**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 SECURITIESEXCHANGE
      ACT OF 1934**




For
      the
      Quarterly period ended September 30, 2008




** ̈** **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  ̈




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  ̈ Accelerated filer  ̈ Non-accelerated filer  ̈ Smaller reporting company x





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




Yes  ̈ 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 November 26, 2008.





**VERSADIAL,
      INC.**


FORM
      10-Q


QUARTERLY
      REPORT


For
      the Three Months Ended September 30, 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 Resultsof Operations
            
            17-23Item
                3. Quantitative and Qualitative Disclosures about Market
                Risk
            
            24Item
                4. Controls and Procedures
            
            24-25Part
                II. - Other Information
            
            26Signatures
            
            27Exhibit
                31Exhibit
                32








**Item
        1. Consolidated Interim Financial Statements**
 
 **VERSADIAL,
        INC.**
  **CONSOLIDATED
        INTERIM BALANCE SHEETS**
  
 **September 30,**
              
              **June 30,****2008**
              
              **2008****(Unaudited)**
              
              ******ASSETS****Current
                  assets**Cash
              
              $
              101,628
              
              $
              216,705Due
                  from affiliates
              
              
              23,964
              
              
              23,964Accounts
                  receivable
              
              
              198,708
              
              
              550,554Sublease
                  and other receivable
              
              
              24,000
              
              
              19,500Inventories
              
              
              192,892
              
              
              261,349Prepaid
                  expenses and other current assets
              
              
              19,772
              
              
              19,425Total
                  current assets
              
              
              560,964
              
              
              1,091,497**Property
                  and equipment,** net
              
              
              5,311,098
              
              
              5,692,425**Other
                  assets**Development
                  of production equipment in progress
              
              
              5,857,703
              
              
              5,599,615Deferred
                  financing costs
              
              
              112,000
              
              
              196,000Security
                  deposit
              
              
              34,155
              
              
              34,155Total
                  other assets
              
              
              6,003,858
              
              
              5,829,770$
              11,875,920
              
              $
              12,613,692**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****Current
                  liabilities**Secured
                  accounts receivable financing and interest, related party
              
              $
              370,101
              
              $
              108,705Notes
                  and interest payable
              
              
              237,569
              
              
              233,439Notes
                  and interest payable, related party
              
              
              1,185,092
              
              
              1,162,434Interest
                  payable on convertible note
              
              
              117,280
              
              
              116,665Accounts
                  payable and accrued expenses
              
              
              4,505,444
              
              
              4,679,186Due
                  to licensor
              
              
              906,528
              
              
              -Capital
                  lease obligations
              
              
              3,663,600
              
              
              3,772,599Due
                  to related parties
              
              
              287,083
              
              
              275,775Deferred
                  revenue
              
              
              135,358
              
              
              153,264Customer
                  deposits
              
              
              18,911
              
              
              45,570Total
                  current liabilities
              
              
              11,426,966
              
              
              10,547,637**Long-term
                  liabilities**Convertible
                  note and interest payable, net of debtdiscount
                  of $90,534 and $154,605
              
              
              9,388,354
              
              
              9,017,266Notes
                  and interest payable, related parties
              
              
              1,618,751
              
              
              1,595,381Due
                  to licensor
              
              
              -
              
              
              809,027Customer
                  advance
              
              
              1,700,000
              
              
              1,700,000Derivative
                  financial instruments
              
              
              8,041
              
              
              235,203Sublease
                  security deposit, affiliate
              
              
              6,830
              
              
              6,830Total
                  long-term liabilities
              
              
              12,721,976
              
              
              13,363,707**Commitments
                  and contingencies****Stockholders'
                  deficit**Preferred
                  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
              
              
              8,737,392
              
              
              8,722,502Accumulated
                  deficit
              
              
              (21,012,245
              )
              
              (20,021,985
              )Total
                  stockholders' deficit
              
              
              (12,273,022
              )
              
              (11,297,652
              )$
              11,875,920
              
              $
              12,613,692
 *See accompanying notes to consolidated interim financial statements*
 1
 **VERSADIAL,
          INC.**
 
 **CONSOLIDATED
          INTERIM STATEMENTS OF OPERATIONS**
  
 **Three Months Ended****September 30,****2008**
                
                **2007****(unaudited)**
                
                **(unaudited)****Net
                    revenues**
                
                $
                454,746
                
                $
                148,687**Cost
                    of revenues**Direct
                    costs
                
