**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-QSB**


(Mark
      One)




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


**EXCHANGE
      ACT OF 1934**




For
      the
      Quarterly period ended March 31, 2008




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




For
      the
      transition period from ______________ to ______________




*Commission
      file number 000-28195*




**VERSADIAL,
      INC.**


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





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




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


(Address
      of principal executive offices)




212-986-0886


(Issuer's
      telephone number including area code)




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




Yes
x
      No o





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




Yes
o
      No x




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




Indicate
      the number of shares outstanding of each of the issuer's class of common stock,
      as of the latest practicable date: 18,309,194 shares of common stock, par value
      $0.0001 per share, as of May 20, 2008.


**VERSADIAL,
      INC.**


FORM
      10-QSB


QUARTERLY
      REPORT


For
      the Nine Months Ended March 31, 2008





**TABLE
      OF CONTENTS**





Part
                I - Financial InformationItem
                1. Consolidated Financial Statements:Consolidated
                Balance Sheet
            
            1Consolidated
                Statements of Operations
            
            2Consolidated
                Statements of Cash Flows
            
            3-4Notes
                to Unaudited Consolidated Financial Statements
            
            5-20Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            
            21-31Item
                3. Controls and Procedures
            
            32Part
                II. - Other Information
            
            33-34Signatures
            
            35Exhibit
                31Exhibit
                32











**Item
      1. Financial Statements**




**VERSADIAL,
      INC.**


**CONSOLIDATED
      BALANCE SHEET**





**March 31,****2008****(unaudited)****ASSETS****Current
                assets**Cash
            
            $
            495,135Due
                from affiliates
            
            
            23,964Accounts
                receivable
            
            
            301,459Sublease
                and other receivable
            
            
            15,000Inventories
            
            
            414,098Prepaid
                expenses and other current assets
            
            
            14,732Total
                current assets
            
            
            1,264,388**Property
                and equipment,**net
            
            
            6,117,674**Other
                assets**Deposits
                on production equipment
            
            
            5,248,883Deferred
                financing costs
            
            
            407,385Security
                deposit
            
            
            34,155Total
                other assets
            
            
            5,690,423$
            13,072,485**LIABILITIES
                AND STOCKHOLDERS' DEFICIT****Current
                liabilities**Notes
                and interest payable
            
            $
            229,331Notes
                and interest payable, related parties, net of debt discount of
                $10,052
            
            
            2,701,982Interest
                payable on convertible note
            
            
            109,440Due
                to licensor, current portion
            
            
            240,000Accounts
                payable and accrued expenses
            
            
            3,777,748Capital
                lease obligations, current portion
            
            
            3,419,919Due
                to related parties
            
            
            256,098Deferred
                revenue
            
            
            226,386Customer
                deposits
            
            
            18,911Total
                current liabilities
            
            
            10,979,815**Long-term
                liabilities**Convertible
                note and interest payable, net of debt discount of
                $217,980
            
            
            8,659,372Customer
                advance
            
            
            1,700,000Capital
                lease obligation
            
            
            676,486Due
                to licensor
            
            
            461,527Derivative
                financial instruments
            
            
            1,141,987Sublease
                security deposit, affiliate
            
            
            6,83012,646,202**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
            
            
            1,831Additional
                paid-in-capital
            
            
            8,944,582Accumulated
                deficit
            
            
            (19,499,945
            )Total
                stockholders' deficit
            
            
            (10,553,532
            )$
            13,072,485




See
      accompanying condensed notes to unaudited consolidated financial
      statements


1





**VERSADIAL,
      INC.**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Nine Months Ended**
            
            **Three Months Ended****March 31,**
            
            **March 31,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)****Net
                revenues**
            
            $
            2,422,984
            
            $
            1,168,356
            
            $
            1,251,010
            
            $
            727,386**Cost
                of revenues**Direct
                costs
            
            
            2,145,122
            
            
            1,100,748
            
            
            978,635
            
            
            687,057Indirect
                costs
            
            
            1,470,224
            
            
            516,880
            
            
            619,513
            
            
            201,0083,615,346
            
            
            1,617,628
            
            
            1,598,148
            
            
            888,065**Gross
                margin**
            
            
            (1,192,362
            )
            
            (449,272
            )
            
            (347,138
            )
            
            (160,679
            )**Operating
                expenses**General
                and administrative
            
            
            2,423,393
            
            
            2,313,071
            
            
            840,032
            
            
            829,362**Loss
                from operations**
            
            
            (3,615,755
            )
            
            (2,762,343
            )
            
            (1,187,170
            )
            
            (990,041
            )**Other
                income (expenses)**Sublease
                income, affiliates
            
            
            35,745
            
            
            5,400
            
            
            11,415
            
            
            (13,848
            )Interest
                and other expense
            
            
            (1,288,923
            )
            
            (958,512
            )
            
            (391,965
            )
            
            (372,206
            )Interest
                expense, related parties
            
            
            (133,421
            )
            
            (79,245
            )
            
            (52,309
            )
            
            (23,371
            )Amortization
                of debt discount
            
            
            (544,120
            )
            
            (573,036
            )
            
            (140,085
            )
            
            (311,533
            )Amortization
                of financing costs
            
            
            (318,420
            )
            
            (340,384
            )
            
            (97,776
            )
            
            (181,548
            )Gain
                (loss) on derivative financial instruments
            
            
            1,444,293
            
            
            (102,570
            )
            
            1,254,395
            
            
            (58,434
            )Loss
                on foreign currency exchange
            
            
            (249,672
            )
            
            (43,472
            )
            
            (155,047
            )
            
            (21,969
            )(1,054,518
            )
            
            (2,091,819
            )
            
            428,628
            
            
            (982,909
            )**Net
                loss**
            
            $
            (4,670,273
            )
            $
            (4,854,162
            )
            $
            (758,542
            )
            $
            (1,972,950
            )**Weighted
                average common shares outstanding**Basic
            
            
            15,655,283
            
            
            13,005,263
            
            
            17,375,861
            
            
            13,539,470Diluted
            
            
            15,660,197
            
            
            14,240,614
            
            
            17,380,775
            
            
            14,455,603**Loss
                per common share**Basic
                and Diluted
            
            $
            (0.30
            )
            $
            (0.37
            )
            $
            (0.04
            )
            $
            (0.15
            )




See
      accompanying condensed notes to unaudited consolidated financial
      statements


2





**VERSADIAL,
      INC.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Nine Months Ended****March 31,****2008**
              
              **2007******
              
              **(unaudited)**
              
              **(unaudited)****Cash
                  flows from operating activities**Net
                  loss
              
              $
              (4,670,273
              )
              $
              (4,854,162
              )Adjustments
                  to reconcile net loss to net cashused in operating activities:Depreciation
                  and amortization
              
              
              840,290
              
              
              274,299Amortization
                  of debt discount
              
              
              544,120
              
              
              573,036Amortization
                  of financing costs
              
              
              318,420
              
              
              340,384(Gain)
                  loss on derivative financial instruments
              
              
              (1,444,293
              )
              
              102,570Compensation
                  expense for revaluation of warrants
              
              
              47,181Changes
                  in operating assets and liabilities:Due
                  from affiliates
              
              
              5,575
              
              
              15,126Accounts
                  receivable
              
              
              (76,475
              )
              
              (228,152
              )Sublease
                  and other receivable
              
              
              (15,000
              )Inventories
              
              
              133,234
              
              
              (535,371
              )Prepaid
                  expenses and other current assets
              
              
              49,556
              
              
              (109,868
              )Due
                  to licensor
              
              
              269,407
              
              
              135,200Accounts
                  payable and accrued expenses
              
              
              2,147,209
              
              
              536,485Due
                  to related parties
              
              
              60,149
              
              
              37,885Deferred
                  revenue
              
              
              226,386Customer
                  deposits
              
              
              
              
              
              (10,618
              )Interest
                  payable
              
              
              1,161,265
              
              
              1,105,076**Net
                  cash used in operating activities**
              
              
              (403,249
              )
              
              (2,618,110
              )**Cash
                  flows from investing activities**Proceeds
                  from private placement
              
              
              2,800,000Purchase
                  of equipment
              
              
              (624,617
              )
              
              (2,533,079
              )Payments
                  of deposits on production equipment
              
              
              (2,828,369
              )
              
              -Payments
                  for merger costs
              
              
              
              
              
              (142,919
              )Payments
                  for registration costs
              
              
              (35,086
              )Payments
                  for private placement costs
              
              
              (127,385
              )Distributions
                  to investors
              
              
              (8,514
              )
              
              (49,122
              )Net
                  cash acquired from merger
              
              
              
              
              
              95**Net
                  cash used in investing activities**
              
              
              (823,971
              )
              
              (2,725,025
              )**Cash
                  flows from financing activities**Proceeds
                  from issuance of convertible notes
              
              
              
              
              
