U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q


(Mark
One)




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


EXCHANGE
ACT OF 1934




For the
Quarterly period ended December 31, 2008




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




For the
transition period from ______________ to ______________




Commission
file number 000-28195




VERSADIAL,
INC.


(Exact
name of small business issuer as specified in its charter)





Nevada
              
              11-3535204(State
      or other jurisdiction of
              
              (State
      or I.R.S. Employerincorporation
      of organization)
              
              Identification
      Number)




305
Madison Avenue, Suite 4510, New York, New York 10165


(Address
of principal executive offices)




212-986-0886


(Issuer's
telephone number including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the  Exchange Act  during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.




Yes x No o




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




Large
accelerated filer o         Accelerated
filer  o   Non-accelerated
filer    o         Smaller
reporting companyx





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




Yes o No x




APPLICABLE
ONLY TO CORPORATE ISSUERS




Indicate
the number of shares outstanding of each of the issuer's class of common stock,
as of the latest practicable date: 18,309,194 shares of common stock, par value
$0.0001 per share, as of February 19, 2009.





VERSADIAL,  INC.


FORM
10-Q


QUARTERLY
REPORT


For the Six Months Ended
December 31, 2008





TABLE
OF CONTENTS





Part
      I - Financial InformationItem
      1.  Consolidated Interim Financial Statements:Consolidated
      Interim Balance Sheet
              1Consolidated
      Interim Statements of Operations
              2Consolidated
      Interim Statements of Cash Flows
              3-4Notes
      to Consolidated Interim Financial Statements
              5-16Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
              17-26Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risk
              26Item
      4.  Controls and Procedures
              26-27Part
      II. - Other Information
              28Signatures
              29Exhibit
      31Exhibit
      32









Item
1. Consolidated Interim Financial Statements


VERSADIAL,
INC.




CONSOLIDATED
INTERIM BALANCE SHEETS









December 31,
                                                
                                                
                                                June 30,2008
                                                
                                                
                                                2008(Unaudited)ASSETSCurrent
      assetsCash
                                                $
                                                93,629
                                                
                                                $
                                                216,705Restricted
      cash
                                                
                                                895,750Due
      from affiliates
                                                
                                                23,964
                                                
                                                
                                                23,964Accounts
      receivable
                                                
                                                427,101
                                                
                                                
                                                550,554Sublease
      and other receivable
                                                
                                                28,500
                                                
                                                
                                                19,500Inventories
                                                
                                                182,291
                                                
                                                
                                                261,349Prepaid
      expenses and other current assets
                                                
                                                131,136
                                                
                                                
                                                19,425Total
      current assets
                                                
                                                1,782,371
                                                
                                                
                                                1,091,497Property and equipment,
      net
                                                
                                                4,923,507
                                                
                                                
                                                5,692,425Other
      assetsDevelopment
      of production equipment in progress
                                                
                                                6,656,745
                                                
                                                
                                                5,599,615Deferred
      financing costs
                                                
                                                639,548
                                                
                                                
                                                196,000Security
      deposit
                                                
                                                34,155
                                                
                                                
                                                34,155Total
      other assets
                                                
                                                7,330,448
                                                
                                                
                                                5,829,770$
                                                14,036,326
                                                
                                                $
                                                12,613,692LIABILITIES
      AND STOCKHOLDERS'  DEFICITCurrent
      liabilitiesSecured
      accounts receivable financing and interest, related party
                                                $
                                                271,278
                                                
                                                $
                                                108,705Notes,
      interest and financing fees payable, net of debt discount of  $73,500
      and $nil
                                                
                                                4,365,148
                                                
                                                
                                                233,439Notes
      and interest payable, related parties
                                                
                                                2,849,379
                                                
                                                
                                                1,162,434Convertible
      note and interest payable, net of debt discount of $26,462 and
      $nil
                                                
                                                9,894,253
                                                
                                                
                                                116,665Accounts
      payable and accrued expenses
                                                
                                                4,200,397
                                                
                                                
                                                4,679,186Due
      to licensor
                                                
                                                984,239Capital
      lease obligations
                                                
                                                3,468,749
                                                
                                                
                                                3,772,599Due
      to related parties
                                                
                                                226,067
                                                
                                                
                                                275,775Deferred
      revenue
                                                
                                                107,318
                                                
                                                
                                                153,264Customer
      deposits
                                                
                                                18,911
                                                
                                                
                                                45,570Total
      current liabilities
                                                
                                                26,385,739
                                                
                                                
                                                10,547,637Long-term
      liabilitiesConvertible
      note and interest payable, net of debt discount
      of  $154,605
                                                
                                                
                                                
                                                
                                                9,017,266Notes
      and interest payable, related parties
                                                
                                                
                                                
                                                
                                                1,595,381Due
      to licensor
                                                
                                                
                                                
                                                
                                                809,027Customer
      advance
                                                
                                                1,700,000
                                                
                                                
                                                1,700,000Derivative
      financial instruments
                                                
                                                4,545
                                                
                                                
                                                235,203Sublease
      security deposit, affiliate
                                                
                                                6,830
                                                
                                                
                                                6,830Total
      long-term liabilities
                                                
                                                1,711,375
                                                
                                                
                                                13,363,707Commitments
      and contingenciesStockholders'
      deficitPreferred
      stock, $.0001 par value, 2 million shares authorized,zero
      issued and outstandingCommon
      stock, $.0001 par value, 35 million shares authorized,18,309,194
      issued and outstanding
                                                
                                                1,831
                                                
                                                
                                                1,831Additional
      paid-in-capital
                                                
                                                8,835,392
                                                
                                                
                                                8,722,502Accumulated
      deficit
                                                
                                                (22,898,011)
                                                
                                                
                                                (20,021,985)Total
      stockholders' deficit
                                                
                                                (14,060,788)
                                                
                                                
                                                (11,297,652)$
                                                14,036,326
                                                
                                                $
                                                12,613,692





See
accompanying notes to consolidated interim financial statements


1


VERSADIAL, INC.




CONSOLIDATED
INTERIM STATEMENTS OF OPERATIONS










Six Months Ended
                                    
                                    
                                    Three Months EndedDecember 31,
                                    
                                    
                                    December 31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2008
                                    
                                    
                                    2007(unaudited)
                                    
                                    
                                    (unaudited)
                                    
                                    
                                    (unaudited)
                                    
                                    
                                    (unaudited)Net
      revenues
                                    
                                    $
                                    1,447,307
                                    
                                    
                                    $
                                    1,171,974
                                    
                                    
                                    $
                                    992,561
                                    
                                    
                                    $
                                    1,023,287Cost
      of revenuesDirect
      costs
                                    
                                    
                                    842,942
                                    
                                    
                                    
                                    1,166,487
                                    
                                    
                                    
                                    601,936
                                    
                                    
                                    
                                    875,498Indirect
      costs
                                    
                                    
                                    876,048
                                    
                                    
                                    
                                    850,711
                                    
                                    
                                    
                                    421,434
                                    
                                    
                                    
                                    429,2081,718,990
                                    
                                    
                                    
                                    2,017,198
                                    
                                    
                                    
                                    1,023,370
                                    
                                    
                                    
                                    1,304,706Gross
      margin
                                    
                                    
                                    (271,683
                                    )
                                    
                                    
                                    (845,224
                                    )
                                    
                                    
                                    (30,809
                                    )
                                    
                                    
                                    (281,419
                                    )Operating
      expensesGeneral
      and administrative
                                    
                                    
                                    1,449,418
                                    
                                    
                                    
                                    1,583,361
                                    
                                    
                                    
                                    751,312
                                    
                                    
                                    
                                    795,724Loss
      from operations
                                    
                                    
                                    (1,721,101
                                    )
                                    
                                    
                                    (2,428,585
                                    )
                                    
                                    
                                    (782,121
                                    )
                                    
                                    
                                    (1,077,143
                                    )Other
      income (expenses)Sublease
      income, affiliates
                                    
                                    
                                    25,830
                                    
                                    
                                    
                                    24,330
                                    
                                    
                                    
                                    12,915
                                    
                                    
                                    
                                    11,415Interest
      expense
                                    
                                    
                                    (877,305
                                    )
                                    
                                    
                                    (896,958
                                    )
                                    
                                    
                                    (559,663
                                    )
                                    
                                    
                                    (417,739
                                    )Interest
      expense, related parties
                                    
                                    
                                    (111,628
                                    )
                                    
                                    
                                    (81,112
                                    )
                                    
                                    
                                    (56,411
                                    )
                                    
                                    
                                    (55,335
                                    )Amortization
      of debt discount
                                    
                                    
                                    (152,643
                                    )
                                    
                                    
                                    (404,035
                                    )
                                    
                                    
                                    (88,571
                                    )
                                    
                                    
                                    (213,808
                                    )Amortization
      of financing costs
                                    
                                    
                                    (571,849
                                    )
                                    
                                    
                                    (220,644
                                    )
                                    
                                    
                                    (487,849
                                    )
                                    
                                    
                                    (95,322
                                    )Gain
      on derivative financial instruments
                                    
                                    
                                    230,658
                                    
                                    
                                    
                                    189,898
                                    
                                    
                                    
                                    3,496
                                    
                                    
                                    
                                    716,799Gain
      (loss) on foreign currency exchange
                                    
                                    
                                    302,012
                                    
                                    
                                    
                                    (94,625
                                    )
                                    
                                    
                                    72,438
                                    
                                    
                                    
                                    (61,451
                                    )(1,154,925
                                    )
                                    
                                    
                                    (1,483,146
                                    )
                                    
                                    
                                    (1,103,645
                                    )
                                    
                                    
                                    (115,441
                                    )Net
      loss
                                    
                                    $
                                    (2,876,026
                                    )
                                    
                                    $
                                    (3,911,731
                                    )
                                    
                                    $
                                    (1,885,766
                                    )
                                    
                                    $
                                    (1,192,584
                                    )Weighted
      average common shares outstandingBasic
      and Diluted
                                    
                                    
                                    18,309,194
                                    
                                    
                                    
                                    14,813,696
                                    
                                    
                                    
                                    18,309,194
                                    
                                    
                                    
                                    15,309,194Loss
      per common shareBasic
      and Diluted
                                    
                                    $
                                    (0.16
                                    )
                                    
                                    $
                                    (0.26
                                    )
                                    
                                    $
                                    (0.10
                                    )
                                    
                                    $
                                    (0.08
                                    )




See
accompanying notes to consolidated interim financial statements


2




VERSADIAL, INC.