                
                241,006
                
                
                290,989Indirect
                    costs
                
                
                454,614
                
                
                421,503695,620
                
                
                712,492**Gross
                    margin**
                
                
                (240,874
                )
                
                (563,805
                )**Operating
                    expenses**General
                    and administrative
                
                
                698,106
                
                
                787,637**Loss
                    from operations**
                
                
                (938,980
                )
                
                (1,351,442
                )**Other
                    income (expenses)**Sublease
                    income, affiliates
                
                
                12,915
                
                
                12,915Interest
                    expense
                
                
                (317,642
                )
                
                (479,219
                )Interest
                    expense, related parties
                
                
                (55,217
                )
                
                (25,777
                )Amortization
                    of debt discount
                
                
                (64,072
                )
                
                (190,227
                )Amortization
                    of financing costs
                
                
                (84,000
                )
                
                (125,322
                )Gain
                    (loss) on derivative financial instruments
                
                
                227,162
                
                
                (526,901
                )Gain
                    (loss) on foreign currency exchange
                
                
                229,574
                
                
                (33,174
                )(51,280
                )
                
                (1,367,705
                )**Net
                    loss**
                
                $
                (990,260
                )
                $
                (2,719,147
                )**Weighted
                    average common shares outstanding**Basic
                    and Diluted
                
                
                18,309,194
                
                
                14,318,197**Loss
                    per common share**Basic
                    and Diluted
                
                $
                (0.05
                )
                $
                (0.19
                )
 *See accompanying notes to unaudited consolidated interim financial statements*
 2
 **VERSADIAL,
          INC.**
 
 **CONSOLIDATED
        INTERIM STATEMENTS OF CASH FLOWS**
  
 **Three Months Ended****September 30,****2008**
              
              **2007****(unaudited)**
              
              **(unaudited)****Cash
                  flows from operating activities**Net
                  loss
              
              $
              (990,260
              )
              $
              (2,719,147
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              381,327
              
              
              203,366Amortization
                  of financing costs
              
              
              84,000
              
              
              125,322Amortization
                  of debt discount
              
              
              64,072
              
              
              190,227(Gain)
                  loss on derivative financial instruments
              
              
              (227,162
              )
              
              526,901Compensation
                  expense for issuance of warrants
              
              
              14,890
              
              
              -Changes
                  in operating assets and liabilities:Due
                  from affiliates
              
              
              -
              
              
              176Accounts
                  receivable
              
              
              351,846
              
              
              1,931Sublease
                  and other receivable
              
              
              (4,500
              )
              
              (229,347
              )Inventories
              
              
              68,457
              
              
              (97,053
              )Prepaid
                  expenses and other current assets
              
              
              (347
              )
              
              (8,169
              )Due
                  to licensor
              
              
              97,501
              
              
              98,673Accounts
                  payable and accrued expenses
              
              
              (173,742
              )
              
              276,538Payments
                  on capital leases
              
              
              (108,999
              )
              
              (58,223
              )Due
                  to related parties
              
              
              11,308
              
              
              28,304Deferred
                  revenue
              
              
              (17,906
              )
              
              257,966Customer
                  deposits
              
              
              (26,659
              )
              
              -Interest
                  payable
              
              
              362,786
              
              
              391,901**Net
                  cash used in operating activities**
              
              
              (113,388
              )
              
              (1,010,634
              )**Cash
                  flows from investing activities**Purchase
                  of equipment
              
              
              -
              
              
              (186,655
              )Payment
                  of development of production equipment in progress
              
              
              (258,088
              )
              
              (653,407
              )**Net
                  cash used in investing activities**
              
              
              (258,088
              )
              
              (840,062
              )**Cash
                  flows from financing activities**Proceeds
                  from secured accounts receivable financing, related party
              
              
              363,000
              
              
              -Proceeds
                  from issuance of note, related parties
              
              
              -
              
              
              600,000Proceeds
                  from issuance of notes
              
              
              -
              
              
              1,200,000Payments
                  on secured accounts receivable financing, related party
              
              
              (106,601
              )
              
              -Payments
                  for financing costs
              
              
              -
              
              
              (30,000
              )**Net
                  cash provided by financing activities**
              