              1,706,846Proceeds
                  from issuance of notes, related parties
              
              
              2,225,000Proceeds
                  from issuance of notes
              
              
              1,200,000
              
              
              2,450,000Proceeds
                  from customer advance
              
              
              
              
              
              700,000Payment
                  on notes payable to related parties
              
              
              (1,185,567
              )
              
              (30,000
              )Payment
                  on note payable
              
              
              (106,186
              )Payments
                  for financing costs
              
              
              (40,000
              )
              
              (267,702
              )Payments
                  on capital leases
              
              
              (505,253
              )**Net
                  cash provided by financing activities**
              
              
              1,587,994
              
              
              4,559,144**Net
                  increase (decrease) in cash**
              
              
              360,774
              
              
              (783,991
              )**Cash,
                  beginning of period**
              
              
              134,361
              
              
              917,296**Cash,
                  end of period**
              
              $
              495,135
              
              $
              133,305




See
      accompanying condensed notes to unaudited consolidated financial
      statements




3


**VERSADIAL,
      INC.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONTINUED)**


**Nine Months Ended****March 31,****2008**
              
              **2007****(unaudited)**
              
              **(unaudited)****Supplemental
                  disclosure of cash flow information,**cash
                  paid during the period for interest
              
              $
              228,062
              
              $
              464,592**Supplemental
                  disclosure of non-cash investing and financing,****activities:**Convertible
                  debentures converted to common stock
              
              $
              4,000,000
              
              $
              1,200,000Interest
                  paid in common stock
              
              $
              796,687
              
              $
              -Interest
                  converted to principal on convertible debenture
              
              $
              379,688
              
              $
              -Debt
                  discount related to convertible note
              
              $
              -
              
              $
              1,457,141Purchase
                  of equipment financed by capital lease obligation
              
              $
              4,350,201
              
              $
              -Reclassification
                  of deposit on production equipment to equipment
              
              $
              147,493
              
              $
              -Shares
                  formerly subject to redemption converted to common stock
              
              $
              -
              
              $
              887,403Reclassification
                  of deferred financing cost payable to equity
              
              $
              -
              
              $
              42,588Issuance
                  of Mellon convertible notes
              
              $
              -
              
              
              7,500,000Payments
                  made directly to debtholders
              
              
              
              
              
              (4,517,154
              )Merger
                  and financing costs
              
              
              
              
              
              (1,026,000
              )Payment
                  made directly to licensor
              
              
              
              
              
              (250,000
              )Net
                  proceeds received
              
              $
              -
              
              $
              1,706,846




See
      accompanying condensed notes to unaudited consolidated financial
      statements


4





**VERSADIAL,
      INC.**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**MARCH
      31, 2008**





**1.**
            **Organization
                and nature of operations**





Versadial,
      Inc. (hereinafter referred to as the “Registrant” or “Versadial” or the
“Company”), was originally incorporated in Nevada under the name
      Carsunlimited.com, Inc. (“CARS”) on March 7, 2000. CARS, a publicly traded
      corporation, prior to August 9, 2006, was a development stage company with
      limited operations and revenues and only nominal assets. Its intended purpose
      was to offer users the ability to search a database that contained products
      and
      information about the Automobile industry, new and used car sales (classified
      ads), as well as automotive products such as extended warranty information
      and
      anti-theft body part marking.





On
      August
      9, 2006, the Registrant executed an Agreement and Plan of Merger (“Merger
      Agreement”) with Pump Acquisition Corp. ("PAC"), a wholly-owned subsidiary of
      the Registrant, Innopump, Inc. D/B/A Versadial (“Innopump”), a Nevada
      corporation which was formed on April 1, 2005, and certain Innopump
      stockholders.





Pursuant
      to the Merger Agreement, the Registrant issued 12,625,243 shares of its common
      stock to shareholders of Innopump in consideration of Innopump merging with
      and
      into PAC and becoming a wholly-owned subsidiary of the Registrant ("Merger")
      which resulted in the Innopump shareholders receiving approximately 93.25%
      of
      the outstanding stock and the CARS shareholders retaining approximately 6.75%
      or
      914,227 shares. As a result of the Merger, Innopump became a wholly-owned
      subsidiary of the Registrant and the holders of Innopump common stock and debt
      acquired a majority interest of the Company. The accounting of this transaction
      differs from its legal form, as Innopump is considered the accounting acquirer
      and the Registrant the acquired entity. The transaction has been accounted
      for
      as a reverse acquisition under the purchase method of accounting, whereby the
      assets of CARS were revalued and the purchase price allocated to those assets
      acquired and liabilities assumed. Innopump’s historical financial statements
      were carried forward subsequent to the merger as those of the combined entity.
      On March 2, 2007, CARS changed its name to Versadial to capitalize on the
      awareness of its trademarked name for its products in the marketplace as
      described below.





The
      Company is engaged in the manufacture of a 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 liquidity**





The
      accompanying unaudited consolidated 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
      March 31, 2008, the Company has incurred cumulative losses of approximately
      $19.5 million since inception and utilized cash of approximately $.4 million
      for
      operating activities during the nine months ended March 31, 2008. The Company
      has a working capital deficit of approximately $9.7 million and a stockholders’
deficit of approximately $10.6 million as of March 31, 2008.





At
      March
      31, 2008, current liabilities include $1.6 million due to shareholders on June
      30, 2008 which management believes will be extended if necessary prior to
      maturity. Accounts payable of approximately $3.8 million includes approximately
      $2.0 million for the purchase and development of new equipment which the Company
      is seeking to obtain financing for under a leasing or possible sale/leaseback
      agreement or enter into an amortization deferral agreement with the supplier
      of
      the equipment for a portion of these costs (see Note 18). Current capital lease
      obligations of approximately $3.3 million are to be repaid through amortization
      of production over the next 12 months based on the number of units produced.
      The
      Company anticipates revenues from production will cover this obligation (see
      Notes 14 and 18). In addition, approximately $1.2 million of current liabilities
      relates to bridge loans which will be repaid out of the proceeds from the
      Company’s private placement as described below (see Note 9).





On
      August
      30, 2007, the Company entered into a Securities Purchase Agreement whereby
      it
      could sell 8% promissory notes in the principal amount of up to $2.5 million
      at
      a price of ninety seven (97%) percent of the principal
      amount of notes. The notes are due upon the earlier of (a) six months following
      final closing date of November 27, 2007, (b) the date on which the Company
      receives no less than $4.0 million in gross proceeds from the closing of a
      private offering of its equity securities or (c) on the date the Company closes
      on a rights offering. The Company received net proceeds of $2.4 million in
      regards to the notes of which $2.2 million was received from a related party.
      On
      January 28, 2008, the Company repaid an aggregate of $1.3 million of these
      notes
      with the proceeds from a private offering inclusive of interest and discount
      of
      which $1.2 million was repaid to a related party (see Notes 8 and 9).




5




**VERSADIAL,
        INC.**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**
 
 **MARCH
        31, 2008**


On
      January 28, 2008 the Company received $2,800,000 for the purchase of 1,750,000
      units of its securities consisting of 1,750,000 shares of common stock and
      stock
      purchase warrants (20% warrant coverage) in connection with a private placement
      offering. The proceeds of the private placement were used primarily for working
      capital purposes including (i) repayment of outstanding current indebtedness
      of
      the Company including approximately $1.3 million in bridge financing incurred
      with the Securities Purchase Agreement inclusive of accrued interest and
      discount, (ii) payment of other outstanding obligations, and (iii) funding
      anticipated working capital requirements including product development and
      the
      acquisition of tooling and molds. The private placement is currently extended
      through a final closing date of May 31, 2008 for a maximum aggregate placement
      of $5,500,000. The Company has received a letter from Fursa Master Global Event
      Driven Fund, L.P. (“Fursa”), the purchaser of 1,250,000 units in the private
      placement, committing Fursa Master Global Event Driven Fund, L.P. to subscribe
      and pay $2,000,000 for an additional 1,250,000 units by May 31, 2008 (see Note
      9).





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 line as well
      as
      commencing production at a domestic manufacturing facility in the United States
      and commencing production in connection with a supply agreement with a customer
      in the consumer products industry as related to the manufacture of a new size
      dispenser. The manufacturing facility in the United States commenced operations
      in November 2007 and became fully operational in February 2008. Management
      believes that the capital received to date from previous financings and
      anticipated to be received by May 31, 2008 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
      during the next twelve months. Additional debt or equity financing may be
      required which may include equipment financing under a sale or sale/leaseback
      agreement, receivables or purchase order financing, and possible amortization
      of
      a portion of construction costs through the Company’s production partners.