CONSOLIDATED
INTERIM STATEMENTS OF CASH FLOWS










Six Months EndedDecember 31,2008
                    
                    
                    2007(unaudited)
                    
                    
                    (unaudited)Cash
      flows from operating activitiesNet
      loss
                    
                    $
                    (2,876,026
                    )
                    
                    $
                    (3,911,731
                    )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
                    
                    
                    768,918
                    
                    
                    
                    467,385Amortization
      of debt discount
                    
                    
                    152,643
                    
                    
                    
                    404,035Amortization
      of financing costs
                    
                    
                    571,849
                    
                    
                    
                    220,644Gain
      on derivative financial instruments
                    
                    
                    (230,658
                    )
                    
                    
                    (189,898
                    )Compensation
      expense for issuance of warrants
                    
                    
                    14,890Changes
      in operating assets and liabilities:Due
      from affiliates
                    
                    
                    
                    
                    
                    
                    6,175Accounts
      receivable
                    
                    
                    123,453
                    
                    
                    
                    (487,201
                    )Sublease
      and other receivable
                    
                    
                    (9,000
                    )
                    
                    
                    3,431Inventories
                    
                    
                    79,058
                    
                    
                    
                    (50,651
                    )Prepaid
      expenses and other current assets
                    
                    
                    (111,711
                    )
                    
                    
                    (193,193
                    )Due
      to licensor
                    
                    
                    175,212
                    
                    
                    
                    202,414Accounts
      payable and accrued expenses
                    
                    
                    678,203
                    
                    
                    
                    1,819,413Payments
      on capital leases
                    
                    
                    (303,850
                    )
                    
                    
                    (244,532
                    )Due
      to related parties
                    
                    
                    (49,708
                    )
                    
                    
                    90,196Deferred
      revenue
                    
                    
                    (45,946
                    )
                    
                    
                    231,406Customer
      deposits
                    
                    
                    (26,659
                    )Interest
      payable
                    
                    
                    888,376
                    
                    
                    
                    797,442Net
      cash used in operating activities
                    
                    
                    (200,956
                    )
                    
                    
                    (834,665
                    )Cash
      flows from investing activitiesPurchase
      of equipment
                    
                    
                    
                    
                    
                    
                    (251,586
                    )Payments
      of development of production equipment in progress
                    
                    
                    (1,057,130
                    )
                    
                    
                    (2,232,879
                    )Payments
      for registration costs
                    
                    
                    
                    
                    
                    
                    (38,054
                    )Net
      cash used in investing activities
                    
                    
                    (1,057,130
                    )
                    
                    
                    (2,522,519
                    )Cash
      flows from financing activitiesProceeds
      from secured accounts receivable financing, related party
                    
                    
                    627,000Proceeds
      from issuance of notes, related parties
                    
                    
                    
                    
                    
                    
                    2,225,000Proceeds
      from issuance of notes, net
                    
                    
                    1,227,611
                    
                    
                    
                    1,200,000Payments  on
      secured accounts receivable financing, related party
                    
                    
                    (469,601
                    )Payments
      for financing costs
                    
                    
                    (250,000
                    )
                    
                    
                    (30,000
                    )Net
      cash provided by financing activities
                    
                    
                    1,135,010
                    
                    
                    
                    3,395,000Net
      increase (decrease) in cash
                    
                    
                    (123,076
                    )
                    
                    
                    37,816Cash,
      beginning of period
                    
                    
                    216,705
                    
                    
                    
                    134,361Cash,
      end of period
                    
                    $
                    93,629
                    
                    
                    $
                    172,177




See
accompanying notes to consolidated interim financial statements


3


VERSADIAL,
INC.




CONSOLIDATED
INTERIM STATEMENTS OF CASH FLOWS (CONTINUED)










Six
      Months EndedDecember
      31,2008
                                            
                                            
                                            2007(unaudited)
                                            
                                            
                                            (unaudited)Supplemental
      disclosure of cash flow information,cash
      paid during the period for interest
                                            
                                            $
                                            28,372
                                            
                                            
                                            $
                                            168,756Supplemental
      disclosure of non-cash investing and financingactivities:Convertible
      debentures and note converted to common stock
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            2,000,000Interest
      paid in common stock
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            796,687Purchase
      of equipment financed by lease obligation
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            2,465,730Reclassification
      of deposit on equipment to equipment
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            147,493Interest
      converted to principal on convertible debenture
                                            
                                            $
                                            408,882
                                            
                                            
                                            $
                                            187,500Debt
      discount related to note
                                            
                                            $
                                            98,000
                                            
                                            
                                            $
                                            -Reclassification
      of deferred financing costs to accounts payable
                                            
                                            $
                                            90,397
                                            
                                            
                                            $
                                            -Reclassification
      of deferred financing costs to financing fees payable
                                            
                                            $
                                            600,000
                                            
                                            
                                            $
                                            -Issuance
      of JBCP-24 note
                                            
                                            $
                                            3,445,750
                                            
                                            
                                            $
                                            -Restricted
      cash retained by lender
                                            
                                            
                                            (895,750
                                            )Payments
      made directly to vendors
                                            
                                            
                                            (1,247,389
                                            )Financing
      costs
                                            
                                            
                                            (75,000
                                            )Net
      proceeds received
                                            
                                            $
                                            1,227,611
                                            
                                            
                                            $
                                            -





See
accompanying notes to consolidated interim financial statements




4




VERSADIAL,
INC.


NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


DECEMBER 31,
2008





1.
            Basis
      of presentation and consolidation





The
accompanying unaudited consolidated interim financial statements of Versadial,
Inc. (hereinafter referred to as the “Registrant” or “Versadial” or the
“Company”) as of December 31, 2008 and June 30, 2008 and for the six and three
months ended December 31, 2008 and 2007, reflect all adjustments of a normal and
recurring nature to fully present the consolidated financial position, results
of operations and cash flows for the interim periods.  The unaudited
consolidated interim financial statements include the accounts of the Company,
Versadial, Inc., its wholly owned subsidiary, Innopump, Inc. (“Innopump”) and
Sea Change Group, LLC (“SCG”), a variable interest entity (“VIE”) that the
Company is the primary beneficiary of under Financial Accounting Standards Board
Interpretation 46R, “Consolidation of Variable Interest
Entities”.  All significant intercompany transactions and account
balances have been eliminated in consolidation.  These unaudited
consolidated interim financial statements have been prepared by the Company
according to the instructions of Form 10-Q and pursuant to the U.S. Securities
and Exchange Commission’s (“SEC”) accounting and reporting requirements under
Article 8 and Article 10 of Regulations S-X.  Pursuant to these
instructions, certain financial information and footnote disclosures normally
included in such consolidated financial statements have been condensed or
omitted.





These
unaudited consolidated interim financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto, together with management’s discussion and analysis or plan of
operations, contained in the Company’s Annual Report on Form 10-KSB for the year
ended June 30, 2008.  The results of operations for the six and three
months ended December 31, 2008 are not necessarily indicative of the results
that may occur for the year ending June 30, 2009.





The
consolidated balance sheet as of June 30, 2008 was derived from the Company’s
audited financial statements but does not include all disclosures required by
generally accepted accounting principles in the United States of
America  (“US GAAP”).





The
Company’s fiscal year ends on June 30, and therefore references to fiscal 2009
and 2008 refer to the fiscal years ended June 30, 2009 and June 30, 2008,
respectively.





The
Company is engaged in the manufacturing of a dual dispenser that enables the
user to blend two liquids in varying proportions. The dispensers are currently
manufactured in both Germany and the United States and are being utilized in the
food, sun care, skincare, and cosmetic industries.





2.
            Going
      concern and management’s response





The
accompanying unaudited consolidated interim financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. At December 31, 2008, the Company has incurred cumulative losses
of approximately $22.9 million since inception.  The Company has a
working capital deficit of approximately $24.6 million and a stockholders’
deficit of approximately $14.1 million as of December 31, 2008.





At
December 31, 2008, current liabilities include accounts payable and accrued
expenses of approximately $4.2 million of which approximately $2.5 million is
for the purchase and development of new equipment due to two vendors in Germany
for which the Company has reached agreements to defer payment on a portion of
these costs.  In October 2008, the Company reached an agreement with
one of these vendors for the $1.7 million due that vendor at December 31, 2008,
to amortize these costs over production on a per piece basis through June 2009
with any remaining unamortized balance due in monthly installments from July
2009 through December 2009. The Company’s customer approval of the finished
product was received in January 2009.  The first commercial shipment
of the product was completed in late January 2009.  In October 2008,
the Company reached an agreement with the other vendor whereby the Company would
pay approximately $275,000 in October 2008 of the outstanding balance and the
remaining balance at a rate of approximately $75,000 per month until paid with
interest at 7%.   At December 31, 2008, this vendor is owed
approximately $.7 million for the equipment and other related charges and
approximately $.1 million in accrued interest.   The payments
were made through December 2008 as scheduled with the proceeds from a financing
as described below.  Approximately $.9 million included in accounts
payable is due to a vendor in the United States for; (a) the amortization of
purchased equipment under a capital lease obligation of approximately $.4
million and; (b) start up costs and additional equipment at a new U.S. based
facility of approximately $.5 million.  The Company is in discussions
with the vendor for deferred payment of the balance.  Current capital
lease obligations of approximately $3.5 million are to be repaid through
amortization of production based on the number of units produced with any
balance due 18 months from the start of production which commenced in November
2007.  The Company anticipates revenues from production will not cover
this obligation and that alternatively this obligation may be extended as to the
term and amount of amortization per unit produced.  Approximately $1.2
million of current liabilities relates to bridge loans which are due upon the
earlier of March 31, 2009 or out of the proceeds from any new additional
financings in excess of $7.0 million.  Approximately $1.6 million of
current liabilities relates to related party loans which are an obligation of
SCG and are due on December 31, 2009.  The convertible debt of
approximately $9.9 million is due on November 9, 2009.  The Company is
presently in discussions with the lender as to possible conversion of the
related debt prior to the maturity date.  In addition, the royalty due
to licensor included in current liabilities of approximately $1.0 million will
not be due prior to July 1, 2009 as per the terms of an agreement with the
licensor (see Note 7).




5


VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008


On
October 20, 2008, Innopump entered into an unsecured loan agreement with SCG.
SCG is the sublicensor of the patented technology used in the manufacturing of
the Company’s proprietary products. The loan is for a principal amount of
$3,445,750, matures on June 29, 2009 and bears interest at the rate of one and
eighty three hundredths percent (1.83%) per month. The net proceeds from the
loan aggregated $1,227,611, after fees of  $75,000, the required
establishment of a cash collateral account of approximately $895,750 and
payments made directly by the lender to the Company’s vendors of $1,247,389.
From the net proceeds, the Company paid additional financing costs of $250,000
to the lender.  The remaining proceeds of the loan were used primarily
for working capital purposes including (i) payment of current accounts payable
and other outstanding obligations and (ii) funding anticipated working capital
requirements including product development and the acquisition of tooling and
molds (see Note 8).





Management
recognizes that the Company must generate additional revenue and gross profits
to achieve profitable operations. Management's plans to increase revenues
include the continued building of its customer base and product
lines.  In regard to these objectives, the Company commenced
commercial production in connection with a supply agreement with a customer in
the consumer products industry as related to the manufacture of a new size
(20mm) dispenser in January 2009 (see Note 10).  In addition, the
Company relocated its operations for the production of its two current product
lines (the 40mm and 49mm size dispensers) from Germany to the United
States.  The manufacturing facility in the United States commenced
operations in November 2007 and became fully operational in February
2008.  This new facility has increased both production capacity and
gross profit margins on these product lines and management anticipates these
trends to continue in the current fiscal year (see Note
10).  Management believes that the capital received to date from
previous financings will not be sufficient to pay current financial obligations,
inclusive of capital equipment commitments which were incurred in order to
expand the Company’s product lines and increase production capacity, fund
operations, and repay debt during the next twelve months.  Additional
debt or equity financing will be required which may include receivables or
purchase order financing, the issuance of new debt or equity instruments,
additional amortization of a portion of construction costs through the Company’s
production partners and possible restructuring of current amortization and debt
agreements.





There can
be no assurance that the Company will be successful in building its customer
base and product line or that available capital will be sufficient to fund
current operations and to meet financial obligations as it relates to capital
expenditures and debt repayment until such time that the revenues increase to
generate sufficient profit margins to cover operating costs and amortization of
capital equipment. If the Company is unsuccessful in building its customer base
or is unable to obtain additional financing on terms favorable to the Company,
there could be a material adverse effect on the financial position, results of
operations and cash flows of the Company. The accompanying unauditedconsolidated
interim financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.




6




VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008


3.
            Summary
      of significant accounting policies





Accounts
Receivable





The
Company carries its accounts receivable at cost less an allowance for doubtful
accounts. On a periodic basis, the Company evaluates its accounts receivable and
establishes an allowance for doubtful accounts, based on a history of past
write-offs and collections and current credit conditions. Accounts are written
off as uncollectible at the discretion of management. There was no allowance for
doubtful accounts at December 31, 2008 and June 30, 2008.