              
              256,399
              
              
              1,770,000**Net
                  decrease in cash**
              
              
              (115,077
              )
              
              (80,696
              )**Cash,
                  beginning of period**
              
              
              216,705
              
              
              134,361**Cash,
                  end of period**
              
              $
              101,628
              
              $
              53,665
  *See
        accompanying notes to unaudited consolidated interim financial
        statements*
  3
 
 **VERSADIAL,
        INC.**
 
 **CONSOLIDATED
        INTERIM STATEMENTS OF CASH FLOWS (CONTINUED)**
  
 **Three Months Ended****September 30,****2008**
              
              **2007****(unaudited)**
              
              **(unaudited)****Supplemental
                  disclosure of cash flow information,**cash
                  paid during the period for interest
              
              $
              6,786
              
              $
              101,857**Supplemental
                  disclosure of non-cash investing and financing****activities:**Convertible
                  debentures and note converted to common stock
              
              $
              -
              
              $
              2,000,000Interest
                  paid in common stock
              
              $
              -
              
              $
              796,687Purchase
                  of equipment financed by lease obligation
              
              $
              -
              
              $
              870,965Reclassification
                  of deposit on equipment to equipment
              
              $
              -
              
              $
              147,493Interest
                  converted to principal on convertible debenture
              
              $
              201,917
              
              $
              -
  *See
        accompanying notes to unaudited consolidated interim financial
        statements*
 
 4




**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 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 September 30, 2008 and June 30, 2008 and for the three months
      ended September 30, 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 three months ended
      September 30, 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 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.





**2.**
            **Going
                concern and management’s
                response**





The
      accompanying 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 September 30,
      2008, the Company has incurred cumulative losses of approximately $21.0 million
      since inception. The Company has a working capital deficit of approximately
      $10.9 million and a stockholders’ deficit of approximately $12.3 million as of
      September 30, 2008.





At
      September 30, 2008, current liabilities include accounts payable and accrued
      expenses of approximately $4.5 million of which approximately $1.9 million
      is
      for the purchase and development of new equipment due to two vendors in Germany.
      In October 2008, the Company reached an agreement with one of these vendors
      for
      the $1.1 million due that vendor to amortize these costs over production on
      a
      per piece basis, which commenced in November 2008, with any remaining
      unamortized balance due in monthly installments commencing July 2009 through
      December 2009. In October 2008, the Company reached an agreement with the other
      vendor for the $0.8 million due that vendor whereby the Company would pay
      approximately $275,000 in October 2008 and the remaining balance at a rate
      of
      approximately $75,000 per month until paid. The payments were made as scheduled
      with the proceeds from a financing as described below. Approximately $1.1
      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 $0.6 million and; (b) start up costs and additional
      equipment at a new U.S. based facility of approximately $0.5 million. In October
      2008, the Company paid approximately $0.5 million of the balance due the vendor
      for the amortization from the proceeds of a financing as described below and
      is
      in discussions with the vendor for deferred payment of the balance. Current
      capital lease obligations of approximately $3.7 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 may 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 will be repaid upon the earlier of
      March 31, 2009 or out of the proceeds from any new additional financings in
      excess of $7.0 million. In addition, the royalty due to licensor included in
      current liabilities of approximately $.9 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**


**SEPTEMBER
      30, 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 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. The net proceeds from the
      loan, after fees and the required establishment of a cash collateral account,
      aggregated approximately $2.2 million. The proceeds of the loan are to be used
      primarily for working capital purposes including (i) payment of current accounts
      payable and other outstanding obligations as described above, and (ii) funding
      anticipated working capital requirements including product development and
      the
      acquisition of tooling and molds (see Note 11).





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 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 November 2008 (see Note 9).
      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 9). Management believes that the capital received
      to date from previous financings may not be sufficient to meet financial
      obligations in regard to the capital equipment commitments required to expand
      its product line and increase production capacity and to fund operations and
      repay debt during the next twelve months. Additional debt or equity financing
      may 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 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 consolidated interim
      financial statements do not include any adjustments that might be necessary
      if
      the Company is unable to continue as a going concern.