There
      can
      be no assurance that the Company will be successful in building its customer
      base and product line or that the available capital will be sufficient to fund
      current operations and to meet financial obligations as it relates to capital
      expenditures 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, if needed, 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 unaudited
      consolidated 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**





*Basis
      of Presentation*





The
      Company’s fiscal year ends on June 30, and therefore references to fiscal 2008,
      2007 and 2006 refer to the fiscal years ended June 30, 2008, June 30, 2007
      and
      June 30, 2006, respectively.





The
      accompanying unaudited consolidated financial statements of the Company reflect
      the historical results of the predecessor entity, Innopump, prior to August
      9,
      2006 and the consolidated results of operations of Versadial subsequent to
      the
      acquisition date of August 9, 2006.




6




**VERSADIAL,
        INC.**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**
 
 **MARCH
        31, 2008**




The
      common stock and per share information in the consolidated financial information
      and related notes have been retroactively adjusted to give effect to the reverse
      merger on August 9, 2006 and to give effect to the one for forty-five reverse
      stock split that became effective on March 2, 2007 (see Note 17).





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with generally accepted accounting principles for interim financial
      statements and with the instructions to Form 10-QSB and Item 310(b) of
      Regulation S-B. Accordingly, they do not include all the information and
      disclosures required for annual financial statements. These financial statements
      should be read in conjunction with the financial statements and related
      footnotes for the year ended June 30, 2007 of the Company, contained in
      Amendment No. 2 to the Company’s annual report on Form 10-KSB for the year ended
      June 30, 2007, filed on January 28, 2008. These statements reflect all
      adjustments which are of a normal recurring nature and which, in the opinion
      of
      management, are necessary for a fair statement of the results for the fiscal
      nine months ended March 31, 2008 and 2007. The results of operations for the
      first nine months of fiscal 2008 are not necessarily indicative of the results
      to be expected for the full year.





*Principles
      of Consolidation*





On
      May
      25, 2005, Innopump acquired all of the assets and assumed certain liabilities
      of
      Sea Change Group, LLC ("SCG"), a privately held New York Limited Liability
      Company formed in 1999. This transaction between Innopump and SCG, which were
      entities under common control, was accounted for in a manner similar to a
      pooling of interests whereby the assets and liabilities of SCG were transferred
      to Innopump at historical amounts. Prior to the merger with Registrant, the
      financial statements of Innopump were prepared as if the transaction had
      occurred at the beginning of the period presented, and present the financial
      data of previously separate entities.





In
      December 2003, the Financial Accounting Standards Board (“FASB”) revised FASB
      Interpretation 46, “Consolidation of Variable Interest Entities” (“FIN 46r”).
      FIN 46r requires certain variable interest entities (“VIE”) to be consolidated
      by the primary beneficiary entity if the equity investors in the entity do
      not
      have the characteristics of a controlling financial interest or do not have
      sufficient equity at risk for the entity to finance its activities without
      additional subordinated financial support from other parties.





The
      Company is the primary beneficiary of SCG under FIN 46r. SCG, as a result of
      the
      business acquisition, is no longer an operating entity and is dependent on
      the
      Company for all of its income consisting of future royalties and license fees.
      The Company consolidated the results of SCG’s operations for the nine months
      ended March 31, 2008 and 2007. For the nine months ended March 31, 2008 the
      operations of SCG consisted of approximately $(16,000) in net loss derived
      from
      an aggregate of $73,000 in royalty fees from the Company, net of interest and
      other operating expenses. For the nine months ended March 31, 2007 the
      operations of SCG consisted of approximately $37,000 in net income derived
      from
      an aggregate of $183,000 in license and royalty fees from the Company, net
      of
      interest and other operating expenses. SCG’s assets at March 31, 2008
      approximated $176,000 consisting mainly of sublease income receivable,
      royalties’ receivable from the Company and a security deposit on a lease. SCG’s
      liabilities at March 31, 2008 approximated $1.6 million consisting primarily
      of
      loans due to partners which were not assumed by the Company as part of the
      business acquisition described above. These assets and liabilities are included
      in the unaudited consolidated financial statements.





The
      unaudited consolidated financial statements include the accounts of the Company
      and SCG. All intercompany transactions and balances have been eliminated in
      consolidation.





*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 March 31, 2008.




7




**VERSADIAL,
      INC.**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**MARCH
      31, 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*





Basic
      loss per common share is computed by dividing net loss by the weighted average
      number of common shares outstanding during the period. Diluted loss per common
      share incorporates the dilutive effect of common stock equivalents on an average
      basis during the period. Warrants are included in the determination of dilutive
      earnings per share if they are dilutive and the potential dilutive effect is
      computed using the treasury stock method. The calculation of diluted net loss
      per share excludes potential common shares if the effect is anti-dilutive.





*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 balance sheets.





*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. There were no
      impairment charges as of March 31, 2008.




8


**VERSADIAL,
        INC.**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**
 
 **MARCH
        31, 2008**




*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
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans”, an amendment of FASB Statements
      No. 87, 88, 106, and 132(R). SFAS No. 158 requires an employer
      to: (a) recognize in its statement of financial position an asset for
      a plan’s overfunded status or a liability for a plan’s underfunded status;
      (b) measure a plan’s assets and its obligations that determine its funded
      status as of the end of the employer’s fiscal year (with limited exceptions);
      (c) recognize changes in the funded status of a defined benefit
      postretirement plan in the year in which the changes occur. Those changes will
      be reported in comprehensive income of a business entity and in changes in
      net
      assets of a not-for-profit organization. The requirement to recognize the funded
      status of a benefit plan and the disclosure requirements are effective for
      us
      for the fiscal year ending on June 30, 2007. The requirement to measure plan
      assets and benefit obligations would become effective for the Company for the
      fiscal year ending June 30, 2009. The Company does not
      expect the new standard to have any material impact on its financial position
      and results of operations.





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
      Statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles, expands disclosures about fair
      value measurements, and applies under other accounting pronouncements that
      require or permit fair value measurements. SFAS No. 157 does not require any
      new
      fair value measurements. However, the FASB anticipates that for some entities,
      the application of SFAS No. 157 will change current practice. SFAS No. 157
      is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, which for the Company would be the fiscal year beginning
      July
      1, 2008. The Company is currently evaluating the impact of SFAS No. 157 but
      does
      not expect that it will have a material impact on its consolidated financial
      statements. 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. The Company is in the process of evaluating the effect, if any,
      the adoption of FSP No. 157-2 will have on its results of operations or
      financial position.





9




**VERSADIAL,
        INC.**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**
 
 **MARCH
        31, 2008**




In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities". This Statement permits entities
      to
      choose to measure many financial assets and financial liabilities at fair value.
      Unrealized gains and losses on items for which the fair value option has been
      elected are reported in earnings. SFAS No. 159 is effective for fiscal years
      beginning after November 15, 2007. The Company is currently assessing the impact
      of SFAS No. 159 on its financial position and results of operations




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 2009.




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.





**4.**
            **Inventories**





Inventories
      consist of the following at March 31, 2008:





**March
                31,****2008**Raw
                materials
            
            $
            241,018Work-in-process
            
            
            35,739Finished
                goods
            
            
            137,341$
            414,098




10


**VERSADIAL,
        INC.**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**
 
 **MARCH
        31, 2008**




**5.**
            **Property
                and equipment**





Property
      and equipment consist of the following at March 31, 2008:





**March
                31,****2008**Machinery
                and equipment
            
            $
            3,056,518Molds
            
            
            4,899,412Computer
                equipment
            
            
            11,3567,967,286Less
                accumulated depreciation
            
            
            1,849,612$
            6,117,674





Depreciation
      and amortization expense amounted to approximately $840,000 and $274,000 for
      the
      nine months ended March 31, 2008 and 2007, respectively and approximately
      $373,000 and $106,000 for the three months ended March 31, 2008 and 2007,
      respectively.





**6.**
            **Income
                Taxes**





In
      July
      2006, the Financial Accounting Standards Board issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48
      creates a single accounting and disclosure model for uncertain tax positions,
      provides guidance on the minimum threshold that a tax uncertainty is required
      to
      meet before it can be recognized in the financial statements and applies to
      all
      tax positions taken by a company, both those deemed to be routine as well as
      those for which there may be a high degree of uncertainty.





FIN
      48
      establishes a two-step approach for evaluating tax positions. The first step,
      recognition, occurs when a company concludes (based solely on the technical
      aspects of the tax matter) that a tax position is more likely than not to be
      sustained on examination by a taxing authority. The second step, measurement,
      is
      only considered after step one has been satisfied and measures any tax benefit
      at the largest amount that is deemed more likely than not to be realized upon
      ultimate settlement of the uncertainty. Tax positions that fail to qualify
      for
      initial recognition are recognized in the first subsequent interim period that
      they meet the more likely than not standard, when they are resolved through
      negotiation or litigation with the taxing authority or upon the expiration
      of
      the statute of limitations. Derecognition of a tax position previously
      recognized would occur when a company subsequently concludes that a tax position
      no longer meets the more likely than not threshold of being sustained. FIN
      48
      also significantly expands the financial statement disclosure requirements
      relating to uncertain tax positions. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The
      adoption of the provisions of FIN 48 did not have a material impact on the
      Company’s financial position, results of operations and cash flows. During the
      quarter ended March 31, 2008, the Company recognized no adjustments for
      uncertain tax provisions.