Inventories





Inventories,
which consist principally of raw materials and finished goods, are stated at
cost on the first-in, first-out basis, which does not exceed market value.
Finished goods are assembled per customer specifications and shipped upon
completion.





Revenue
Recognition





Revenues
are generally recognized at the time of shipment. The Company requires deposits
from certain customers which are recorded as current liabilities until the time
of shipment. All shipments for goods produced at the Company’s subcontractor
manufacturing facility in the United States are picked up by the customers’
freight forwarders and are F.O.B. from the Company’s subcontractor. Shipments
for goods produced at the Company’s subcontractor manufacturing facility in
Germany are either shipped F.O.B  to the customer or at the expense
and risk of the subcontractor.  The Company bears no economic risk for
goods damaged or lost in transit.





Depreciation
and Amortization





Property
and equipment is recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the related assets. The Company
provides for depreciation and amortization over the following estimated useful
lives:





Machinery
      and equipment
              7
      YearsMolds
              2-7
      YearsComputer
      equipment
              3
      Years





Costs of
maintenance and repairs are expensed as incurred while betterments and
improvements are capitalized.





Classification
of Expenses





Cost of
revenues are classified as either direct or indirect costs. Direct costs consist
primarily of expenses at the Company’s three major subcontractor manufacturing
facilities in the United States and Germany which include production of molded
parts, assembly labor, and in certain cases filling of finished product.
Indirect costs consist primarily of equipment repair and maintenance,
depreciation of equipment and molds, the costs of ongoing and new product
development, and technical and administrative support costs as directly related
to production functions such as purchasing and receiving. General and
administrative expenses consist mainly of royalties, salaries of overhead
personnel, consulting fees, legal and professional fees, travel, and other
general expenses.





Loss
Per Share





In
accordance with SFAS No. 128, “Earnings Per Share” (“SFAS
128”), net loss per common share amounts (“basic EPS”) are computed by dividing
net loss by the weighted-average number of common shares outstanding and
excluding any potential dilution.  Net loss per common share amounts
assuming dilution (“diluted EPS”) are generally computed by reflecting potential
dilution from conversion of convertible securities and the exercise of stock
options and warrants.  However, because their effect is antidilutive,
the Company has excluded stock warrants and the potential conversion of
convertible securities aggregating 11,862,088 from the computation of diluted
EPS for the six and three months ended December 31, 2008, respectively, and
10,152,249 for the six and three months ended December 31, 2007,
respectively.




7


VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008




Fair
Value of Financial Instruments





The fair
value of the Company's assets and liabilities, which qualify as financial
instruments under Statement of Financial Accounting Standards (“SFAS”) No. 107,
"Disclosures About Fair Value of Financial Instruments,” approximate the
carrying amounts presented in the accompanying balance sheet.





Impairment
of Long-Lived Assets





Certain
long-lived assets of the Company are reviewed at least annually to determine
whether there are indications that their carrying value has become impaired,
pursuant to guidance established in SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". Management considers assets to be impaired if
the carrying value exceeds the future projected cash flows from related
operations (undiscounted and without interest charges). If impairment is deemed
to exist, the assets will be written down to fair value. Management also
reevaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. In the fourth
quarter of fiscal 2008, we tested for impairment of our long lived assets as
part of our annual long-lived asset impairment review. There were no impairment
charges for the six months ended December 31, 2008 or for the year ended June
30, 2008. There can be no assurance that there will not be impairment charges in
subsequent periods as a result of our future periodic impairment reviews. To the
extent that future impairment charges occur, they will likely have a material
impact on our financial results.





Foreign
Currency Transactions




The
Company complies with SFAS No. 52 “Foreign Operations and Currency Translation”.
All foreign currency transaction gains and losses are included in the Company’s
net income (loss) in the period the exchange rate changes.





Derivative
Financial Instruments





The
Company accounts for non-hedging contracts that are indexed to, and potentially
settled in, its own common stock in accordance with the provisions of Emerging
Issues Task Force (“EITF”) No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock".
These non-hedging contracts accounted for in accordance with EITF No. 00-19
include freestanding warrants and options to purchase the Company's common stock
as well as embedded conversion features that have been bifurcated from the host
financing contract in accordance with the requirements of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". Under certain
circumstances that could require the Company to settle these equity items in
cash or stock, and without regard to probability, EITF 00-19 could require the
classification of all or part of the item as a liability and the adjustment of
that reclassified amount to fair value at each reporting date, with such
adjustments reflected in the Company's consolidated statements of
operations.





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 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.





Recent
Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“FAS 141R”). FAS 141R establishes principles and requirements for
how the acquirer in a business combination recognizes and measures in its
financial statements the fair value of identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at the
acquisition date. FAS 141R determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. FAS 141R is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the impact of
adopting FAS 141R on its consolidated results of operations and financial
condition and plans to adopt it as required in the first quarter of fiscal
2010.




8




VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008


In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“FAS 160”), an amendment of Accounting
Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB
51”).  FAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Minority interests will be recharacterized as noncontrolling
interests and will be reported as a component of equity separate from the
parent’s equity, and purchases or sales of equity interests that do not result
in a change in control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement and upon
a loss of control, the interest sold, as well as any interest retained, will be
recorded at fair value with any gain or loss recognized in earnings. This
pronouncement is effective for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the impact of adopting FAS 160 on the
consolidated results of operations and financial condition and plan to adopt it
as required in the first quarter of fiscal 2010.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“FAS 161”).  FAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities and thereby
improves the transparency of financial reporting. The objective of the guidance
is to provide users of financial statements with an enhanced understanding of
how and why an entity uses derivative instruments; how derivative instruments
and related hedged items are accounted for; and how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. FAS 161 is effective for fiscal years beginning
after November 15, 2008. Management is currently evaluating the impact FAS 161
will have on the Company’s consolidated financial statements.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”.  SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States.  It is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”.  The adoption of this statement is not expected to have a
material effect on the Company’s financial statements.





4.
            Inventories





Inventories
consist of the following:





December 31,
                          
                          
                          June 30,2008
                          
                          
                          2008Raw
      materials
                          
                          $
                          59,300
                          
                          
                          $
                          116,368Work-in-process
                          
                          
                          127
                          
                          
                          
                          3,303Finished
      goods
                          
                          
                          122,864
                          
                          
                          
                          141,678$
                          182,291
                          
                          
                          $
                          261,349




5.
            Secured
      Accounts Receivable and Purchase Order Financing, Related
      Party




Beginning
in May 2008, the Company began raising short-term financing through financing
its accounts receivable. Under this program, specific accounts receivable are
sold at a discount and the Company retains the right to repurchase the accounts,
subject to a 1.5% per month financing charge.  The Company records
this as a financing transaction in which the receivables sold are carried on the
consolidated balance sheet and the amount to be repaid is reflected as a
short-term debt.  At December 31, and June 30, 2008, this liability
approximated $271,000 and $109,000 respectively, inclusive of interest was
payable to an entity owned by Richard Harriton, a related party, who serves as a
Director and is a major shareholder of the Company. All accounts receivable sold
at June 30, 2008, were subsequently repurchased by the
Company.  During the six months ended December 31, 2008, the Company
financed approximately $627,000 of additional receivables and receivables to
arise subsequent to the finance date from this related party.  As of
February13,
2009, approximately $363,000 of these amounts have been repurchased by
the Company to date.  Interest expense approximated $20,000 and
$13,000 for the six and three months ended December 31, 2008.




9




VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008
  6.
              Fair
      values of Financial
Instruments





Cash,
Accounts Receivable and Accounts Payable





The fair
values of cash, accounts receivable and accounts payable approximate carrying
values due to the short maturity of these items.





Derivatives





The fair
values for certain of the Company’s warrants are based on current settlement
values.





Pursuant
to Paragraph 14 of EITF No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock",
certain warrants issued by the Company  meet the requirements of and
are accounted for as a liability since the warrants contain registration rights
where Liquidated Damages Warrants would be required to be issued to the holder
in the event the Company failed to receive and maintain an effective
registration.





The
Company has other outstanding warrants which provide for the Company to register
the shares underlying the warrants and are silent as to the penalty to be
incurred in the absence of the Company's ability to deliver registered shares to
the warrant holders upon warrant exercise. Under EITF No. 00-19 "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF No. 00-19"), registration of the common stock
underlying the Company's warrants is not within the Company's control. As a
result, the Company must assume that it could be required to settle the warrants
on a net-cash basis, thereby necessitating the treatment of the potential
settlement obligation as a liability. Further EITF No. 00-19, requires the
Company to record the potential settlement liability at each reporting date
using the current estimated fair value of the warrants, with any changes being
recorded through the Company's statement of operations. The potential settlement
obligation related to the warrants will continue to be reported as a liability
until such time that the warrants are exercised, expire, or the Company is
otherwise able to modify the registration requirements in the warrant agreement
to remove the provisions which require this treatment. The fair value of the
warrant liability is determined using the trading value of the
warrants.





The
initial value of the warrants granted on August 9, 2006 ($635,000) was treated
as a discount to the convertible notes payable (debt discount) and recorded as a
liability (derivative financial instruments). The value of the additional
warrants granted on October 17, 2006, March 31, 2007, and May 4, 2007 in
connection with convertible notes payable ($346,000) were treated as additional
debt discount expense and recorded as a liability (derivative financial
instruments). The value of the warrants granted on February 1, 2007 ($494,000)
related to a line of credit were treated as a discount to the debt (debt
discount) and recorded as a liability (derivative financial
instruments).  The value of the warrants granted on January 28, 2008
($72,000) as part of a private placement were treated as a component of equity
and recorded as a liability (derivative financial instruments).  The
additional incremental fair value of the warrants reissued on January 28, 2008
($47,000), as part of the antidilution requirements resulting from the private
placement unit price, was recorded as compensation cost  and recorded
as a liability (derivative financial instruments).





Using the
Black-Scholes option-pricing method, the value of the derivative financial
instruments are reassessed at each balance sheet date and marked to market as a
derivative gain or loss until exercised or expiration. Upon exercise of the
derivative financial instruments, the related liability is removed by recording
an adjustment to additional paid-in-capital.





The
Company adopted Statement of Financial Accounting Standards 157, "Fair Value
Measurements" (SFAS No. 157”) for the first quarter of the fiscal year ending
June 30, 2009, and there was no material impact to the consolidated financial
statements. SFAS 157 currently applies to all financial assets and liabilities
and for nonfinancial assets and liabilities recognized or disclosed at fair
value on a recurring basis. In February 2008, FASB issued FASB Staff Position
(“FSP”) No. 157-2, Effective Date of FASB Statement No. 157, which delayed the
effective date of SFAS 157 for certain non-financial assets and non-financial
liabilities to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The
Company is in the process of evaluating the effect, if any, of the adoption of
FSP No. 157-2 will have on its consolidated results of operations or financial
position. The Company does not expect the adoption of FSP No. 157-2 to have
a material effect on its consolidated financial statements.




10




VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008


On
October 10, 2008, the FASB issued FSP FAS No. 157-3, “Fair Value
Measurements” (FSP FAS 157-3), which clarifies the application of SFAS
No. 157 in an inactive market and provides an example to demonstrate how
the fair value of a financial asset is determined when the market for that
financial asset is inactive. FSP FAS 157-3 was effective upon issuance,
including prior periods for which financial statements had not been
issued.  The adoption of this standard did not have a material impact on
the Company’s consolidated results of operations, cash flows or financial
positions.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
155” (“SFAS 159”). This statement permits entities to choose to measure
selected assets and liabilities at fair value. The Company adopted SFAS 159 on
July 1, 2008 resulting in no material impact to the Company’s financial
condition, results of operation or cash flows.




SFAS No.
157 requires disclosure that establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements.  SFAS No.
157 is intended to enable the readers of financial statements to assess the
inputs used to develop those measurements by establishing a hierarchy for
ranking the quality and reliability of the information used to determine fair
values.  SFAS No. 157 requires that assets and liabilities carried at
fair value be classified and disclosed in one of the following
categories:





Level
1:  Quoted market prices in active markets for identical assets or
liabilities.