**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 September 30, 2008 and June 30, 2008.





6


**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      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 are picked up by the customers’ freight forwarders
      and are F.O.B. from the Company’s manufacturer. 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 assembly labor, the cost of materials and parts used to manufacture
      the dispensers, freight charges and warehouse storage charges. Indirect costs
      consist primarily of equipment repair and maintenance, manufacturing supplies,
      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 11,686,212 and 10,152,249 from the computation of diluted EPS for
      the three months September 30, 2008 and September 30, 2007,
      respectively.





*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.




7




**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





*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 three months ended September 30, 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.




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.




8




**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**




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:


**September 30,**
            
            **June 30,****2008**
            
            **2008**Raw
                materials
            
            $
            62,481
            
            $
            116,368Work-in-process
            
            
            127
            
            
            3,303Finished
                goods
            
            
            130,284
            
            
            141,678$
            192,892
            
            $
            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 June 30, 2008, this liability of approximately $109,000
      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. At September 30, 2008, the Company financed
      approximately $363,000 of additional receivables and receivables to arise
      subsequent to September 30, 2008 from this related party. As of November
      26, 2008, approximately $163,000 of these amounts have been repurchased by the Company
      to
      date. Interest expense approximated $7,000 for the three months ended September
      30, 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.




9




**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





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.





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.




10


**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**




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 $8,000
      and $235,000 at September 30, 2008 and June 30, 2008, respectively. The
      derivative gain (loss) for the three months ended September 30, 2008 and 2007
      approximated $227,000 and $(527,000), 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.





At
      September 30, 2008 and June 30, 2008, the Licensor was due approximately
      $907,000 and $809,000 in past due royalties, 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, 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.




11


**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**8.
      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
      September 30, 2008, the basic loss per common share does not include an
      aggregate of 4,651,076 warrants outstanding and 7,035,136 shares issuable under
      the terms of convertible debt. At September 30, 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 September 30, 2007, diluted loss per common share includes
      3,082,491 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.





**9.
      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. 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. As of September 30, 2008, the Company has paid an aggregate of
      approximately $3.1 million for the production molds which are included in
      deposits on production equipment in progress and has an outstanding liability
      due the contractor for $1.4 million which is included in current liabilities. On
      October 2, 2008, the Company 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 September
      30, 2008 obligation due to the contractor of $1.4 million includes approximately
      $1.1 million related to the $1.7 million obligation. The remaining $.6 million
      is attributable to equipment and development costs incurred subsequent to
      September 30, 2008. These costs in the aggregate of $1.7 million 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. Upon completion of construction of the production molds, the
      remaining balance due the contractor of approximately $.2 million will be
      financed through a capital lease to be paid monthly through March 2009.
      Production commenced as related to the agreement in November 2008 (see Note
      11).





12




**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





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. The Company has made payments of approximately $.4 million for the
      equipment and has a current liability of approximately $.8 million for the
      balance which is included in deposits on production equipment in progress and
      in
      current liabilities. The equipment was received in December 2007. In October,
      2008, the Company reached an agreement with the vendor for the $.8 million
      due
      whereby the Company would pay approximately $275,000 in October 2008 and the
      remaining balance at a rate of approximately $75,000 per month including 7%
      interest on the past due amount until paid. The payments were made as scheduled
      with the proceeds from a financing (see Note 11).





*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
      September 30, 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 three months ended September 30, 2008, amortization of the
      molds and equipment approximated $75,000. The remaining balance due at September
      30, 2008 of approximately $3.6 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 September 30, 2008 in the amount of approximately
      $694,000 in amortization which is included in current liabilities. In October,
      2008, the Company paid $500,000 of the past due amortization from the proceeds
      of a financing (see Note 11). 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.





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.





13


**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





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
      Products, Inc. (“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 (see Note 11).





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 (see Note 11).
      Production commenced in November 2008.





**10.
      Major customers and segment information**





*Major
      customers*




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





**Three months**
              **ending**
              **September 30,**
              **2008**
            
            **Three months**
              **ending**
              **September 30,**
              **2007**Customer
                A
            
            $
            318,000
            
            $
            27,000Customer
                B
            
            
            53,000
            
            
            39,000Customer
                C
            
            
            -
            
            
            74,000$
            371,000
            
            $
            140,000




Accounts
      receivable from customer A aggregated approximately $95,000 at September 30,
      2008.