**7.**
            **Deposits
                on production equipment**





Deposits
      on production equipment consist of the following at March 31, 2008:





**Amount at March 31, 2008**
            
            **Total estimated cost**New
                assembly equipment
            
            $
            141,409
            
            $
            425,000Assembly
                equipment new size dispenser
            
            
            1,240,924
            
            
            1,240,924
            (a)Production
                molds for new size dispenser
            
            
            3,866,550
            
            
            4,500,000
            (b)$
            5,248,883
            
            $
            6,165,924





(a)
            Equipment
                was received in December 2007 and a net obligation of approximately
                $840,000 is included in current liabilities (see Note
                18).






11


**VERSADIAL,
          INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
          STATEMENTS**
 
 **MARCH
          31, 2008**




(b)
            Upon
                completion of construction of molds, approximately $650,000 of balance
                will be financed through a capital lease to be paid monthly through
                March
                2009 (see Note 18).





**8.**
            **Securities
                Purchase Agreement**





On
      August
      30, 2007, with the consent of the holder of the Company’s $7.5 million senior
      convertible debt, Fursa (referred to herein as the “Investor”), the Company
      entered into a Securities Purchase Agreement whereby it could sell 8% promissory
      notes (“Notes”) in the principal amount of up to $2.5 million at a price of
      ninety seven (97%) percent of the principal amount of Notes. The Notes and
      interest are due upon the earlier of (a) six months following the final closing
      date on November 27, 2007 of the Notes, (b) the date on which the Company
      receives no less than $4.0 million in gross cash proceeds from the closing
      of a
      private offering of its equity securities or (c) on the date the Company closes
      on a rights offering. The Company has received $2.4 million in net proceeds
      of
      which $2.2 million was received from Richard Harriton, a related party, who
      serves as a Director and is a major shareholder of the Company. Debt discount
      of
      approximately $74,000 will be charged to operations over the life of the
      underlying debt with a corresponding increase to the debt. For the nine and
      three months ended March 31, 2008, approximately $65,000 and $36,000 was charged
      to operations, respectively. Interest expenses approximated $71,000 and $32,000
      for the nine and three months ended March 31, 2008, respectively.





On
      January 28, 2008, the Company repaid an aggregate of $1.3 million of these
      notes
      with the proceeds from the Company’s private offering inclusive of interest and
      discount of which $1.2 million was repaid to Richard Harriton. (see Note 9).





**9.**
            **Private
                Placement**





Under
      the
      terms of a private placement agreement, the Company is offering for sale a
      maximum of 3,437,500 units of its securities at $1.60 per unit with a minimum
      unit purchase of $80,000. Each unit consists of one share of common stock and
      20% warrant coverage. The private placement is currently extended through a
      final closing date of May 31, 2008 for a maximum aggregate placement of
      $5,500,000.





On
      January 28, 2008, the Company received $2,800,000 for the purchase of 1,750,000
      units of its securities consisting of 1,750,000 shares of common stock and
      stock
      purchase warrants (20% warrant coverage or an aggregate of 350,000 warrants)
      in
      connection with the private placement offering. The proceeds of the private
      placement were used primarily for working capital purposes including (i)
      repayment of outstanding current indebtedness of the Company including
      approximately $1.3 million in bridge financing incurred with the Securities
      Purchase Agreement inclusive of accrued interest and discount, (ii) payment
      of
      other outstanding obligations, and (iii) funding working capital requirements
      including product development and the acquisition of tooling and
      molds.





The
      Company has received a letter from the Investor, the purchaser of 1,250,000
      units in the private placement, committing the Investor subscribe and pay
      $2,000,000 for an additional 1,250,000 units by May 31, 2008.





A
      5%
      commitment fee will be payable to the Investor, calculated on its total
      $4,000,000 commitment, concurrently with the Company’s receipt of its remaining
      $2,000,000 subscription commitment. A fee of 7% (aggregating $56,000) of the
      securities placed payable in cash, and (ii) a number of common stock purchase
      warrants (aggregating 25,000 warrants) equal to 5% of the number of units placed
      were paid to participating dealers in respect of the purchase of the Company’s
      securities by purchasers other than the Investor. The Company has incurred
      legal
      and other expenses in connection with the placement of approximately $71,000.
      These costs and the related fees will be capitalized upon completion of the
      offering.





The
      aggregate warrants issued to the investors and placement agents to purchase
      375,000 shares of the Company’s common stock were valued at the grant date at
      approximately $72,000. The fair value was calculated using the Black-Scholes
      model with an expected volatility of 39% and a risk free interest rate of 2.50%.
      The warrants are exercisable for five years from the date of issuance at an
      initial exercise price equal to $2.00 per share subject to adjustment under
      certain events.




12


**VERSADIAL,
          INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
          STATEMENTS**
 
 **MARCH
          31, 2008**




The
      Company signed a Registration Rights Agreement whereby the Company is obligated
      to register to the extent permitted by applicable rules and regulations the
      resale of its shares of common stock and underlying warrants issuable within
      ninety (90) days following the final closing of the offering and have the
      registration statement declared effective by the Securities and Exchange
      Commission within one hundred eighty (180) days following the filing date.





**10.**
            **Amendment
                to the Secured Line of Credit
                Agreement**





The
      Secured Line of Credit Agreement (“Credit Agreement”) with Fursa Alternative
      Strategies, LLC (referred to herein as the “Lender”) dated February 1, 2007 was
      amended on July 9, 2007 to reflect the increased amount of the line of credit
      available to the Company from $3.0 million to $4.0 million. On July 10, 2007,
      Versadial drew down the additional $1.0 million available under the terms of
      the
      amended Credit Agreement. In August 2007, the Lender agreed to convert $2.0
      million of the line of credit to equity. In January 2008, the Lender agreed
      to
      convert the remaining $2.0 million of the line of credit to equity (See Note
      11).





The
      Company also agreed to pay to the Lender a waiver fee of $50,000, payable on
      the
      earlier of September 30, 2007 or upon obtaining additional financing, as
      referred to in the amended Credit Agreement. The waiver fee is payable for
      the
      Company’s failure to appoint a chief operating officer and meet certain
      financial covenants, as referred to in the amended Credit Agreement and was
      accrued at June 30, 2007. The waiver also required the Company, no later than
      September 30, 2007, to establish a comprehensive financing plan that addresses
      Versadial’s funding needs for at least 18 months following September 30,
      2007.





On
      September 28, 2007, the Company paid the $50,000 waiver fee and provided the
      Lender a comprehensive financing plan for the next 18 months. The Lender also
      agreed to delay, until further notice, the requirement of the Company to appoint
      a chief operating officer.





**11.**
            **Debt
                and Interest Conversions**





In
      August, 2007, a total of 1,769,724 shares of common stock were issued upon
      the
      conversion of debt and interest payments based upon the following transactions.
      First on August 27, 2007, the Lender agreed to convert $2.0 million in principal
      amount of the Company’s secured revolving credit notes (see Note 10) at a
      conversion price of $1.7662 per share for an aggregate of 1,132,375 shares.
      Second, the Investor agreed to convert $750,000 in interest due on August 9,
      2007, on the Company’s $7.5M senior convertible debt at a conversion price of
      $1.1768, equal to the conversion price of the underlying convertible notes
      for
      an aggregate 637,349 shares. The value of the shares ($796,686) and amount
      of
      interest expense recorded by the Company was calculated based on the market
      price on August 9, 2007 of $1.25 per share.





On
      January 28, 2008, a total of 1,250,000 shares of common stock were issued upon
      the conversion of debt.


The
      Lender agreed to convert $2.0 million in principal amount of the Company’s
      secured revolving credit notes (see Note 10) at a conversion price of $1.60
      per
      share, the offering unit price of the Company’s private placement.





**12.**
            **Debt
                Extensions**





The
      Company has an outstanding note in the principal amount of $104,284 which bears
      interest at 8% and matured, as amended, on February 28, 2008. The lender has
      agreed to extend the maturity date, under the same terms and conditions as
      the
      original note, to May 31, 2008.





SCG
      has
      an outstanding note with a related party in the principal amount of $1,098,536
      which bears interest at 8% and matured, as amended, on February 28, 2008. On
      February 28, 2008, the lender agreed to extend the maturity date, under the
      same
      terms and conditions as the original note, to June 30, 2008.





SCG
      has
      an outstanding note with a related party in the principal amount of $70,000
      which bears interest at 8% and matured, as amended, on February 28, 2008. On
      February 28, 2008, the lender agreed to extend the maturity date, under the
      same
      terms and conditions as the original note, to June 30, 2008.