Level
2:  Observable market based inputs or unobservable inputs that are
corroborated by market data.


Level
3:  Unobservable inputs that are not corroborated by market
data.





SFAS 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. SFAS 157 establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The derivative liabilities are valued using the Black-Scholes
model using inputs applicable to each issuance. Such valuation falls under Level
3 of the fair value hierarchy under FAS 157.




The
Company has financial liabilities classified as Level 3 in the fair value
hierarchy consisting of warrants to purchase common stock, which are accounted
for as derivative financial instruments and had a value of approximately $5,000
and $235,000 at December 31, 2008 and June 30, 2008, respectively. The
derivative gain (loss) for the six and three months ended December 31, 2008
approximated $231,000 and $4,000, respectively, and $(95,000) and $(62,000) for
the six and three months ended December 31, 2007, respectively.





7.
            License
      agreement





In August
2001, SCG entered into a license agreement (“License Agreement”) with Anton
Brugger for the exclusive right to manufacture and sell the dual dispenser. In
January 2003, the License Agreement was amended and restated between SCG (the
“Licensee”) and Gerhard Brugger (the “Licensor”, an assignee of Anton Brugger).
The term of the license will be in effect for the next twenty two years. Gerhard
Brugger is also one of the Company’s major stockholders.





The
License Agreement calls for royalties to be paid to the Licensor 30% of all
gross revenues with respect to sublicensing agreements in which the Licensee
does not manufacture the dispenser. With respect to the sale of the dispenser
and products derived thereof, rates will vary between  the greater of
5% and 8.5% or a minimum royalty per the agreement.




11




VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008


At
December 31, 2008 and June 30, 2008, the Licensor was due approximately $984,000
and $809,000 in past due royalties and expenses, respectively.





On
October 20, 2008 Innopump entered into an unsecured loan agreement with SCG. In
order to provide such funds to Innopump, SCG entered into a loan transaction
with a third party lender.  The Licensor gave the third party lender
his consent of a collateral assignment of the License by SCG to the lender and
agreed that any outstanding indebtedness of SCG under the License Agreement,
which aggregated approximately $907,000 at the date of the closing and $984,000
at December 31, 2008, would not be due prior to July 1, 2009.  SCG, in
consideration for the Licensor’s cooperation, agreed to provide cash collateral
for its payment obligations under its License Agreement of $895,750, which
Innopump agreed to fund out of the loan proceeds. Where Innopump complies with
the terms of the loan agreement with SCG, this amount shall be a credit against
its loan agreement obligations (see Note 8).





8.
            Unsecured
      Loan Agreement with SCG





On
October 20, 2008 Innopump entered into an unsecured loan agreement with SCG. SCG
is an affiliate of the Company as members of the Board of Directors own
approximately 69% of the outstanding membership interests of SCG. SCG is the
sublicensor of the patented technology used in the manufacture of the Company’s
proprietary products. The loan is for a principal amount of $3,445,750, matures
on June 29, 2009 and bears interest at the rate of one and eighty three
hundredths percent (1.83%) per month payable in arrears on the first day of each
month or payable in kind at the option of Innopump with the interest being added
to the principal balance.  The agreement also obligates Innopump to
pay a fully earned facility fee of $400,000 at maturity, a commitment fee of
$250,000, which was paid upon execution of the loan, and an in kind non-interest
bearing monitoring fee in the amount of $100,000 per month for five (5)
consecutive months commencing on November 1, 2008 and terminating on March 1,
2009 payable at maturity.  The loan is not prepayable before March 1,
2009.





In order
to provide such funds to Innopump, SCG entered into a loan transaction with a
third party lender.  Innopump’s payment obligations under the terms of
its loan agreement with SCG are equivalent to SCG’s payment obligations to its
lender with the consequence that all loan payments made by Innopump to SCG will
in turn be paid by SCG to its lender. As of December 31, 2008 the balance
included in the consolidated interim financial statements in the notes,
interest, and financing fees payable, net of the debt discount, includes the
principle amount of $3,445,750, interest of $151,243, a facility fee of
$400,000, and two months monitoring fees of $200,000, payable to the third party
lender, under the terms stated above. In addition, the third party lender was
granted a warrant to purchase a 10% membership interest in SCG at an aggregate
price equal to $1. The warrant issued to the lender was valued at the grant date
at approximately $98,000 and is being amortized as debt discount over the term
of the loan. Debt discount expense aggregated approximately $24,000 for the six
and three months ended December 31, 2008.  The fair value was
calculated using the Black-Scholes model with an expected volatility of 105% and
a risk free interest rate of .76%. The warrant is exercisable through October
2010. Innopump also executed a letter in favor of the third party lender to SCG
providing an indemnity to such lender in the event the lender becomes subject to
litigation commenced by creditors of the Company on account of its having made
such loan.





Gerhard
Brugger, who is the licensor to SCG of the patented technology sublicensed to
Innopump, gave the third party lender his consent of a collateral assignment of
the License by SCG to the lender and agreed that any outstanding indebtedness of
SCG under the License Agreement, which aggregated approximately $907,000 at the
date of the closing and $984,000 at December 31, 2008, would not be due prior to
July 1, 2009.  SCG, in consideration for Mr. Brugger’s cooperation,
agreed to provide cash collateral for its payment obligations to Mr. Brugger
under its License Agreement of $895,750, which Innopump funded out of the loan
proceeds. Where Innopump complies with the terms of the loan agreement with SCG,
this amount shall be a credit against its loan agreement
obligations.   No changes were made in the sublicense agreement
with SCG in connection with this loan.





The net
proceeds from the loan aggregated $1,227,611, after fees of  $75,000,
the required establishment of a cash collateral account of approximately
$895,750 and payments made directly by the lender to the Company’s vendors
of  $1,247,389. From the net proceeds, the Company paid additional
financing costs of $250,000 to the lender.  The remaining proceeds of
the loan were used primarily for working capital purposes including (i) payment
of current accounts payable and other outstanding obligations and (ii) funding
anticipated working capital requirements including product development and the
acquisition of tooling and molds.




12




VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008
  Financing
fees including the monthly monitoring fees incurred in connection with this debt
approximated $1,015,000 at December 31, 2008, which are being amortized over the
term of the loan. For the six and three months ended December 31, 2008, the
amortization of financing costs including the monthly monitoring fees
approximated $404,000.  Interest expense for the six and three months
ended December 31, 2008 approximated $151,000 payable in
kind.   The principal amount of the loan aggregated $3,796,993 at
December 31, 2008 including the monthly monitoring fees and interest payable in
kind and related accrued financing costs due the lender aggregated $400,000 at
December 31, 2008.





9.
            Stockholders’
      deficit





Loss
Per Share





Basic
loss per share excludes dilution and is calculated by dividing the net loss
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock and resulted in the issuance of
common stock.





At
December 31, 2008, the basic loss per common share does not include an aggregate
of 4,651,073 warrants outstanding and 7,211,015 shares issuable under the terms
of convertible debt. At December 31, 2007, the basic loss per common share does
not include an aggregate of 3,778,834 warrants outstanding and 6,373,415 shares
issuable under the terms of convertible debt. The effect of these securities
would be antidilutive. These warrants are currently exercisable at prices that
range between $.94-$2.282 and expire between August 9, 2011 and July 1, 2013. At
December 31, 2007, diluted loss per common share includes 2,240,625 shares as
calculated using the treasury stock method for proceeds that would have been
received from the exercise of convertible debt and warrants as if they were used
to purchase common stock at the average market price during the
period.





Issuance
of Warrants





On July
1, 2008, in consideration for an amendment of the terms of the sublicense
between the Company and SCG on June 30, 2008, the Company granted SCG 250,000
warrants to purchase the Company’s common stock exercisable for five years from
the date of issuance at an initial exercise price equal to $2.282 per
share.  These warrants were valued at the grant date at approximately
$15,000 and were treated as compensation expense.  The fair value was
calculated using the Black Scholes model with an expected volatility of 51% and
a risk free interest rate of 3.00%.  SCG assigned 175,000 of these
warrants to two related parties as consideration for debt
extensions.





10.
            Commitments
      and contingencies





Manufacturing
Agreement and Equipment Purchase





On
September 20, 2006, the Company entered into a 30-month manufacturing agreement
with an outside contractor located in Germany. After the initial 30-month term,
the agreement may be terminated by either party but only upon at least nine (9)
months advance written notice of such termination.  The agreement
calls for the contractor to develop certain production molds for the Company for
a new size (20 millimeter) dispenser. The Company will place all customer orders
relating to the product with the contractor until at least eighty percent (80%)
of the manufacturer’s production capacity is utilized based on five (5) days per
week, three (3) shifts per day. The agreement calls for the Company to make
payments in the aggregate of approximately $5.3 million for the required
production molds and other production equipment.   As of December
31, 2008, the Company has paid an aggregate of approximately $3.5 million for
the production molds which are included in development of production equipment
in progress and has an outstanding liability due the contractor for $1.7 million
which is included in current liabilities. On October 2, 2008, the Company and
the contractor entered into an amortization agreement as related to the $1.7
million liability.  This liability will be deferred and amortized over
production on a per piece basis with any remaining unamortized balance due in
monthly installments commencing July 2009 through December
2009.   The Company’s customer approval of the finished product
was received in January 2009.  The first commercial shipment of the
product was completed in late January 2009.  Contemporaneously with
this agreement, on October 2, 2008, the Company was fully relieved of its
obligation to repay the $1.7 million advance received from its customer, Avon
Products, Inc. (“Avon”),  provided that the Company shall instead pay
the tooling and mold contractor this amount.  The payment due the
contractor is independent of the credit relief that Avon has provided the
Company; however, if Avon does not forgive any or all of the $1.7 million
advance, then the Company and the contractor shall promptly negotiate a mutually
agreeable payment schedule for any balance due.




13




VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008


The
additional remaining balance due the contractor of approximately $.1 million was
financed through a capital lease to be paid monthly through March
2009.  All of the equipment was capitalized in January 2009 and the
amortization period became effective at that time.





In
conjunction with the above manufacturing agreement, the Company also ordered
related assembly equipment from a vendor in the amount of approximately $1.2
million.  In October 2008, the Company reached an agreement with the
vendor whereby the Company would pay approximately $275,000 in October 2008 of
the outstanding balance and the remaining balance at a rate of approximately
$75,000 per month until paid with interest at 7%.   At December
31, 2008, this vendor is owed approximately $.7 million for the equipment and
other related charges and approximately $.1 million in accrued
interest.   The payments were made through December 2008 as
scheduled with the proceeds from a financing (see Note 8).





Supply
and Tooling Amortization Agreement





On April
24, 2007, the Company entered into a Supply Agreement and a related Tooling
Amortization Agreement with an outside contractor located in the United States
(the “Supplier”) for the manufacture of its 40mm and 49mm size dispensers which
were previously manufactured in Germany. These two agreements became effective
on April 30, 2007, when SCG and the licensor to the Company of the technology
covering the patented dispenser produced by the Company, and Gerhard Brugger,
the patent owner of the patented dispenser, entered into an Agreement to License
with the Supplier. This agreement, a condition precedent to the effectiveness of
the Supply Agreement and the related Tooling Amortization Agreement, provides
security to the Supplier if the Company were to default in the performance of
its obligations under the Supply Agreement.





The
Supply Agreement provides, among other things, that the Company, over the
five-year term of the Agreement, will purchase from the Supplier no less than
100.0 million units of the Company’s 40 millimeter and 49 millimeter
dispensers.