*Segment
      information*





Assets,
      classified by geographic location are as follows:





**September 30,**
            
            **June 30,****2008**
            
            **2008**United
                States
            
            $
            4,791,282
            
            $
            5,502,628Other
                countries
            
            
            7,084,638
            
            
            7,111,064$
            11,875,920
            
            $
            12,613,692




14


**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





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:





**Three months**
              **ending**
              **September 30,**
              **2008**
            
            **Three months**
              **ending**
              **September 30,**
              **2007**United
                States
            
            $
            347,218
            
            $
            100,970Other
                countries
            
            
            107,528
            
            
            47,717$
            454,746
            
            $
            148,687




**11.
      Subsequent events**





*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. The agreement calls for the
      contractor to develop certain production molds for the Company for a new size
      (20 millimeter) dispenser. On October 2, 2008, the agreement was amended for
      certain price adjustments based on current market conditions. T he
      Company 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 September 30, 2008
      obligation due to the contractor of $1.4 million includes approximately $1.1
      million related to the $1.7 million obligation. The remaining $.6 million is
      attributable to equipment and development costs incurred subsequent to September
      30, 2008. These costs in the aggregate of $1.7 million will be deferred and
      amortized over production. Contemporaneously with this agreement, on
      October 2, 2008, the Company was fully relieved of its obligation to repay
      the
      $1.7 million advance from 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. 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 (see Note 9). Production
      commenced as related to the agreement in November 2008.





*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. 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
      addition, 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.
      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 (see Note 9). Production
      commenced as related to the agreement in November 2008.




15


**VERSADIAL,
      INC.**


**NOTES
      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





*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 upon
      execution of the loan and an in kind 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. 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 expires on October 31, 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, 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 after fees, aggregated approximately $3.1 million. The
      proceeds of the loan are to be used (i) to establish the required cash
      collateral account (ii) payment of current accounts payable and other
      outstanding obligations, and (iii) funding anticipated working capital
      requirements including product development and the acquisition of tooling and
      molds.





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 and
      are
      currently being utilized in the food, sun care, skincare, and cosmetic
      industries.





Innopump,
      our wholly owned subsidiary, holds the exclusive worldwide license for a
      patented dual-chambered variable dispensing system for all categorizes 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 three months ended September 30,
      2008 and subsequent to September 30, 2008:





·
            On
                September 20, 2006, we entered into a 30-month manufacturing agreement
                with 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.
                Wealso 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 September
                30,
                2008 obligation due to the contractor of $1.4 million includes
                approximately $1.1 million related to the $1.7 million obligation.
                The
                remaining $.6 million is attributable to equipment and development
                costs
                incurred subsequent to September 30, 2008. These costs in the aggregate
                of
                $1.7 million will be deferred and amortized over production.
                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.Production
                commenced as related to the agreement in November
                2008.





·
            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
      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. Production
      commenced as related to the agreement in November 2008.





·
            On
                October 20, 2008, our subsidiary, Innopump, entered into an unsecured
                loan
                agreement with SCG. SCG is an affiliate of ours as members of our
                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 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
                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 upon execution
                of the
                loan and an in kind 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. 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 expires on October 31, 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 our creditors
      on account of its having made such loan.




18




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, 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 after fees, aggregated approximately $3.1 million. The
      proceeds of the loan are to be used (i) to establish the required cash
      collateral account (ii) payment of current accounts payable and other
      outstanding obligations, and (iii) 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 three
      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.




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.




19




RESULTS
      OF OPERATIONS





Executive
      Summary





The
      table
      below sets forth a summary of financial highlights for the three months ended
      September 30, 2008 and 2007:





Overall,
      our revenue grew substantially by 206% during the current quarter as our
      operations began to grow in the skincare and cosmetic sectors. Our direct costs
      were 53% and 196% 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 $.4 million in 2007
      and
      $.5 million in 2008. Our revenues did not increase enough to cover these
      indirect costs. Our general and administrative expenses decreased about 11%
      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 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.
      Manufacturing of our new 20mm dispenser commenced in November 2008 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 three months ended September 30,**
            
            **2008**
            
            **2007**
            
            **CHANGE****Net
                revenues**
            
            $
            454,746
            
            $
            148,687
            
            
            206
            %**Cost
                of revenues**Direct
                costs
            