13




**VERSADIAL,
          INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
          STATEMENTS**
 
 **MARCH
          31, 2008**




On
      February 28, 2008, the Investor granted a nine month extension of the stated
      maturity of the Company’s 10% Senior Convertible Redeemable Promissory
      Debentures (“Convertible Debentures”) in the currently outstanding principal
      amount of approximately $7,880,000 (120% due at maturity of approximately
      $9,456,000) from February 9, 2009 to November 9, 2009. A nine month extension,
      through October 28, 2008, as also granted of the period that the Company has
      to
      repurchase 25% of the warrants issued as contemplated by the Line of Credit
      Financing Agreement dated as of February 1, 2007 between the Company and the
      Lender.





**13.**
            **Registration
                Rights**





The
      Company signed a Registration Rights Agreement with the Investor on August
      9,
      2006 whereby the Company is obligated to register the resale of its shares
      of
      common stock issuable upon the conversion of senior convertible debt and
      exercise of the related warrants and have the registration statement declared
      effective by the Securities and Exchange Commission. On August 6, 2007, the
      Investor agreed to waive the Liquidated Damages Warrants which were to be issued
      for the Company’s failure to have the Registration Statement declared effective
      by the original due date and failure to include all of the Investor’s securities
      in the Registration Statement. The Investor agreed to extend the effective
      date
      to October 1, 2007 and to allow the Company to file two subsequent separate
      Registration Statements no earlier than six months after the initial effective
      date of the first filing. On September 28, 2007, the Investor agreed to extend
      the required date for the initial Registration statement to be declared
      effective again to a date to be established as long as the Company filed an
      amended SB-2A addressing the SEC comments and responded to the current comment
      letter by October 31, 2007. On October 24, 2007, the Company responded to the
      SEC comments and filed an amended SB-2A. On February 11, 2008, the Registration
      Statement was declared effective.





If
      the
      additional required registration statements are not declared effective within
      the time frame described, or if the registrations are suspended, the Company
      will be obligated to issue additional warrants (“Liquidated Damages Warrants”)
      to the Investor. Initially, the Company will be obligated to issue to the
      Investor 2% of the number of shares of common stock issuable to the Investor
      upon conversion of the Convertible Debt or approximately 127,000 shares. In
      addition, for each full thirty (30) day period after the date that the required
      registration statement has not been declared effective, the Company is obligated
      to issue to the Investor warrants exercisable for a number of shares of common
      stock equal to 2% percent of the number of shares of common stock issuable
      to
      the Investor.





**14.**
            **Capital
                lease obligation**





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
      (see Note 18).





These
      Agreements provide that the Supplier will 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
      will capitalize the related equipment at inception of production. 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.





During
      the nine months ended March 31, 2008, all of the molds and equipment in the
      aggregate of approximately $4.6 million were completed, utilized in production
      and capitalized by the Company. Approximately $4.35 million of this cost is
      being amortized. For the nine and three months ended March 31, 2008,
      amortization of the molds and equipment approximated $372,000 and $216,000,
      respectively. The Company estimates that approximately $3.3 million will be
      amortized over the next 12 months and the remaining balance of approximately
      $677,000 during fiscal 2009 based on production forecasts.




14


**VERSADIAL,
        INC.**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**
 
 **MARCH
        31, 2008**


**15.**  **Derivative
      financial instruments**





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 to the Investor 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 (see Note 13).





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 ($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) to the Lender 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
      the
      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 in the current period and recorded as a liability
      (derivative financial instruments) (see Note 17).





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 derivative financial
      instruments had a value of $1,141,987 at March 31, 2008. The derivative gain
      (loss) for the nine and three months ended March 31, 2008 and the year ended
      June 30, 2007 approximated $1,444,000, $1,254,000 and $(992,000), respectively.





**16.**  **License
      agreement and sublicense agreement, related parties**





*License
      Agreement*





On
      September 18, 2007, under the terms of a License Agreement between SCG (the
      “Licensee”) and Gerhard Brugger (the “Licensor”), the Licensor signed a waiver
      of defaults whereby royalty payments in arrears due through June 30, 2007 of
      $432,000 would be paid as follows: 5% of any proceeds received from a capital
      raise between $1 million and $2 million and 10% of everything over $2 million
      in
      proceeds until the entire amount of the past due royalty is paid in full. In
      calculating the proceeds of a capital raise, (i) any bridge loans raised prior
      to completion of a capital raise and to be and actually paid out of the capital
      raise, and (ii) any debt of the Company converted into the capital raise will
      not be deemed to be proceeds. On January 21, 2008, the Licensor agreed to defer
      any payments for royalties in arrears until the completion of the capital raise
      which was to close on February 28, 2008 and has been extended to May 31, 2008.
      In addition, the licensor agreed to accept royalties as calculated on actual
      shipments after June 30, 2007 through June 30, 2008 to be paid monthly and
      the
      cumulative difference between minimum monthly royalties and actual monthly
      royalties to be paid no later than June 30, 2008 unless the Licensor and the
      Company have entered into a written agreement prior to that date providing
      for
      an alternate payment schedule; and if the past due royalties are not fully
      paid
      prior to June 30, 2008, then the parties agree to, in good faith negotiations,
      negotiate a further arrangement to fully repay any such balance based on cash
      flow projections prior to June 30, 2008 as long as the technical consultant
      payments are made in accordance with the License Agreement.





15





**VERSADIAL,
      INC.**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**MARCH
      31, 2008**




On
      March
      14, 2008, the terms of the September 18, 2007 waiver of defaults were further
      amended. The Licensor agreed to receive royalty payments of a total of $7,500
      per month for the months of March, April and May 2008 and $22,500 per month
      through March 2009. No past due royalties were paid or will be due from any
      capital raise. The Company will continue to accrue either the minimum royalty
      or
      the actual royalty whichever is greater each month. Commencing April 1, 2009,
      the Company will resume payment of actual royalty payments which will be the
      greater of the minimum due for the month or the amount as calculated on actual
      sales. At that time, the parties will enter into discussions leading to a
      written agreement providing for all past due royalties through March 31, 2009.
      The technical consultant payments will continue to be paid timely each
      month.





All
      technical consulting payments and royalties per the amended waiver were paid
      when due through March 31, 2008. At March 31, 2008, the licensor is due
      royalties of approximately $702,000.





*Sublicense
      Agreement*





On
      May 1,
      2005, SCG (the “Sub-licensor”) entered into a sub-license agreement with the
      Company (the “Sub-licensee”) whereby SCG assigned to the Company all rights,
      titles and interests that the Sub-licensor has in the Amended and Restated
      License Agreement dated January 1, 2003 between SCG and Gerhard Brugger. In
      consideration for the assignment and patent rights hereunder, the Company agreed
      to pay SCG a sublicense fee in the aggregate of $600,000. In addition the
      Company agreed to pay the royalties due under the original Amended and Restated
      License Agreement either directly to the original licensor or to SCG. The
      Company also agreed to pay SCG a royalty of 3% of the first $100 million of
      gross revenues, which was increased to $130 million in July 2006. On September
      18, 2007, the agreement was amended to extend the payment dates of the remaining
      $450,000 sublicense fee, with $300,000 due on December 31, 2007, and $150,000
      due on May 1, 2008. On January 15, 2008, the agreement was further amended
      to
      extend the payment dates of the remaining sublicense fee of $450,000, with
      $300,000 due on September 30, 2008 and $150,000 due on December 31,
      2008.





**17.**  **Stockholders’
      deficit**





*Capitalization*





The
      Company’s initial authorized capitalization consisted of 50 million (50.0
      million) shares of common stock, par value $.001 and no preferred stock. Prior
      to the merger, the certificate of incorporation was amended to increase the
      capitalization of the Company to 1.3 billion (1,300.0 million) shares of common
      stock, par value $.001 and 100 million (100.0 million) shares of preferred
      stock, par value $.001.





On
      March
      2, 2007, the Company completed a one for forty-five reverse stock split. The
      Company’s Articles of Incorporation were amended to provide for authority to
      issue 35 million shares of common stock, par value $.0001 per share, and 2
      million shares of preferred stock, par value $.0001 per share. The common stock
      and per share information in the consolidated financial information and related
      notes have been retroactively adjusted to give effect to the stock split. Prior
      to the reverse split the Company had outstanding 609,259,259 common shares.
      Subsequent to the reverse split, the Company had outstanding 13,539,470 common
      shares. All fractional shares were rounded up.





16





**VERSADIAL,
      INC.**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**MARCH
      31, 2008**




*Issuance
      of Common Stock*





On
      August
      8, 2006, ODC Partners, LLC, a debt holder of Registrant, agreed to convert
      its
      outstanding debt of approximately $100,000 and accrued interest into 222,223
      shares of the Company’s common stock. This conversion resulted in an aggregate
      of 914,227 shares (as rounded up for fractional shares) outstanding prior to
      the
      merger.