These
Agreements provided that the Supplier would fund the majority of the estimated
$4.6 million cost of the injection molding, tooling and automated equipment
necessary to produce the products to be purchased by the Company. Although
financed by the Supplier, the equipment will be owned by the Company. The
Company capitalized the related equipment at inception of production in November
2007.  The cost of the tooling and automated equipment, with a three
(3%) percent per annum interest factor, will be amortized over a period of 18
months against dispensers purchased and delivered to the Company pursuant to the
Supply Agreement, with a per unit amortization cost included in the cost price
for the dispensers.  If the Company fails to place orders within 18
months sufficient to cover the amortization, any remaining balance will be due
in 18 months from the inception of the respective amortization
period.





As of
December 31, 2008, all of the molds and equipment in the aggregate of
approximately $4.6 million were completed, utilized in production and
capitalized by the Company.  Approximately $4.35 million of this cost
is being amortized.  For the six and three months ended December 31,
2008, amortization of the molds and equipment approximated $164,000 and $75,000,
respectively, and for the six and three months ended December 31, 2007
approximately $151,000.  The remaining balance due at December 31,
2008 of approximately $3.5 million is to be amortized over production with any
remaining balance due 18 months from inception of
production.   The Company is currently in arrears at December 31,
2008 in the amount of approximately $385,000 in amortization which is included
in current liabilities.  The Company is in discussions with the
contractor to restructure the current amortization program as to duration of
term and amount per piece to be amortized as well as deferral of the amount in
arrears.




14




VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008


The
Supply Agreement also contains normal commercial terms, including a
representation by the Supplier as to the dispensers being produced in accordance
with specifications, indemnification of the Supplier by the Company against
intellectual property infringement claims of third parties, insurance,
confidentiality and termination provisions, including a right of optional
termination by Company upon payment of all unamortized tooling and equipment
costs plus a penalty, the amount of which varies based on the date of
termination.





The price
for the dispensers is fixed, subject to adjustment at six-month intervals to
reflect changes in the cost of resins and other component parts.





The
Supply Agreement also grants to the Supplier a right of first refusal to furnish
additional tooling, if the Company elects to acquire additional tooling, and
affords the Supplier a right to match the terms of a replacement supply contract
at the end of the five year term of the Supply Agreement.





The
related Agreement to License between the Supplier and Sea Change Group, LLC and
Gerhard Brugger permits the Supplier, in the event of a default by the Company
under the Supply Agreement, to require that SCG and Brugger utilize the Supplier
to continue to produce and market the dispensers that are the subject of the
Supply Agreement for the remaining term of the Supply Agreement, if the Supplier
is not then in default of its obligations under the Supply Agreement. In such
case, the right of Supplier to continue to amortize the cost of the tooling and
automatic equipment would continue.





Customer
Master Supply Agreement





On July
10, 2007 the Company entered into a two-year Master Supply Agreement with Avon,
a consumer products company, for seventeen million units of certain of the
Company’s products. The Agreement will remain in effect through the second
anniversary of the first shipment of such products in commercial production
quantities.  On October 2, 2008, the agreement was amended and Avon’s
commitment to purchase certain of the Company’s products was reduced in number
in return for certain price adjustments based on current market
conditions.  In late January 2009, the initial shipment to Avon was
made under this agreement.





Pursuant
to the terms of the Credit Memo previously entered into with Avon, the Company
was to repay Avon’s $1.7 million advances received in fiscal year 2007 by a
credit against the purchase price of products sold to Avon pursuant to the
Master Supply Agreement and pursuant to other agreements that may be entered
into between Versadial and Avon, commencing six months after the date of the
first shipment of products to Avon.  On October 2, 2008, the Company
was fully relieved of its obligation to repay the $1.7 million advance provided
that the Company shall instead pay the tooling and mold contractor this amount
pursuant to a payment schedule to be determined between the Company and the
contractor as consideration for additional equipment costs and development costs
related to the tooling and mold expenses.  In the event of a default
by the Company in payment to the contractor, the credit relief granted shall
immediately be null and void to the extent of any unpaid balance, and the
customer shall have the right to enforce against the Company collection of the
full amount of such unpaid balance.  Upon the Company’s payment to the
tooling and mold contractor, the Company will recognize the credit relief
granted by Avon.





11.
            Major
      customers and segment information





Major
customers





Customers
accounting for 10% or more of revenues are as follows:





Six months
                                ending
                                December 31,
                                2008
                              
                              
                              Six months
                                ending
                                December 31,
                                2007
                              
                              
                              Three months
                                ending
                                December 31,
                                2008
                              
                              
                              Three months
                                ending
                                December 31,
                                2007Customer
      A
                              
                              $
                              880,000
                              
                              
                              $
                              1,039,000
                              
                              
                              $
                              562,000
                              
                              
                              $
                              1,012,000Customer
      B
                              
                              
                              315,000
                              
                              
                              
                              -
                              
                              
                              
                              315,000
                              
                              
                              
                              -$
                              1,195,000
                              
                              
                              $
                              1,039,000
                              
                              
                              $
                              877,000
                              
                              
                              $
                              1,012,000
  15
 VERSADIAL,
INC.
 NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 DECEMBER 31,
2008
 
 Accounts
receivable from customer A aggregated approximately $314,000 at December 31,
2008.
 
 Segment
information
 
 Assets,
classified by geographic location are as follows:
 
 December
      31,
                                          
                                          
                                          June
      30,2008
                                          
                                          
                                          2008United
      States
                                          
                                          $
                                          6,258,272
                                          
                                          
                                          $
                                          5,502,628Other
      countries
                                          
                                          
                                          7,778,054
                                          
                                          
                                          
                                          7,111,064$
                                          14,036,326
                                          
                                          
                                          $
                                          12,613,692
 
 Assets in
other countries are primarily inventory and equipment which are located at
subcontractor production facilities in Germany and amounts classified as
deposits on production equipment.
 
 Revenue,
classified by the major geographic areas was as follows:
 
 Six months
                                            ending
                                            December 31,
                                            2008
                                          
                                          
                                          Six months
                                            ending
                                            December 31,
                                            2007
                                          
                                          
                                          Three months
                                            ending
                                            December 31,
                                            2008
                                          
                                          
                                          Three months
                                            ending
                                            December 31,
                                            2007United
      States
                                          
                                          $
                                          1,012,174
                                          
                                          
                                          $
                                          1,113,131
                                          
                                          
                                          $
                                          664,956
                                          
                                          
                                          $
                                          1,012,161Other
      countries
                                          
                                          
                                          435,133
                                          
                                          
                                          
                                          58,843
                                          
                                          
                                          
                                          327,605
                                          
                                          
                                          
                                          11,126$
                                          1,447,307
                                          
                                          
                                          $
                                          1,171,974
                                          
                                          
                                          $
                                          992,561
                                          
                                          
                                          $
                                          1,023,287
  16
  ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  The
following discussion should be read along with our financial statements, which
are included in another section of this 10-Q. This discussion contains
forward-looking statements about our expectations for our business and financial
needs. These expectations are subject to a variety of uncertainties and risks
that may cause actual results to vary significantly from our expectations. The
cautionary statements made in this Report should be read as applying to all
forward-looking statements in any part of this 10-Q. The forward-looking
statements are made as of the date of this Form 10-Q, and the Company assumes no
obligation to update the forward-looking statements, or to update the reasons
actual results could differ from those projected in such forward-looking
statements.
  NATURE OF BUSINESS AND
COMPETITION
 
 Versadial
is engaged in the manufacture of a dual dispenser that enables the user to blend
two liquids in varying proportions. The dispensers are currently manufactured in
both Germany and the United States and are being utilized in the food, sun care,
skincare, and cosmetic industries. Versadial’s business is designed to
capitalize on the commercial opportunities for innovation in packaging and
dispensing within the consumer products
industries.   Substantially all of our revenues come from
wholesale sales and our customers are located both in the United States and in
Europe.  The manufacture of the dual dispensers are currently
outsourced to third party subcontractors in the United States for our 40mm and
49mm size dispensers and in Germany for our 20mm size dispenser.
 
 Innopump,
our wholly owned subsidiary, holds the exclusive worldwide license for a
patented dual-chambered variable dispensing system for all categories of uses,
marketed under the registered trademark "Versadial®". The
patented system utilizes multiple volumetric pumps, controlled by a rotating
head and disc system, providing the dispensing of precise fixed or variable
ratios of distinct and separate fluids. The Versadial® custom
blending dual dispensing head provides consumer packaged goods manufacturers
with a new and innovative dispensing technique permitting precision measured
blending by the consumer of different lotions, gels, creams, and liquids, or
combination thereof.
  Although,
we are not aware of any direct competition for our type of dual chamber variable
dispensing product, there are other dispensing solutions available.
  Other
manufacturers within the sub-sector of dispensing valves, pumps and other
dispensing systems are large multinational companies offering a range of
products to all major personal care, pharmaceutical, OTC and food sectors. They
include but are not limited to Owens-Illinois, Rexam plc., Aptar, Bespak, 3M,
Calmar, Precision, Summit, Coster, Lindal and PAI Partners.
  Other
manufacturers within the personal care and food packaging sectors are large,
well-financed, national and international manufacturers of caps, jars and
bottles well as pumps and valves including but not limited to Owen-Illinois,
Tetra Pak, Crown, Cork and Seal, Alcan, Rexam plc., Amcor Limited, Toyo Seikan,
Ball, Compagnie de Saint-Gobain, and Alcoa.
  Nearly
all of the other manufacturers have longer operating histories, greater
experience, greater name recognition, larger customer bases, greater
manufacturing capabilities, and significantly greater financial, technical and
marketing resources than we do. Because of their greater resources, other
manufacturers are able to undertake more extensive marketing campaigns for their
brands and products, and make more attractive offers to potential employees,
retail affiliates, and others. Although, we believe our products are superior to
any other product currently on the market, we cannot assure you that we will be
able to compete successfully against our current or future competitors or that
our business and financial results will not suffer from
competition.
  17
  Recent
Developments
 
 The following developments took place
during the six months ended December 31, 2008 and subsequent to December 31,
2008:
 
 ·
                                On
      September 20, 2006, we entered into a 30-month manufacturing agreement
      with Seidel GMBH (“Seidel”), an outside contractor located in Germany. The
      agreement calls for the contractor to develop certain production molds for
      us for a new size (20 millimeter) dispenser.  On October 2,
      2008, the agreement was amended for certain price adjustments based on
      current market conditions.  We also agreed to pay the contractor
      an aggregate of $1.7 million for additional equipment to be purchased and
      for development costs related to the molds under the terms of an
      amortization agreement.  The December 31, 2008 obligation due to
      the contractor of $1.7 million will be amortized over production on a per
      piece basis starting in January 2009, the date of the first commercial
      shipment of the product. Contemporaneously with this agreement, on October
      2, 2008, we were fully relieved of our obligation to repay the $1.7
      million advance received from our customer, Avon, provided that we shall
      instead pay the tooling and mold contractor this amount.  The
      payment due the contractor is independent of the credit relief that Avon
      has provided us; however, if Avon does not forgive any or all of the $1.7
      million advance, then we and the contractor shall promptly negotiate a
      mutually agreeable payment schedule for any balance due.  The
      $1.7 million is to be paid to the contractor on a per piece amortization
      for all pieces produced through June 30, 2009, with any balance to be paid
      in six equal monthly payments from July 2009 through December 2009.
 
 ·
                                On
      July 10, 2007 we entered into a two-year Master Supply Agreement with
      Avon, a consumer products company for seventeen million units of certain
      of our Company’s products. On October 2, 2008, the agreement was amended
      and Avon’s commitment to purchase certain of our products was reduced in
      number in return for certain price adjustments based on current market
      conditions.  In late January 2009, the initial shipment to Avon
      was made under this agreement.
 