            
            241,006
            
            
            290,989
            
            
            -17
            %Indirect
                costs
            
            
            454,614
            
            
            421,503
            
            
            8
            %695,620
            
            
            712,492
            
            
            -2
            %**Gross
                margin**
            
            
            (240,874
            )
            
            (563,805
            )
            
            -57
            %**Operating
                expenses**General
                and administrative
            
            
            698,106
            
            
            787,637
            
            
            -11
            %**Loss
                from operations**
            
            
            (938,980
            )
            
            (1,351,442
            )
            
            -31
            %**Other
                income (expenses)**Sublease
                income, affiliates
            
            
            12,915
            
            
            12,915
            
            
            0
            %Interest
                and other expense
            
            
            (317,642
            )
            
            (479,219
            )
            
            -34
            %Interest
                expense, related parties
            
            
            (55,217
            )
            
            (25,777
            )
            
            114
            %Amortization
                of debt discount
            
            
            (64,072
            )
            
            (190,227
            )
            
            -66
            %Amortization
                of financing costs
            
            
            (84,000
            )
            
            (125,322
            )
            
            -33
            %Loss
                on derivative financial instruments
            
            
            227,162
            
            
            (526,901
            )Loss
                on foreign currency exchange
            
            
            229,574
            
            
            (33,174
            )
            
            -792
            %(51,280
            )
            
            (1,367,705
            )
            
            -96
            %**Net
                loss**
            
            $
            (990,260
            )
            $
            (2,719,147
            )
            
            -64
            %




REVENUES.
      During the three months ended September 30, 2008, we had revenues of $454,746
      as
      compared to revenues of $148,687 during the three months ended September 30,
      2007, an increase of approximately 206%. In 2008, 82% of the revenue was
      primarily attributable to two customers in the cosmetic and food industries.
      In
      2007, 95% of the revenue was primarily attributable to three customers in the
      skincare, cosmetic and food industries. As discussed above, we anticipate our
      revenues to continue to increase in the coming fiscal year.





GROSS
      MARGIN. Cost of revenues – direct costs, which consist of direct labor, overhead
      and product costs, were $241,006 (53% of revenues) for the three months ended
      September 30, 2008 as compared to $290,989 (196% of revenues) for the year
      three
      months September 30, 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 $454,614
      for the three months ended September 30, 2008 as compared to $421,503 for the
      three months ended September 30, 2007. The increase was due primarily to
      increased depreciation of approximately $178,000 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 $(240,874) for the three months ended September 30,
      2008
      as compared to a deficit of $(563,805) for the three months ended September
      30,
      2007, representing gross margins of approximately (53) % and (379) % 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 as discussed above as our new U.S. facility became fully operational
      in
      February 2008 and our new 20mm facility in Germany will became operational
      in
      November 2008 and both our capacity and production capabilities will increase
      and we will become more cost efficient.




21




OPERATING
      EXPENSES. General and administrative expenses totaled $698,106 for the three
      months ended September 30, 2008, as compared to $787,637 for the three months
      ended September 30, 2007, a decrease of approximately 11%. This decrease of
      approximately $90,000 is primarily attributable to  a
      decrease in consulting fees for primarily overseas consultants no longer
      required.





NET
      LOSS.
      We had a net loss of $990,260 for the three months ended September 30, 2008
      as
      compared to $2,719,147 for the three months ended September 30, 2007, a decrease
      of approximately $1,729,000. 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. In addition, interest expense
      and amortization of debt/financing costs decreased by approximately $299,000
      in
      2008 due to conversion of certain debt obligations and completion of certain
      amortization periods. In addition, we recognized derivative income of
      approximately $227,000 for the three months ended September 30, 2008 as compared
      to a derivative loss of approximately ($527,000) for the three months ended
      September 30, 2007 as a result of the decline of the market price of our shares
      in the current period as compared to the prior period. 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.




GOING
      CONCERN, LIQUIDITY AND CAPITAL RESOURCES





The
      following table sets forth our working capital deficit as of September 30,
      2008:





At September 30,2008Current
                assets
            
            $
            560,964Current
                liabilities
            
            
            11,426,966Working
                capital deficit
            
            $
            (10,866,002
            )




At
      September 30, 2008, we had incurred cumulative losses of approximately $21.0
      million since inception and $1.0 million for the three months ended September
      30, 2008. We have a working capital deficit of approximately $10.9 million
      and a
      stockholders’ deficit of approximately $12.3 million as of September 30, 2008.