On
      August
      9, 2006, as a result of the merger, the Company issued an aggregate of
      11,377,331 shares to Innopump shareholders (a conversion of approximately 43.333
      shares of stock for each share of Innopump stock, 262,500 shares outstanding).
      In addition the Company issued an aggregate of 1,247,912 shares to Innopump
      debt
      holders who elected to convert their debt to equity prior to the merger (a
      conversion of approximately 43.333 shares of stock for each share of Innopump
      stock). These debt holders converted $1.2 million in debt to 28,792 shares
      of
      Innopump stock prior to the merger.





In
      August
      2007, a total of 1,769,724 shares of common stock were issued upon the
      conversion of debt and interest payments based upon the following transactions.
      First on August 27, 2007, the Lender agreed to convert $2.0 million in principal
      amount of the Company’s secured revolving credit notes at a conversion price of
      $1.7662 per share for an aggregate of 1,132,375 shares. Second, the Investor
      agreed to convert $750,000 in interest due on August 9, 2007 on the Company’s
      $7.5M senior convertible debt at a conversion price of $1.1768, equal to the
      conversion price of the underlying convertible notes for an aggregate 637,349
      shares. The value of the shares ($796,686) and amount of interest expense
      recorded by the Company was calculated based on the market price on August
      9,
      2007 of $1.25 per share (see Notes 10 and 11).





On
      January 28, 2008 the Company received $2,800,000 for the purchase of 1,750,000
      units of its securities consisting of 1,750,000 shares of common stock and
      stock
      purchase warrants (20% warrant coverage or an aggregate of 350,000 warrants)
      in
      connection with a private placement offering. The shares were issued on January
      28, 2008. Each unit is priced at $1.60 with a minimum unit purchase of $80,000.
      The stock purchase warrants have a term of five years and are exercisable for
      shares of common stock at an initial exercise price of $2.00. The private
      placement is currently extended through a final closing date of May 31, 2008
      for
      a maximum aggregate placement of $5,500,000 (see Note 9).





On
      January 28, 2008, a total of 1,250,000 shares of common stock were issued upon
      the conversion of debt.


The
      Lender agreed to convert $2.0 million in principal amount of the Company’s
      secured revolving credit notes at a conversion price of $1.60 per share, the
      offering price of the Company’s private placement (see Notes 10 and
      11).





*Warrant
      Reissuance*





On
      January 28, 2008, in connection with the Company’s private placement, the
      Company reissued certain warrants as required by the antidilution provisions
      contained in the warrants. An aggregate of 1,681,814 warrants with an original
      exercise price of $2.475 were reissued as new warrants in the aggregate of
      1,824,053 warrants with an exercise price of $2.282. The incremental fair value
      of the modification to the warrants of $47,181 has been recognized by the
      Company as additional compensation cost. The incremental fair value was
      calculated using the Black-Scholes model with an expected volatility of 40%
      and
      a risk free interest rate of 2.50%.




*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
      March
      31, 2008, the basic loss per common share does not include an aggregate of
      4,296,076 warrants outstanding and 6,696,144 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 January 28, 2013. At March 31, 2008, diluted
      loss per common share includes 4,915 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.





17





**VERSADIAL,
      INC.**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**MARCH
      31, 2008**




**18.**  **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 $780,000 for preproduction molds and
      approximately $4.6 million for the required production molds. Title of the
      molds
      will transfer to the Company upon final payment. As of June 30, 2007, the
      preproduction molds were complete and placed in service. The Company paid an
      aggregate of approximately $529,000 for the preproduction molds prior to their
      completion and financed the balance of approximately $251,000 under the terms
      of
      a capital lease obligation. The total amount of the lease, including interest,
      is to be paid monthly in varying installments through March 2009. At March
      31,
      2008, the Company has an outstanding balance of approximately $118,000 due
      on
      the remaining capital lease. As of March 31, 2008, the Company has paid an
      aggregate of approximately $2.977 million for the production molds which are
      included in deposits on production equipment (see Note 7) and has an outstanding
      current liability of approximately $889,000 due to the contractor. Upon
      completion of construction of the production molds, the remaining balance due
      the contractor of approximately $650,000 will be financed through a capital
      lease to be paid monthly through March 2009. In addition, the Company may enter
      into an amortization agreement with the contractor to defer a portion of the
      current obligation due until production commences. The Company may also seek
      to
      enter into a financing or sale /leaseback agreement for this production
      equipment. It is anticipated that production will commence by the third quarter
      of calendar 2008.





In
      conjunction with the above manufacturing agreement, the Company also ordered
      related assembly equipment from a vendor in the amount of approximately $1.24
      million. The Company has made payments of approximately $401,000 for the
      equipment and has a current liability of approximately $840,000 for the balance
      which is included in deposits on production equipment and in current liabilities
      (see Note 7). The equipment was received in December 2007. It is anticipated
      that production will commence by the third calendar quarter of 2008. The Company
      is currently seeking to obtain financing of this assembly equipment under a
      leasing or possible sale/leaseback agreement.





*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”). 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 provide that the Supplier will 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 (see note
      14).
      Although financed by the Supplier, the equipment will be owned by the Company.
      The Company will capitalize the related equipment at inception of production.
      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.





18





**VERSADIAL,
      INC.**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**MARCH
      31, 2008**




During
      the nine months ended March 31, 2008, all of the molds and equipment in the
      aggregate of approximately $4.6 million were completed, utilized in production
      and capitalized by the Company. Approximately $4.35 million of this cost is
      being amortized. For the nine and three months ended March 31, 2008,
      amortization of the molds and equipment approximated $372,000 and $216,000,
      respectively. The Company estimates that approximately $3.3 million will be
      amortized over the next 12 months and the remaining balance of approximately
      $677,000 during fiscal 2009 based on production forecasts.





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





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




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





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





*Customer
      Master Supply Agreement*





On
      July
      10, 2007 the Company entered into a two-year Master Supply Agreement with Avon
      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.





Pursuant
      to the terms of the Credit Memo previously entered into with Avon, the Company
      will 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. In the event of a default by the Company, Avon
      may, at its discretion, recover the remaining amount of the advance as a credit
      against other product purchases from us or the amount will be due under the
      terms of a promissory note to be issued at the time of default. The Company
      anticipates that the exclusive supply relationship with Avon will consume all
      available manufacturing capacity of the specially designed 20 millimeter
      dispenser through the first year. The Company anticipates production to begin
      in
      the third quarter of calendar of 2008.





19





**VERSADIAL,
      INC.**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**MARCH
      31, 2008**




**19.**  **Major
      customers and segment information**





*Major
      customers*




Customers
        accounting for 10% or more of revenue for the nine and three months ended
        March
        31, 2008 and 2007 are as follows:





**Nine months**
              **ending**
              **March 31, 2008**
            
            **Nine months**
              **ending**
              **March 31, 2007**
            
            **Three months**
              **ending**
              **March 31, 2008**
            
            **Three months**
              **ending**
              **March 31, 2007**Customer
                A
            
            $
            1,913,000
            
            $
            -
            
            $
            874,000
            
            $
            -Customer
                B
            
            
            266,000
            
            
            870,000
            
            
            266,000
            
            
            564,000Customer
                C
            
            
            -
            
            
            257,000
            
            
            -
            
            
            163,000$
            2,179,000
            
            $
            1,127,000
            
            $
            1,140,000
            
            $
            727,000




Accounts
      receivable from customer A, B and C aggregated approximately $4,000, $100,000
      and $45,000 at March 31, 2008, respectively.





*Segment
      information*





Assets,
      classified by geographic location are as follows at March 31, 2008:





United
                States
            
            $
            5,814,323Other
                countries
            
            
            7,258,162$
            13,072,485





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:





Nine months ending
            
            Nine months ending
            
            Three months ending
            
            Three months endingMarch 31, 2008
            
            March, 31, 2007
            
            March 31, 2008
            
            March 31, 2007United
                States
            
            $
            2,331,745
            
            $
            1,146,090
            
            $
            1,218,615
            
            $
            727,386Other
                countries
            
            
            91,239
            
            
            22,266
            
            
            32,395
            
            
            -0-$
            2,422,984
            
            $
            1,168,356
            
            $
            1,251,010
            
            $
            727,386


20




**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-QSB. 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-QSB. The forward-looking
      statements are made as of the date of this Form 10-QSB, 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.*





OVERVIEW





Versadial,
      Inc. was originally incorporated in Nevada under the name Carsunlimited.com,
      Inc. (“CARS”) on March 7, 2000, with a principal business objective to operate
      an Internet database business involving the automobile industry. Prior to August
      9, 2006, we were a development stage company with limited operations and
      revenues and only nominal assets. Our intended purpose was to offer users the
      ability to search a database that contained products and information about
      the
      automobile industry, new and used car sales (classified ads), as well as
      automotive products such as extended warranty information and anti-theft body
      part marking.