 In
addition, pursuant to the terms of the Credit Memo previously entered into with
Avon, we were to repay Avon’s $1.7 million advance received in fiscal year 2007
by a credit against the purchase price of products sold to Avon.  On
October 2, 2008, we were fully relieved of our obligation to repay the $1.7
million advance provided that we shall instead pay the tooling and mold
contractor this amount pursuant to a payment schedule to be determined between
us and the contractor as consideration for additional equipment costs and
development costs related to the tooling and mold expenses.  In the
event of a default by us in payment to the contractor, the credit relief granted
shall immediately be null and void to the extent of any unpaid balance, and the
customer shall have the right to enforce against us collection of the full
amount of such unpaid balance.  Upon our payment to the tooling and
mold contractor, we will recognize the credit relief granted by
Avon.
 
 ·
                                On
      October 20, 2008 Innopump entered into an unsecured loan agreement with
      SCG. SCG is an affiliate of the Company as members of the Board of
      Directors own approximately 69% of the outstanding membership interests of
      SCG. SCG is the sublicensor of the patented technology used in the
      manufacture of the Company’s proprietary products. The loan is for a
      principal amount of $3,445,750, matures on June 29, 2009 and bears
      interest at the rate of one and eighty three hundredths percent (1.83%)
      per month payable in arrears on the first day of each month or payable in
      kind at the option of Innopump with the interest being added to the
      principal balance.  The agreement also obligates Innopump to pay
      a fully earned facility fee of $400,000 at maturity, a commitment fee of
      $250,000, which was paid upon execution of the loan, and an in kind
      non-interest bearing monitoring fee in the amount of $100,000 per month
      for five (5) consecutive months commencing on November 1, 2008 and
      terminating on March 1, 2009 payable at maturity.  The loan is
      not prepayable before March 1,
2009.
  18
 
 In order
to provide such funds to Innopump, SCG entered into a loan transaction with a
third party lender.  Innopump’s payment obligations under the terms of
its loan agreement with SCG are equivalent to SCG’s payment obligations to its
lender with the consequence that all loan payments made by Innopump to SCG will
in turn be paid by SCG to its lender. As of December 31, 2008 the balance
included in the consolidated interim financial statements in the notes,
interest, and financing fees payable, net of the debt discount, includes the
principle amount of $3,445,750, interest of $151,243, a facility fee of
$400,000, and two months monitoring fees of $200,000, payable to the third party
lender, under the terms stated above. In addition, the third party lender was
granted a warrant to purchase a 10% membership interest in SCG at an aggregate
price equal to $1. The warrant issued to the lender was valued at the grant date
at approximately $98,000 and is being amortized as debt discount over the term
of the loan. Debt discount expense aggregated approximately $24,000 for the six
and three months ended December 31, 2008.  The fair value was
calculated using the Black-Scholes model with an expected volatility of 105% and
a risk free interest rate of .76%. The warrant is exercisable through October
2010. Innopump also executed a letter in favor of the third party lender to SCG
providing an indemnity to such lender in the event the lender becomes subject to
litigation commenced by creditors of the Company on account of its having made
such loan.
 
 Gerhard
Brugger, who is the licensor to SCG of the patented technology sublicensed to
Innopump, gave the third party lender his consent of a collateral assignment of
the License by SCG to the lender and agreed that any outstanding indebtedness of
SCG under the License Agreement, which aggregated approximately $907,000 at the
date of the closing and $984,000 at December 31, 2008, would not be due prior to
July 1, 2009.  SCG, in consideration for Mr. Brugger’s cooperation,
agreed to provide cash collateral for its payment obligations to Mr. Brugger
under its License Agreement of $895,750, which Innopump agreed to fund out of
the loan proceeds. Where Innopump complies with the terms of the loan agreement
with SCG, this amount shall be a credit against its loan agreement
obligations.   No changes were made in the sublicense agreement
with SCG in connection with this loan.
 
 The net
proceeds from the loan aggregated $1,227,611, after fees of  $75,000,
the required establishment of a cash collateral account of approximately
$895,750 and payments made directly by the lender to our vendors
of  $1,247,389. From the net proceeds, we paid additional financing
costs of $250,000 to the lender.  The remaining proceeds of the loan
were used primarily for working capital purposes including (i) payment of
current accounts payable and other outstanding obligations and (ii) funding
anticipated working capital requirements including product development and the
acquisition of tooling and molds.
 
 Critical Accounting Policies
and Estimates
  We
believe that several accounting policies are important to understanding our
historical and future performance. We refer to these policies as “critical”
because these specific areas generally require us to make judgments and
estimates about matters that are uncertain at the time we make the estimate, and
different estimates, which also would have been reasonable, could have been
used, which would have resulted in different financial results. The Company
adopted changes to its critical accounting policies during the first six months
of the fiscal year ending June 30, 2009 as set forth below.
 
 In
September 2006, the FASB issued SFAS 157. This Standard defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. It applies to other accounting pronouncements where the
FASB requires or permits fair value measurements but does not require any new
fair value measurements. In February 2008, the FASB issued FSP 157-2, which
delayed the effective date of SFAS 157 for certain non-financial assets and
non-financial liabilities to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. The Company adopted SFAS 157 for
financial assets and liabilities for the first quarter of the fiscal year ending
June 30, 2009. The disclosures required under SFAS 157 are set forth in Note 6
to our condensed financial statements set forth in Item 1 of this quarterly
report. We are currently in the process of evaluating the effect, if any, that
the adoption of FSP 157-2 will have on our results of operations or financial
position.
 
 On
October 10, 2008, the FASB issued FSP FAS No. 157-3, “Fair Value
Measurements” (FSP FAS 157-3), which clarifies the application of SFAS
No. 157 in an inactive market and provides an example to demonstrate how
the fair value of a financial asset is determined when the market for that
financial asset is inactive. FSP FAS 157-3 was effective upon issuance,
including prior periods for which financial statements had not been
issued.  The adoption of this standard did not have a material impact on
the Company’s consolidated results of operations, cash flows or financial
positions.
  19
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
155” (“SFAS 159”). This statement permits entities to choose to measure
selected assets and liabilities at fair value. The Company adopted SFAS 159 on
July 1, 2008 resulting in no material impact to the Company’s financial
condition, results of operation or cash flows.
  The
critical accounting policies we identified in our Annual Report on Form 10-KSB
for the fiscal year ended June 30, 2008 related to various significant
accounting policies. It is important that the discussion of our operating
results that follows be read in conjunction with the critical accounting
policies disclosed in our Annual Report on Form 10-KSB, as filed with the SEC on
November 14, 2008.
 
 RESULTS OF
OPERATIONS
 
 Executive
Summary
 
 The table
below sets forth a summary of financial highlights for the six and three months
ended December 31, 2008 and 2007:
 
 Overall,
our revenue grew substantially by 23% during the current fiscal year as our
operations began to grow in the skincare and cosmetic sectors. Our revenues to
date in the current fiscal year were derived from nine customers as compared to
four customers in the prior fiscal year for the same
period.   Our direct costs were 58% and 99% of revenues for the
respective periods due to several factors, which were primarily the need for
manual labor of certain functions in Germany in 2007 which have ceased as we
relocated our operations to the U.S. in late 2007, the unfavorable Euro/US
Dollar currency exchange fluctuation in 2007, which also has ceased as a result
of this relocation, and high direct freight costs in 2007 due mainly to
component parts being produced in the U.S. and shipped to Germany for assembly
prior to completion of the U.S. facility becoming fully
operational.  Our indirect costs, which consist mainly of
depreciation, costs for prototype samples for new customers and products, and
costs for testing of new equipment, were approximately $.9 million in both
periods.  Our revenues did not increase enough to cover these indirect
costs.  Our general and administrative expenses decreased about 8% in
the current fiscal period due to a decrease in consulting fees for primarily
overseas consultants no longer required.  These changes are explained
in more detail below.
 
 Our focus
for the coming fiscal year and the future will be to grow our revenues and
continue to decrease our direct costs per unit which we believe will be
accomplished as our transition to the U.S. has been completed for production of
our 40mm and 49mm dispensers and our new 20mm dispenser product line is now
completed.  First commercial production and shipping of our new 20mm
dispenser commenced in January 2009 at the Seidel plant located in
Germany.  We estimate we will be able to produce approximately 15
million units annually of our 20mm dispenser.   In addition, we
believe the completion of our new U.S. based facility in February 2008 for our
40 and 49mm product line will enable us to increase production with
substantially all new automated molds and assembly
equipment.    We estimate we will be able to produce
approximately 20 million units annually of these products.  We have
commitments from several multi-national customers for in excess of four (4)
million units at the current time for our various products.  We also
anticipate improving our costs and margins as both the injection molding and
assembly functions will be performed together at both of these new subcontractor
facilities and we will be better able to manage our costs as they will be on a
per piece basis and we will no longer need to purchase individual component
parts and contract assembly labor separately.  Additionally, we will
retain the services of Holzmann Montague, our prior assembly manufacturer in
Germany, for development projects with new and existing customers, and possibly
for assembly of foreign orders or additional production use if
necessary.
  20
 
 For
      the six months ended December 31,
                                                          
                                                          2008
                                                          
                                                          
                                                          2007
                                                          
                                                          
                                                          CHANGENet
      revenues
                                                          
                                                          $
                                                          1,447,307
                                                          
                                                          
                                                          $
                                                          1,171,974
                                                          
                                                          
                                                          
                                                          23
                                                          %Cost
      of revenuesDirect
      costs
                                                          
                                                          
                                                          842,942
                                                          
                                                          
                                                          
                                                          1,166,487
                                                          
                                                          
                                                          
                                                          -28
                                                          %Indirect
      costs
                                                          
                                                          
                                                          876,048
                                                          
                                                          
                                                          
                                                          850,711
                                                          
                                                          
                                                          
                                                          3
                                                          %1,718,990
                                                          
                                                          
                                                          
                                                          2,017,198
                                                          
                                                          
                                                          
                                                          -15
                                                          %Gross
      margin
                                                          
                                                          
                                                          (271,683
                                                          )
                                                          
                                                          
                                                          (845,224
                                                          )
                                                          
                                                          
                                                          -68
                                                          %Operating
      expensesGeneral
      and administrative
                                                          
                                                          
                                                          1,449,418
                                                          
                                                          
                                                          
                                                          1,583,361
                                                          
                                                          
                                                          
                                                          -8
                                                          %Loss
      from operations
                                                          
                                                          
                                                          (1,721,101
                                                          )
                                                          
                                                          
                                                          (2,428,585
                                                          )
                                                          
                                                          
                                                          -29
                                                          %Other
      income (expenses)Sublease
      income, affiliates
                                                          
                                                          
                                                          25,830
                                                          
                                                          
                                                          
                                                          24,330
                                                          
                                                          
                                                          
                                                          6
                                                          %Interest
      and other expense
                                                          
                                                          
                                                          (877,305
                                                          )
                                                          
                                                          
                                                          (896,958
                                                          )
                                                          
                                                          
                                                          -2
                                                          %Interest
      expense, related parties
                                                          
                                                          
                                                          (111,628
                                                          )
                                                          
                                                          
                                                          (81,112
                                                          )
                                                          
                                                          
                                                          38
                                                          %Amortization
      of debt discount
                                                          
                                                          
                                                          (152,643
                                                          )
                                                          
                                                          
                                                          (404,035
                                                          )
                                                          
                                                          
                                                          -62
                                                          %Amortization
      of financing costs
                                                          
                                                          
                                                          (571,849
                                                          )
                                                          
                                                          
                                                          (220,644
                                                          )
                                                          
                                                          
                                                          159
                                                          %Gain
      on derivative financial instruments
                                                          
                                                          
                                                          230,658
                                                          
                                                          
                                                          
                                                          189,898
                                                          
                                                          
                                                          
                                                          21
                                                          %Gain
      (loss) on foreign currency exchange
                                                          
                                                          
                                                          302,012
                                                          
                                                          
                                                          
                                                          (94,625
                                                          )
                                                          
                                                          
                                                          -419
                                                          %(1,154,925
                                                          )
                                                          
                                                          
                                                          (1,483,146
                                                          )
                                                          
                                                          
                                                          -22
                                                          %Net
      loss
                                                          
                                                          $
                                                          (2,876,026
                                                          )
                                                          
                                                          $
                                                          (3,911,731
                                                          )
                                                          
                                                          
                                                          -26
                                                          %
 
 REVENUES.
During the six months ended December 31, 2008, we had revenues of $1,447,308 as
compared to revenues of $1,171,974 during the six months ended December 31,
2007, an increase of approximately 23%. In 2008, 82% of the revenue was
primarily attributable to two customers in the cosmetic and food industries and
the balance from seven additional customers.  In 2007, 89% of the
revenue was primarily attributable to one customer in the skincare, cosmetic and
food industries and the balance from three additional customers.  As
discussed above, we anticipate our revenues to continue to increase in the
coming fiscal year as to amount and customer base.
 
