. Of the gross proceeds of $2,680,645 raised in the offering,

(i)

$1,935,000 represents cash received by the Company from investors,

(ii)

$705,000 represents an amount due under six secured promissory notes previously issued by the Company that was invested by five holders into this offering, and

(iii)

$40,645 represents amounts owed by the Company to three non-employee board members and two advisory board members in lieu of payment for fees due to them.

In addition, the Company issued 100,000 units to a financial consultant that provided services in connection with the offering in lieu of a $20,000 payment in cash for such services.

F-30

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 12: STOCKHOLDERS’ DEFICIENCY (continued)

The offering was made pursuant to a U.S. investor subscription agreement and an offshore subscription agreement, each dated April 9, 2008, Each unit was sold for $0.20 and consists of one share of common stock of the Company and one share purchase warrant, exercisable at an exercise price of $0.40 per share at any time upon election of the holder during the 24 month period following the offering. The Company agreed to register the shares of common stock and the shares of common stock underlying the warrants on a registration statement that must be filed with the Securities and Exchange Commission within the earlier of 21 days after the closing of the offering or 10 days after the Company filed its Annual Report on Form 10-KSB. The Company filed the registration statement on Form S-1 on April 24, 2008. The registration statement was declared effective on August 7, 2008.

In an effort to preserve cash for Company operations, it agreed to convert the $40,645 in debt owed to the non-employee board members and advisory board members into the private placement in lieu of payment for fees due to them.

Upon execution of the secured notes (Note 9), the holders received shares of common stock in an amount that was equal to (x) half of the principal amount of the note divided by (y) the closing trading price of the Company’s common stock on the date of the note. The lowest trading price used to calculate the number so shares to be issued under the secured notes was $0.22 per share. In consideration of the holders investing the principal due into private placement in lieu of payment and waiving any and all interest due, each holder that received shares upon the execution of the note based on a trading price higher than $0.22 per share were issued additional shares of common stock. These additional shares were equal to the number of shares that would have been received if $0.22 were in the formula, minus the number of shares actually received upon execution of the secured note. A total of 316,298 additional shares were issued to these secured note holders. The Company booked a fee expense equal to the fair value of the additional common shares issuable at April 9, 2008 or approximately $187,000 in its consolidated statement of operations for the year ended December 31, 2008. Our former Chief Financial Officer and Chairman of the Board were each note holders that converted amounts of $15,000 and $100,000, respectively, in the private placement on the same terms and conditions as the rest of the investors.

On June 16, 2008 the Company appointed Michael Solomon as its new Chief Financial Officer and executed an employment letter on July 9, 2008. Mr. Solomon will be paid $175,000 base salary per year which will be increased to $200,000 per year after the Company completes a financing transaction or series of financing transactions cumulatively totaling in excess of $1 million. Mr. Solomon also was granted 150,000 shares of the Company’s common stock to be issued upon his appointment and will receive an additional 250,000 shares of common stock three months from the commencement of his employment. The common shares issued were originally subject to only certain legal restrictions. The total fair value of the common stock on the date of grant is $92,000. On October 30, 2008 the Company considered the shares granted to Mr. Solomon to be vested and, accordingly, issued the 400,000 shares , subject only to the conditions stated below. For the year ended December 31, 2008 the Company recognized $92,000 of compensation expense which is included in selling, general and administrative expenses.

On July 30, 2008, the Company and Mr. Solomon, entered into an amendment (the “Amendment”) to the employment letter agreement dated July 9, 2008.

F-31

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 12: STOCKHOLDERS’ DEFICIENCY (continued)

Pursuant to the terms of the Amendment, the 400,000 restricted shares of the Company’s Common Stock originally granted to Mr. Solomon on June 16, 2008 were subject to certain additional restrictions and subject to forfeiture, including the following:

(i) While an employee of the Company, Mr. Solomon will only be able to sell the shares in the event of a corporate action such as a merger, acquisition, sale of substantially all of the Company’s assets, change in control (as defined in the agreement), dissolution, or windup of the Company; however Mr. Solomon may, at the sole discretion of the Company, be allowed to sell some or all of the shares outside of this restriction.

(ii) If Mr. Solomon is terminated without cause or terminates employment for good reason, each as defined in the Amendment, Mr. Solomon may keep any of the shares granted to him for five years from the date of termination; however, Mr. Solomon will only be able to sell the shares in the event of a corporate action, unless otherwise authorized by the Company in its discretion. If at the end of the five year period the Company has not completed a corporate action or the Company has not allowed Mr. Solomon to sell the shares then Mr. Solomon will lose rights in any remaining shares at that time.