On
      August
      9, 2006, we executed an Agreement and Plan of Merger (“Merger Agreement”) with
      PAC, our wholly-owned subsidiary, Innopump, a Nevada corporation which was
      formed on April 1, 2005, and certain Innopump stockholders. Pursuant to the
      merger contemplated by the Merger Agreement, Innopump became a wholly-owned
      subsidiary of ours ("Merger").





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.





Versadial’s
      business is designed to capitalize on the commercial opportunities for
      innovation in packaging and dispensing within the consumer products industries.
      We are engaged in the manufacture of a dual dispenser that enables the user
      to
      blend two liquids in varying proportions. Substantially all of our revenues
      come
      from wholesale sales and our customers are located both in the United States
      and
      in Europe. The dual dispensers are currently manufactured in both Germany and
      the United States and are currently being utilized in the food, sun care,
      skincare, and cosmetic industries. We began manufacturing in the United States
      in the fourth calendar quarter of 2007.





On
      March
      2, 2007, we changed our name to Versadial, Inc. (“Versadial” or “the Company”)
      to capitalize on the awareness of our trademarked name for our products in
      the
      marketplace.





Our
      fiscal year ends on June 30, and therefore references to fiscal 2008, 2007
      and
      2006 refer to the fiscal years ended June 30, 2008, June 30, 2007 and June
      30,
      2006, respectively. Our fiscal year end was December 31, which was changed
      to
      June 30 to conform to the year end of Innopump, the accounting acquirer as
      a
      result of the Merger.





The
      common stock and per share information have been retroactively adjusted to
      give
      effect to the reverse merger on August 9, 2006 and to give effect to the one
      for
      forty-five reverse stock split that became effective on March 2,
      2007.





Recent
      Developments





The
      following developments took place during the past fiscal year, the nine months
      ended March 31, 2008 and subsequent to March 31, 2008:




21




·
            On
                August 9, 2006, concurrent with the merger closing, we sold 10% senior
                redeemable convertible debt (“Convertible Debt”) in the principal amount
                of $7.5 million to Mellon HBV Master U.S. Event Driven Fund, L.P.
                and
                Mellon HBV Master Global Event Driven Fund, L.P. Fund (now known
                as Fursa
                Master Global Event Driven Fund, LP, and referred to herein as the
                “Investor”) under the terms of a Securities Purchase Agreement in exchange
                for $7.5 million in cash. The Convertible Debt matures, as amended,
                on
                November 9, 2009 (“Maturity Date”) and bears interest at 10% per annum. We
                do not have the option to prepay the Convertible Debt prior to the
                Maturity Date and must redeem 100% of the Convertible Debt, unless
                earlier
                converted, for an amount equal to 120% ($9.45 million at March 31,
                2008)
                of the outstanding principal plus accrued but unpaid interest, on
                the
                Maturity Date. The proceeds from the Convertible Debt were used for
                working capital, capital expenditures, mandatory debt repayment,
                and
                general corporate purposes.





·
            On
                September 20, 2006, we entered into a 30-month manufacturing agreement
                with Seidel GMBH, 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. We 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 us to
                make payments in the aggregate of approximately $780,000 for preproduction
                molds and $4.6 million for the required production molds. Title of
                the
                molds will transfer to us upon final payment. As of June 30, 2007,
                the
                preproduction molds were complete and placed in service. We paid
                an
                aggregate of approximately $529,000 for the preproduction molds prior
                to
                their completion and financed the balance of approximately $251,000
                under
                the terms of a capital lease obligation. At March 31, 2008, we have
                an
                outstanding balance of approximately $118,000 due on the remaining
                capital
                lease. As of March 31, 2008, we have paid an aggregate of approximately
                $2.977 million for the production molds and we have an outstanding
                current
                liability of approximately $889,000 due to the contractor.Upon
                completion of construction of the production molds, the remaining
                balance
                due the contractor of approximately $650,000 will be financed through
                a
                capital lease to be paid monthly through March 2009. In addition,
                we may
                enter into an amortization agreement with the contractor to defer
                a
                portion of the current obligation due until production commences.
                We may
                also seek to enter into a financing or sale/leaseback agreement for
                this
                production equipment. It is anticipated that production will commence
                by
                the third quarter of calendar 2008.





In
      conjunction with the above manufacturing agreement, the Company also ordered
      related assembly equipment from a vendor in the amount of approximately $1.24
      million. The Company has made payments of approximately $401,000 for the
      equipment and has a current liability of approximately $840,000 for the balance
      which is included in deposits on production equipment and in current
      liabilities. The equipment was received in December 2007. It is anticipated
      that
      production will commence by the third calendar quarter of 2008. The Company
      is
      currently seeking to obtain financing of this assembly equipment under a leasing
      or possible sale/leaseback agreement.





·
            On
                February 1, 2007, we entered into a $3.0 million Secured Line Of
                Credit
                Agreement (“Credit Agreement”) with Fursa Alternative Strategies, LLC
                (referred to herein as the “Lender”). The line was due on February 1,
                2008. At June 30, 2007, we had drawn an aggregate of $3.0 million
                of the
                available line. On July 9, 2007, the Credit Agreement was amended
                to (i)
                increase the amount of the line of credit available to us from $3.0
                million to $4.0 million and (ii) waive certain default provisions
                required
                by the original Credit Agreement. In August 2007, the Lender agreed
                to
                convert $2.0 million of the outstanding principal balance to equity
                at a
                conversion price of $1.7662 per share for an aggregate of 1,132,375
                shares. On January 28, 2008, the Lender agreed to convert the remaining
                $2.0 million of the outstanding principal balance to equity at a
                conversion price of $1.60 per share, the offering price of our private
                placement, for an aggregate of 1,250,000
                shares.





·
            On
                April 24, 2007, we entered into a Supply Agreement and a related
                Tooling
                Amortization Agreement with Alltrista Plastics Corporation d/b/a
                Jarden
                Plastic Solutions, an outside contractor located in the United States
                (the
                “Supplier”). The Supply Agreement provides, among other things, that we,
                over the five year term of the Agreement, will purchase from the
                Supplier
                no less than 100.0 million units of our 40 millimeter and 49 millimeter
                dispensers.





These
      Agreements provide that the Supplier will fund the majority of the estimated
      $4.6 million cost of the injection molding, tooling and automatic equipment
      necessary to produce the products to be purchased by us. Although financed
      by
      the Supplier, the equipment will be owned by Versadial. We will capitalize
      the
      related equipment at inception of production. 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 us pursuant to the Supply Agreement, with a per unit amortization
      cost included in the cost price for the dispensers. If we fail 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.





22




During
      the nine months ended March 31, 2008, molds and equipment in the aggregate
      of
      approximately $4.6 million were completed, utilized in production and
      capitalized. Approximately $4.35 million of this cost is being amortized. For
      the nine and three months ended March 31, 2008, amortization of the molds and
      equipment approximated $372,000 and $216,000, respectively. We estimate that
      approximately $3.3 million will be amortized over the next 12 months and the
      remaining balance of approximately $677,000 during fiscal 2009 based on
      production forecasts.





·
            On
                July 10, 2007 we entered into a two-year Master Supply Agreement
                with Avon
                Products, Inc. (“Avon”), a consumer products company for seventeen million
                units of certain of our products. The Agreement will remain in effect
                through the second anniversary of the first shipment of such products
                in
                commercial production quantities.





Pursuant
      to the terms of a Credit Memo previously entered into with Avon, we will repay
      Avon’s $1.7 million advances 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. We anticipate
      that the exclusive supply relationship with Avon will consume all available
      manufacturing capacity of the specially designed 20mm dispenser through the
      first year. We anticipate production to begin in the third quarter of calendar
      2008.





·
            On
                August 30, 2007, with the consent of the Investor, we entered into
                a
                Securities Purchase Agreement whereby we could sell 8% promissory
                notes
                (“Notes”) in the principal amount of up to $2.5 million at a price of
                ninety seven (97%) percent of the principal amount of Notes. The
                Notes are
                due upon the earlier of (a) six months following the final closing
                date of
                November 27, 2007 of the Notes, (b) the date on which we receive
                no less
                than $4.0 million in gross cash proceeds from the closing of a private
                offering of our equity securities or (c) on the date we close on
                a rights
                offering. We have received net proceeds of approximately $2.4 million
                from
                the sale of the Notes of which $2.2 million was received from Richard
                Harriton, a related party who serves as a Director and is a major
                shareholder of the Company.





On
      January 28, 2008, we repaid an aggregate of $1.3 million of these notes with
      the
      proceeds from a private offering inclusive of interest and discount of which
      $1.2 million was repaid to Richard Harriton.