 GROSS
MARGIN. Cost of revenues – direct costs, which consist of direct labor, overhead
and product costs, were $842,942 (58% of revenues) for the six months ended
December 31, 2008 as compared to $1,166,487 (99% of revenues) for the six months
December 31, 2007.  The significant improvement in the percentage of
direct costs as related to revenues for 2008 is a direct result of our
relocation to the United States in late 2007 as more fully described
above.  Cost of revenues – indirect costs, which consist of indirect
labor, quality control costs, factory maintenance, product development and
depreciation, were $876,048 for the six months ended December 31, 2008 as
compared to $850,711 for the six months ended December 31, 2007.  The
increase was due primarily to increased depreciation of approximately $302,000
due to the purchase of more manufacturing equipment, which was offset by a
decrease in additional costs for runoff testing of parts needed to validate the
new U.S. equipment in 2007.  Gross margin was a deficit of $(271,683)
for the six months ended December 31, 2008 as compared to a deficit of
$(845,224) for the six months ended December 31, 2007, representing gross
margins of approximately (19) % and (72) % of revenues, respectively. We believe
that indirect costs, which are primarily related to depreciation and the testing
of new automated equipment, will decrease both in amount and as a percent of
revenues as the equipment is placed in service and revenues increase to cover
these costs. We also
believe direct costs should remain at the current level as a percentage of
revenues for our 40mm and 49mm dispensers as discussed above as our new U.S.
facility became fully operational in February 2008 and our new 20mm facility in
Germany began commercial production in January 2009.  Our production
capacity and customer base should continue to grow in the future resulting in
revenue growth to support our direct and indirect costs.
  21
 
 OPERATING
EXPENSES.  General and administrative expenses totaled $1,449,418 for
the six months ended December 31, 2008, as compared to $1,583,361 for the six
months ended December 31, 2007, a decrease of approximately 8%. This decrease of
approximately $134,000 is primarily attributable toa decrease in consulting
fees for primarily overseas consultants no longer required.
 
 NET LOSS.
We had a net loss of $2,876,026 for the six months ended December 31, 2008 as
compared to $3,911,731 for the six months ended December 31, 2007, a decrease of
approximately $1,036,000. The decrease in net loss is attributable to the
corresponding increases and decreases in revenues, general and administrative
expenses and cost of revenues as described above aggregating an improvement of
approximately $708,000.  In addition, we incurred an increase in gain
on foreign currency exchange due to the favorable fluctuation in the foreign
currency rates of approximately $302,000 for the six months ended December 31,
2008 as compared to a loss of approximately $(95,000) for 2007.  We
believe that revenues should increase in the coming fiscal year as we introduce
our new product line and are able to grow our customer base, and direct costs
should decrease as production becomes more automated and diversified in both the
U.S. and in Germany, allowing operating expenses to decline on a per piece basis
and indirect costs to be covered.
 
 For
      the three months ended December 31,
                                          
                                          2008
                                          
                                          
                                          2007
                                          
                                          
                                          CHANGENet
      revenues
                                          
                                          $
                                          992,561
                                          
                                          
                                          $
                                          1,023,287
                                          
                                          
                                          
                                          -3
                                          %Cost
      of revenuesDirect
      costs
                                          
                                          
                                          601,936
                                          
                                          
                                          
                                          875,498
                                          
                                          
                                          
                                          -31
                                          %Indirect
      costs
                                          
                                          
                                          421,434
                                          
                                          
                                          
                                          429,208
                                          
                                          
                                          
                                          -2
                                          %1,023,370
                                          
                                          
                                          
                                          1,304,706
                                          
                                          
                                          
                                          -22
                                          %Gross
      margin
                                          
                                          
                                          (30,809
                                          )
                                          
                                          
                                          (281,419
                                          )
                                          
                                          
                                          -89
                                          %Operating
      expensesGeneral
      and administrative
                                          
                                          
                                          751,312
                                          
                                          
                                          
                                          795,724
                                          
                                          
                                          
                                          -6
                                          %Loss
      from operations
                                          
                                          
                                          (782,121
                                          )
                                          
                                          
                                          (1,077,143
                                          )
                                          
                                          
                                          -27
                                          %Other
      income (expenses)Sublease
      income, affiliates
                                          
                                          
                                          12,915
                                          
                                          
                                          
                                          11,415
                                          
                                          
                                          
                                          13
                                          %Interest
      and other expense
                                          
                                          
                                          (559,663
                                          )
                                          
                                          
                                          (417,739
                                          )
                                          
                                          
                                          34
                                          %Interest
      expense, related parties
                                          
                                          
                                          (56,411
                                          )
                                          
                                          
                                          (55,335
                                          )
                                          
                                          
                                          2
                                          %Amortization
      of debt discount
                                          
                                          
                                          (88,571
                                          )
                                          
                                          
                                          (213,808
                                          )
                                          
                                          
                                          -59
                                          %Amortization
      of financing costs
                                          
                                          
                                          (487,849
                                          )
                                          
                                          
                                          (95,322
                                          )
                                          
                                          
                                          412
                                          %Gain
      on derivative financial instruments
                                          
                                          
                                          3,496
                                          
                                          
                                          
                                          716,799
                                          
                                          
                                          
                                          -100
                                          %Gain
      (loss) on foreign currency exchange
                                          
                                          
                                          72,438
                                          
                                          
                                          
                                          (61,451
                                          )
                                          
                                          
                                          -218
                                          %(1,103,645
                                          )
                                          
                                          
                                          (115,441
                                          )
                                          
                                          
                                          856
                                          %Net
      loss
                                          
                                          $
                                          (1,885,766
                                          )
                                          
                                          $
                                          (1,192,584
                                          )
                                          
                                          
                                          58
                                          %
  22
 
 REVENUES.
During the three months ended December 31, 2008, we had revenues of $992,561 as
compared to revenues of $1,023,287 during the three months ended December 31,
2007, a decrease of approximately 3%. In 2008, 88% of the revenue was primarily
attributable to two customers in the cosmetic industry and the balance from
three additional customers.  In 2007, 99% of the revenue was primarily
attributable to one customer in the cosmetic industry.  In 2007, we
experienced a large startup order from this customer for the initial product
launch which has leveled off in the current period as inventory was acquired by
the customer  to meet their respective customer
demands.   As discussed above, we anticipate our revenues to
continue to increase in the coming fiscal year as to amount and customer base in
connection with the 40mm and 49mm product lines and the start of our 20mm
product line in January 2009.
 
 GROSS
MARGIN. Cost of revenues – direct costs, which consist of direct labor, overhead
and product costs, were $601,936 (61% of revenues) for the three months ended
December 31, 2008 as compared to $875,498 (86% of revenues) for the three months
December 31, 2007.  The significant improvement in the percentage of
direct costs as related to revenues for 2008 is a direct result of our
relocation to the United States in late 2007 as more fully described
above.  Cost of revenues – indirect costs, which consist of indirect
labor, quality control costs, factory maintenance, product development and
depreciation, were $421,434 for the three months ended December 31, 2008 as
compared to $429,208 for the three months ended December 31, 2007. The decrease
was due primarily to a decrease in additional costs for runoff testing of parts
needed to validate the new U.S. equipment in 2007 which was offset by increased
depreciation of approximately $124,000 due to the purchase of more manufacturing
equipment.   Gross margin was a deficit of $(30,809) for the
three months ended December 31, 2008 as compared to a deficit of $(281,419) for
the three months ended December 31, 2007, representing gross margins of
approximately (3) % and (27) % of revenues, respectively. We believe that
indirect costs, which are primarily related to depreciation and the testing of
new automated equipment, will decrease both in amount and as a percent of
revenues as the equipment is placed in service and revenues increase to cover
these costs. We also
believe direct costs should remain at the current level as a percentage of
revenues for our 40mm and 49mm dispensers as discussed above as our new U.S.
facility became fully operational in February 2008 and our new 20mm facility in
Germany began commercial production in January 2009.  Our production
capacity and customer base should continue to grow in the future resulting in
revenue growth to support our direct and indirect costs.
 
 OPERATING
EXPENSES.  General and administrative expenses totaled $751,312 for
the three months ended December 31, 2008, as compared to $795,724 for the three
months ended December 31, 2007, a decrease of approximately 8%. This decrease of
approximately $45,000 is primarily attributable toa decrease in consulting
fees for primarily overseas consultants no longer required.
 
 NET LOSS.
We had a net loss of $1,885,766 for the three months ended December 31, 2008 as
compared to $1,192,584 for the three months ended December 31, 2007, an increase
of approximately $693,000. The increase in net loss is attributable to the
corresponding increases and decreases in revenues, general and administrative
expenses and cost of revenues as described above aggregating an improvement to
the net loss of approximately $295,000.  In addition, we incurred an
increase in gain on foreign currency exchange due to the favorable fluctuation
in the foreign currency rates of approximately $72,000 for the six months ended
December 31, 2008 as compared to a loss of approximately $(61,000) for
2007.  Interest expense and related financing costs increased by
approximately $411,000 for the 2008 period due primarily to the financing costs
associated with the new debt obligation effective in October
2008.  For the three months ended December 31, 2007 we also had a gain
from derivative financial instruments of approximately $717,000 as compared to
approximately $4,000 in 2008 as a result of the decrease in the market price of
our common shares in 2007.  We believe that revenues should increase
in the coming fiscal year as we introduce our new product line and are able to
grow our customer base, and direct costs should decrease as production becomes
more automated and diversified in both the U.S. and in Germany, allowing
operating expenses to decline on a per piece basis and indirect costs to be
covered.
  23
 
 GOING
CONCERN, LIQUIDITY AND CAPITAL RESOURCES
 
 The
following table sets forth our working capital deficit as of December 31,
2008:
 
 At
      December 31,2008Current
      assets
                                      
                                      $
                                      1,782,371Current
      liabilities
                                      
                                      
                                      26,385,739Working
      capital deficit
                                      
                                      $
                                      (24,603,638
                                      )
  At
December 31, 2008, we had incurred cumulative losses of approximately $22.9
million since inception and $2.9 million for the six months ended December 31,
2008.  We have a working capital deficit of approximately $24.6
million and a stockholders’ deficit of approximately $14.1 million as of
December 31, 2008.
 
 During
the six months ended December 31, 2008, we utilized cash for operating
activities of approximately $.2 million for operating activities primarily due
to the revenues not yet great enough to cover general and administrative
expenses and indirect costs.  We generated net cash of approximately
$.1 million from investing and financing activities primarily to purchase molds
and equipment. Our cash balance decreased by approximately $.1 million for the
six months ended December 31, 2008.
 