(iii) If Mr. Solomon is terminated for cause, he will lose all rights to all shares granted to him or due to be granted to him immediately.

(iv) Any sales of the shares are further restricted by the applicable securities regulations and in no event may a sale of the shares be in violation of such regulations or in conflict with the Company’s insider trading policy.

The Company concluded that the modification of the restricted terms was a probable to probable modification as defined by FAS 123(R) and therefore would not affect the fair value of the original grant or result in additional compensation because the modification does not affect the number of shares expected to vest.

On July 30, 2008 (“date of grant”), the Company entered into a finder’s agreement with Alicia Johnson pursuant to which the Company agreed to issue 200,000 shares of common stock to Ms. Johnson in exchange for locating and placing Michael Solomon with the Company as its new Chief Financial Officer. Pursuant to the agreement, if during a six month probation period, starting on June 16, 2008, the Company terminates the employment of Mr. Solomon for cause or Mr. Solomon voluntarily terminates employment for any reason, Ms. Johnson agreed to use best efforts to locate the Company a suitable replacement candidate during the remaining portion of the six month period. Ms. Johnson agreed that the 200,000 shares to be issued to her can only be transferred or sold after the expiration of the six-month probation. In addition, if Ms. Johnson fails to present a suitable replacement candidate for the Company, if such requirement should arise, the 200,000 shares issued to her would be returned to the Company and cancelled. The Company will use the provisions of FAS 123(R) and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services to account for the finders fee expense associated with the common stock grant. The Company will measure the compensation associated with this grant based on the fair value of the common stock issued. There is no measurement date to calculate the fair value of the common stock at the date of grant because the performance commitment had not yet occurred (there are no sufficiently large disincentives for non-performance) and the performance by the Ms. Johnson was not complete. Pursuant to FAS 5, Accounting for Contingencies, the Company concluded that it is probable that a loss contingency related to the agreement with Ms. Johnson had occurred. As such, the Company has accrued on the date of grant a finders fee expense of $44,000 which equal to the fair value of the 200,000 common shares granted. On October 30, 2008 the Company considered the performance of Ms. Johnson complete and, accordingly, issued 200,000 shares to her. For the year ended December 31, 2008 the Company recognized an expense of $44,000 which is included in Selling, general, and administrative expenses.

F-32

Skins Inc. and Subsidiary

(A Development Stage Company)

Notes to Consolidated Financial Statements

NOTE 12: STOCKHOLDERS’ DEFICIENCY (continued)

On October 31, 2008 the Company entered into a one year Consulting Agreement for, among other things, strategic planning and marketing services. For its services the Company shall pay to the consultant a total of 1,400,000 shares of unrestricted Company common stock as follows: 900,000 shares upon execution of the agreement, 250,000 shares 30 days after execution of the agreement, and 250,000 shares 60 days after the execution of the agreement. Pursuant to this agreement the Company issued 900,000 shares of its common stock on November 17, 2008. The Company has recorded an accrual of $24,000 for the remaining 500,000 shares of common stock have not yet been issued. On November 5, 2008 the Company entered into a three month Consulting Agreement for corporate planning services for a fee of 1,000,000 shares of Company common stock. Pursuant to this agreement the Company issued these shares on November 17, 2008.

Pursuant to a private placement offering the Company sold 4,900,000 private placement units for $245,000 in September 2008. On November 7, 2008 and November 19, 2008 the Company sold 3,000,000 and 1,800,000 private placement units for $150,000 and $90,000, respectively. Each Unit was sold for $0.05 and consists of one share of the Company Common stock and one purchase Warrant representing one and one-half shares of Company Common Stock, exercisable at an exercise price of $0.05 per Warrant. The Warrants expire 30 months from the date of issuance.

In addition, the Company, in lieu of cash, paid November 2008 private placement units to Steve Reimer, former Board member, and to William Priakos and Mark Itzkowitz, former Advisory Board members. In lieu of $10,718 of accrued Board fees, consulting fees, and expenses Mr. Reimer received 214,367 shares of common stock and 214,367 purchase warrants exercisable for 321,551 shares of common stock. In lieu of accrued Advisory board fees of $5,000 each Mr. Priakos and Mr. Itzkowitz each received 100,000 shares of common stock and 100,000 purchase warrants exercisable for 150,000 shares of common stock.

NOTE 13. INCOME TAXES

The components of the Company’s deferred tax assets as of December 31, 2008 and 2007 are as follows:

Fixed assets and start up costs	$	3,417,000			2,270,000
Stock compensation		180,000			342,000
Net operating losses		1,369,000			689,000
Less: valuation allowance		(4,966,000	)		(3,301,000	)
Net deferred tax asset	$	—		$	—

In a

SKINS INC. 10-K