During
      the three months ended September 30, 2008, we did not utilize cash for operating
      activities as a result of accounts receivable collections supporting part of
      our
      operations and a corresponding increase in our accounts payable and accrued
      expenses of approximately $.2 million due to the revenues not yet great enough
      to cover all general and administrative expenses and indirect costs. We utilized
      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 three months ended September 30,
      2008.





At
      September 30, 2008, current liabilities include accounts payable and accrued
      expenses of approximately $4.5 million of which approximately $1.9 million
      is
      for the purchase and development of new equipment due to two vendors in Germany.
      In October 2008, we reached an agreement with one of these vendors for the
      $1.1
      million due that vendor to amortize these costs over production on a per piece
      basis, which commenced in November 2008, with any remaining unamortized balance
      due in monthly installments commencing July 2009 through December 2009. In
      October 2008, we reached an agreement with the other vendor for the $0.8 million
      due that vendor whereby we would pay approximately $275,000 in October 2008
      and
      the remaining balance at a rate of approximately $75,000 per month until paid.
      The payments were made as scheduled with the proceeds from a financing as
      described below. Approximately $1.1 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 $0.6 million and;
      (b) start up costs and additional equipment at a new U.S. based facility of
      approximately $0.5 million. In October 2008, we paid approximately $0.5 million
      of the balance due the vendor for the amortization from the proceeds of a
      financing as described below and is in discussions with the vendor for deferred
      payment of the balance. Current capital lease obligations of approximately
      $3.7
      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 may
      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 will be repaid
      upon
      the earlier of March 31, 2009 or out of the proceeds from any new additional
      financings in excess of $7.0 million. In addition, the royalty due to licensor
      included in current liabilities of approximately $.9 million, will not be due
      prior to July 1, 2009 as per the terms of an agreement with the
      licensor.





22


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, after
      fees
      and the required establishment of a cash collateral account, aggregated
      approximately $2.2 million. The proceeds of the loan are to be used primarily
      for working capital purposes including (i) payment of current accounts payable
      and other outstanding obligations as described above, and (ii) funding
      anticipated working capital requirements including product development and
      the
      acquisition of tooling and molds.





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 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 November 2008. 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 will increase both production capacity and gross profit margins
      on
      these product lines. We have currently manufactured and shipped approximately
      5.1 million dispensers to date and have firm orders on hand from several
      customers for production of approximately 1.0 million 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 may not be sufficient
      to
      meet financial obligations in regard to the capital equipment commitments
      required to expand its product line and increase production capacity and to
      fund
      operations and repay debt during the next twelve months. Additional debt or
      equity financing may 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 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 agreements
      with Jarden or Seidel, 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 the
      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.




23




The
      following is a table summarizing our significant commitments as of September
      30,
      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
                Thereafter**Convertible
                Debt and interest
            
            $
            10.6
            
            $
            0.6
            
            $
            10.0
            
            $
            -
            
            $
            -Notes
                and interest - related parties
            
            
            2.7
            
            
            1.1
            
            
            1.6Other
                notes and interest
            
            
            0.2
            
            
            0.2Royalties
                including arrears
            
            
            15.8
            
            
            0.5
            
            
            2.0
            
            
            1.4
            
            
            11.9Equipment
                obligations and leases
            
            
            2.5
            
            
            2.5
            
            
            -Tooling
                Amortization
            
            
            3.7
            
            
            3.7
            
            
            -Operating
                lease
            
            
            0.1
            
            
            0.1
            
            
            -$
            35.6
            
            $
            8.7
            
            $
            13.6
            
            $
            1.4
            
            $
            11.9




Based
      on
      the current operating plan and available cash and cash equivalents currently
      available, we may 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, 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.




24




Changes
      in Internal Control over Financial Reporting




During
      the first 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:




•
                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 September 30, 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 September 30, 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.




25




**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.





26




**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 26th day of November
      2008.





VERSADIAL,
                INC./s/
                Geoffrey DonaldsonBy:
            Geoffrey
                Donaldson, Principal Executive and FinancialOfficer/s/
                Karen NazzarenoBy:
            Karen
                Nazzareno,Controller





27