 At
December 31, 2008, current liabilities include accounts payable and accrued
expenses of approximately $4.2 million of which approximately $2.5 million is
for the purchase and development of new equipment due to two vendors in Germany
for which we have reached agreements to defer payment a portion of these
costs.  In October 2008, we reached an agreement with one of these
vendors for the $1.7 million due that vendor at December 31, 2008 to amortize
these costs over production on a per piece basis through June 2009 with any
remaining unamortized balance due in monthly installments from July 2009 through
December 2009. Actual startup production commenced in December 2008 and we
received customer approval of the finished product in January
2009.  The first commercial shipment of the product was completed in
late January 2009.  In October 2008, we reached an agreement with the
other vendor whereby we would pay approximately $275,000 in October 2008 of the
outstanding balance and the remaining balance at a rate of approximately $75,000
per month until paid with interest at 7%.   At December 31, 2008,
this vendor is owed approximately $.7 million for the equipment and other
related charges and approximately $.1 million in accrued
interest.   The payments were made through December 2008 as
scheduled with the proceeds from a financing as described
below.  Approximately $.9 million included in accounts payable is due
to a vendor in the United States for; (a) the amortization of purchased
equipment under a capital lease obligation of approximately $0.4 million and;
(b) start up costs and additional equipment at a new U.S. based facility of
approximately $0.5 million.  We are in discussions with the vendor for
deferred payment of the balance.  Current capital lease obligations of
approximately $3.5 million are to be repaid through amortization of production
based on the number of units produced with any balance due 18 months from the
start of production which commenced in November 2007.  We anticipate
revenues from production will not cover this obligation and that alternatively
this obligation may be extended as to the term and amount of amortization per
unit produced.  Approximately $1.2 million of current liabilities
relates to bridge loans which are due upon the earlier of March 31, 2009 or out
of the proceeds from any new additional financings in excess of $7.0
million.  Approximately $1.6 million of current liabilities relates to
related party loans which are an obligation of SCG and are due on December 31,
2009.  The convertible debt of approximately $9.9 million is due on
November 9, 2009.  We are presently in discussions with the lender as
to possible conversion of the related debt prior to the maturity date. In
addition, the royalty due to licensor included in current liabilities of
approximately $1.0 million will not be due prior to July 1, 2009 as per the
terms of an agreement with the licensor.
 
 On October 20, 2008, Innopump entered
into an unsecured loan agreement with SCG. SCG is the sublicensor of the
patented technology used in the manufacture of our proprietary products. The
loan is for a principal amount of $3,445,750, matures on June 29, 2009 and bears
interest at the rate of one and eighty three hundredths percent (1.83%) per
month.  The net proceeds from the loan aggregated $1,227,611, after
fees of  $75,000, the required establishment of a cash collateral
account of approximately $895,750 and payments made directly by the lender to
our vendors of  $1,247,389. From the net proceeds, we paid additional
financing costs of $250,000 to the lender.  The remaining proceeds of
the loan were used primarily for working capital purposes including (i) payment
of current accounts payable and other outstanding obligations and (ii) funding
anticipated working capital requirements including product development and the
acquisition of tooling and molds.
  24
 
 We
recognize that we must generate additional revenue and gross profits to achieve
profitable operations. Management's plans to increase revenues include the
continued building of its customer base and product lines.  In regard
to these objectives, we commenced commercial production in connection with a
supply agreement with Avon, a customer in the consumer products industry, as
related to the manufacture of our new size (20mm) dispenser in January
2009.  We have an initial order from Avon for 2.5 million units
subject to increase to 4.0 million units upon us delivering product in the
timeframe specified by Avon.  In addition, we are involved in
development projects with new customers with the potential to manufacture more
than twenty (20) million units for the combined 2009 and 2010 seasons; the
solidification of high potential customer interest equivalent to an additional
twenty (20) million units for the same period deliverable upon demonstration of
ability to manufacture; the realization that the above production is coming from
a limited amount of potential customers whose demand is so great it may limit
our opportunity to create capacity for other interested customers, and the
resultant focus by us to identify production partners who will fund
manufacturing equipment in consideration for customer commitment.  In
addition, we have relocated our operations for the production of our two current
product lines (the 40mm and 49mm size dispensers) from Germany to the United
States.  The manufacturing facility in the United States commenced
operations in November 2007 and became fully operational in February
2008.  This new facility has increased both production capacity and
gross profit margins on these product lines.  We have currently
manufactured and shipped approximately 6.2 million dispensers to date and have
firm orders on hand from several customers for production of  our 40
millimeter and 49 millimeter dual chambered dispensing pumps. We believe we will
have recurring orders with these customers as well as new orders in the coming
fiscal year from several customers we are working with on new products.
Management believes that the capital received to date from previous financings
will not be sufficient to pay current financial obligations, inclusive of
capital equipment commitments which were incurred in order to expand our product
lines and increase production capacity, fund operations, and repay debt during
the next twelve months.  Additional debt or equity financing will be
required which may include receivables or purchase order financing, the issuance
of new debt or equity instruments, additional amortization of a portion of
construction costs through our production partners and possible restructuring of
current amortization and debt agreements.
 
 We are
currently in negotiations with several other large consumer products companies
regarding the introduction of a 20mm dual chamber pump similar to the pump
assembled by Seidel.  The fulfillment of these orders, if obtained,
will require a similar capital investment as described above as related to our
agreement with  Seidel, our subcontractor located in Germany, and we
are currently evaluating, in lieu of additional debt or equity financing,
several opportunities for capitalization of same from existing and new
production partners in consideration for a volume and amortization
commitment.  We believe that in the future we can finance all of our
capital requirements through such arrangements due to the strength of the
current customer commitments; the performance of our products currently in the
marketplace; the consumer interest demonstrated in our products, as revealed by
our customers market research investigations and resultant large initial order
commitments; and the multiple indicators of support we are receiving from
potential manufacturing partners.
 
 The
following is a table summarizing our significant commitments as of December 31,
2008, consisting of  equipment commitments, debt repayments, royalty
payments and future minimum lease payments with initial or remaining terms in
excess of one year for the next fiscal 5 years.
 
 Contractual
      Obligations
                                            (in
      millions):
                                          
                                          Total
                                          
                                          
                                          FYE
      2009
                                          
                                          
                                          FYE
                                            2010-2011
                                          
                                          
                                          FYE
                                            2012-2013
                                          
                                          
                                          FYE
      2014 and
                                            ThereafterConvertible
      Debt and interest
                                          
                                          $
                                          10.6
                                          
                                          
                                          $
                                          0.4
                                          
                                          
                                          $
                                          10.2
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Notes
      and interest - related parties
                                          
                                          
                                          3.1
                                          
                                          
                                          
                                          1.5
                                          
                                          
                                          
                                          1.6Other
      notes and interest
                                          
                                          
                                          4.4
                                          
                                          
                                          
                                          4.4Royalties
      including arrears
                                          
                                          
                                          15.7
                                          
                                          
                                          
                                          0.3
                                          
                                          
                                          
                                          2.1
                                          
                                          
                                          
                                          1.4
                                          
                                          
                                          
                                          11.9Equipment
      obligations and leases
                                          
                                          
                                          2.6
                                          
                                          
                                          
                                          2.6
                                          
                                          
                                          
                                          -Tooling
      Amortization
                                          
                                          
                                          3.5
                                          
                                          
                                          
                                          3.5
                                          
                                          
                                          
                                          -$
                                          39.9
                                          
                                          
                                          $
                                          12.7
                                          
                                          
                                          $
                                          13.9
                                          
                                          
                                          $
                                          1.4
                                          
                                          
                                          $
                                          11.9
  25
 
 Based on
the current operating plan and available cash and cash equivalents currently
available, we will need to obtain additional financing through the sale of
equity securities, private placements, funding from new or existing production
partners, and/or bridge loans within the next 12 months.  Additional
financing, whether through public or private equity or debt financing,
arrangements with stockholders or other sources to fund operations, may not be
available, or if available, may be on terms unacceptable to us. The ability to
maintain sufficient liquidity is dependent on our ability to successfully build
our customer base and product line with the required capital
equipment.  If additional equity securities are issued to raise funds
or convert existing debt, the ownership percentage of existing stockholders
would be reduced. New investors may demand rights, preferences or privileges
senior to those of existing holders of common stock. Debt incurred by us would
be senior to equity in the ability of debt holders to make claims on our assets.
The terms of any debt issued could impose restrictions on our
operations.
 
 There can
be no assurance that we will be successful in building our customer base and
product line or that available capital will be sufficient to fund current
operations and to meet financial obligations as related to capital expenditures
and debt repayment until such time that revenues increase to generate sufficient
profit margins to cover operating costs and amortization of capital equipment.
If we are unsuccessful in building our customer base or are unable to obtain
additional financing, if needed, on terms favorable to us, there could be a
material adverse effect on our financial position, results of operations and
cash flows. The accompanying  consolidated interim financial
statements do not include any adjustments that might be necessary if we are
unable to continue as a going concern.
 
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
 
 As a
smaller reporting company, the registrant is not required to provide a response
to Item 3.
 
 ITEM
4. CONTROLS AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
  We maintain a system of disclosure
controls and procedures, as defined in Exchange Act Rule 13a-15(e), which
is designed to provide reasonable assurance that information, which is required
to be disclosed in our reports filed pursuant to the Securities and Exchange Act
of 1934, as amended (the “Exchange Act”), is accumulated and communicated to
management in a timely manner. At the end of the period covered by this report,
we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer, who serves as our
Principal Executive Officer and Principal Financial Officer, and our Controller,
who serves as our Principal Accounting Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief
Executive Officer and Controller concluded that our disclosure controls and
procedures as of the end of the period covered by this report were not effective
due to an insufficient number of resources in the accounting and finance
department that does not allow for a thorough review process.
 
 Changes
in Internal Control over Financial Reporting
  During
the second quarter of the fiscal year ended June 30, 2009, there were no
significant changes in our internal control over financial reporting or in other
factors that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
  Management’s
Report on Internal Control over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f), is a process designed by, or under
the supervision of, our principal executive and principal financial officers and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
  26
 
 • Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets;
  • Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors;
and
  • Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. The scope of management’s
assessment of the effectiveness of internal control over financial reporting
includes all of our Company’s consolidated subsidiaries.
  Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in “Internal Control-Integrated Framework.” Based on
this assessment, management believes that, as of December 31, 2008, our internal
control over financial reporting was not effective due to an insufficient number
of resources in the accounting and finance department that does not allow for a
thorough review process.
 
 The
material weakness will not be considered remediated until necessary remedial
procedures are completed and tested and management has concluded that the
procedures are operating effectively.
  27
  PART
II. OTHER INFORMATION
  ITEM
1. Legal Proceedings
  None
  ITEM
1A. Risk Factors
  As a
smaller reporting company, the registrant is not required to provide a response
to Item 1A.
  ITEM
2. Unregistered Sales of Equity Securities
  There
have been no changes in the instruments defining the rights or rights evidenced
by any class of registered securities.
  There
have been no dividends declared.
  ITEM
3. Defaults Upon Senior Securities
  None
  ITEM
4. Submission of Matters to Vote of Security Holders
  None
  ITEM
5. Other Information
  None
  ITEM
6. Exhibits
  Exhibit
No.
  10.23
                                Loan
      Agreement dated October 20, 2008 between Sea Change Group, LLC and
      Innopump, Inc. (1)
  31
                                Certification
      of CEO and CFO pursuant to Securities Exchange Act rules 13a-15 and
      15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
      2002.*
  32
                                Certification
      of Chief Executive Officer and Chief Financial Officer, pursuant to 18
      U.S.C. section 1350, as adopted pursuant to section 906 of the
      Sarbanes-Oxley Act of 2002.*
  * Filed
herewith
 (1)
                                Incorporated
      by reference to Exhibit 10.1 of Form 8-K of the Company filed on October
      24, 2008.
  28
 
 SIGNATURES
 
 Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 19th day of February 2009.
 .
 VERSADIAL,
      INC./s/ Geoffrey DonaldsonBy:
                                        Geoffrey
      Donaldson, Principal Executive and Financial
                                          Officer/s/ Karen NazzarenoBy:
                                        Karen
      Nazzareno,Controller
  29