·
            Under
                the terms of a private placement, we are offering for sale a maximum
                of
                3,437,500 units of our securities at $1.60 per unit with a minimum
                unit
                purchase of $80,000. Each unit consists of one share of common stock
                and
                20% warrant coverage. The warrants are exercisable for five years
                from the
                date of issuance at an initial exercise price equal to $2.00 per
                share
                subject to adjustment under certain events. The private placement
                is
                currently extended through a final closing date of May 31, 2008 for
                a
                maximum aggregate placement of $5,500,000.





On
      January 28, 2008 we received $2,800,000 for the purchase of 1,750,000 units
      of
      our securities consisting of 1,750,000 shares of common stock and stock purchase
      warrants (20% warrant coverage or an aggregate of 350,000 warrants) in
      connection with the private placement offering. The proceeds of the private
      placement were used primarily for working capital purposes including (i)
      repayment of outstanding current indebtedness including approximately $1.3
      million in bridge financing incurred with the Securities Purchase Agreement
      inclusive of accrued interest and discount, (ii) payment of other outstanding
      obligations, and (iii) funding working capital requirements including product
      development and the acquisition of tooling and molds.





We
      have
      received a letter from the Investor, the purchaser of 1,250,000 units in the
      private placement, committing the Investor subscribe and pay $2,000,000 for
      an
      additional 1,250,000 units by May 31, 2008.




23




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
      critical accounting policies we identified in Amendment No. 2 to our Annual
      Report on Form 10-KSB for the fiscal year ended June 30, 2007 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 Amendment No. 2 to our Annual Report on Form
      10-KSB, as filed with the SEC on January 28, 2008.





RESULTS
      OF OPERATIONS





Executive
      Summary





The
      table
      below sets forth a summary of financial highlights for the nine months ended
      March 31, 2008 and 2007:





Overall,
      our revenue grew substantially by 107% during the nine months ended March 31,
      2008 as compared to the nine months ended March 31, 2007 as our operations
      began
      to grow in the skincare and cosmetic sectors. Our direct costs were 89% and
      94%
      of revenues for the respective periods due to several factors, which were
      primarily the need for manual labor of certain functions in Germany which will
      begin to decline next quarter as U.S. production began in late 2007, the
      unfavorable Euro/US Dollar currency exchange fluctuation which also will begin
      to decline as U.S. production increases, and high direct freight costs 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.
      This will no longer be a factor as our U.S. production facility commenced
      operations in late 2007 and became fully operational in February 2008. Our
      indirect costs increased due to higher depreciation expenses in the current
      year
      on capital acquisitions, costs for prototype samples for new customers and
      products, and high costs for testing of new equipment for the U.S. facility.
      Our
      revenues did not increase enough to cover these costs as our production capacity
      was limited due to the moving of equipment from Germany to the U.S. Our German
      facility is still operational but with a limited amount of equipment with less
      production capacity than previously as the newer higher cavity equipment shipped
      to the U.S. in September 2007. The equipment had to be retrofitted for U.S.
      production and became operational in November 2007. Our interest expense and
      related debt discount and financing costs increased due to the increase in
      debt
      obligations which were incurred for future growth including capital expenditures
      and for ongoing expenses. These changes are explained in more detail below.





Our
      focus
      for the coming fiscal year will be to grow our revenue and decrease our direct
      costs per unit which we believe will be accomplished as our new 20mm product
      line is completed and manufacturing should begin in the third quarter calendar
      2008 at Seidel in Germany. We estimate we will be able to produce approximately
      15 million units annually of this product. In addition, we believe the
      completion of our new U.S. based facility for our 40 and 49mm product line
      will
      enable us to increase production with substantially all new automated molds
      and
      assembly equipment. This began in November 2007 at Jarden and became fully
      operational for both our 40 and 49mm product lines in February 2008. 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 20 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
      completed 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, with limited production capacity, for development projects with new
      and
      existing customers, and possibly for assembly of foreign orders or additional
      production use if necessary.





24




*Nine
      Months Ended March 31, 2008 and 2007*





**For
                the nine months ended March 31,**
            
            **2008**
            
            **2007**
            
            **CHANGE****Net
                revenues**
            
            $
            2,422,984
            
            $
            1,168,356
            
            
            107
            %**Cost
                of revenues**Direct
                costs
            
            
            2,145,122
            
            
            1,100,748
            
            
            95
            %Indirect
                costs
            
            
            1,470,224
            
            
            516,880
            
            
            184
            %3,615,346
            
            
            1,617,628
            
            
            123
            %**Gross
                margin**
            
            
            (1,192,362
            )
            
            (449,272
            )
            
            165
            %**Operating
                expenses**General
                and administrative
            
            
            2,423,393
            
            
            2,313,071
            
            
            5
            %**Loss
                from operations**
            
            
            (3,615,755
            )
            
            (2,762,343
            )
            
            31
            %**Other
                income (expenses)**Sublease
                income, affiliates
            
            
            35,745
            
            
            5,400
            
            
            562
            %Interest
                and other expense
            
            
            (1,288,923
            )
            
            (958,512
            )
            
            34
            %Interest
                expense, related parties
            
            
            (133,421
            )
            
            (79,245
            )
            
            68
            %Amortization
                of debt discount
            
            
            (544,120
            )
            
            (573,036
            )
            
            -5
            %Amortization
                of financing costs
            
            
            (318,420
            )
            
            (340,384
            )
            
            -6
            %Gain
                (loss) on derivative financial instruments
            
            
            1,444,293
            
            
            (102,570
            )
            
            -1508
            %Loss
                on foreign currency exchange
            
            
            (249,672
            )
            
            (43,472
            )
            
            474
            %(1,054,518
            )
            
            (2,091,819
            )
            
            -50
            %**Net
                loss**
            
            $
            (4,670,273
            )
            $
            (4,854,162
            )
            
            -4
            %





REVENUES.
      During the nine months ended March 31, 2008, we had revenues of $2,422,984
      as
      compared to revenues of $1,168,356 during the nine months ended March 31, 2007,
      an increase of approximately 107%. In 2008, 79% of the revenue was attributable
      to one customer in the cosmetic industry and 11% was attributable to one
      customer in the suncare industry. In 2007, 96% of the revenue was attributable
      to two customers in the suncare industry. 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 $2,145,122 (89% of revenues) for the nine
      months ended March 31, 2008 as compared to $1,100,748 (94% of revenues) for
      the
      nine months March 31, 2007. The increase in dollars for 2007 is a result of
      the
      increase in revenues. The high percentage of direct costs as related to revenues
      in both periods is attributable to several factors which are discussed above
      and
      should begin to improve in the next quarter as the transition from Germany
      to
      the U.S. for both our 40mm and 49mm product lines is now complete. Cost of
      revenues – indirect costs, which consist of indirect labor, quality control
      costs, factory maintenance, product development and depreciation, were
      $1,470,224 for the nine months ended March 31, 2008 as compared to $516,880
      for
      the nine months ended March 31, 2007. The increase was due primarily to
      increased depreciation of approximately $566,000 due to the purchase of more
      manufacturing equipment, for additional costs for runoff testing of parts of
      approximately $125,000 needed to validate the new U.S. equipment and the new
      20mm equipment in Germany, and for additional labor for testing and development
      in 2008 as compared to 2007. Also included in indirect costs for the nine months
      ended March 31, 2008 is a charge of approximately $157,000 for writedown of
      inventory and defective parts in Germany related to the 40mm and 49mm product
      lines. As the majority of these operations are now U.S. based, these parts
      were
      no longer customer validated or considered compatible with U.S. resins or the
      manufacturing process. Gross margin was a deficit of $(1,192,362) for the nine
      months ended March 31, 2008 as compared to a deficit of $(449,272) for the
      nine
      months ended March 31, 2007 as of a result of revenues insufficient to cover
      indirect operating costs. 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 decrease on a percentage of revenue basis as discussed above as
      our
      new U.S. facility became fully operational in February 2008 and our new 20mm
      facility in Germany will become operational in 2008 and both our capacity and
      production capabilities will increase and we will become more cost
      efficient.





25




OPERATING
      EXPENSES. General and administrative expenses totaled $2,423,293 for the nine
      months ended March 31, 2008, as compared to $2,313,071 for the nine months
      ended
      March 31, 2007, an increase of approximately 5%. This increase of approximately
      $110,000 is primarily attributable to an increase in the royalties due the
      licensor under contract of $75,000, and an increase in other general expenses
      due to the growth of the business.





NET
      LOSS.
      We had a net loss of $4,670,273 for the nine months ended March 31, 2008 as
      compared to $4,854,162 for the nine months ended March 31, 2007, a decrease
      of
      approximately $184,000. The decrease in net loss is attributable to the
      increases in general and administrative and cost of revenues as described above
      of approximately $854,000. In addition, interest expense and amortization of
      debt/financing costs increased by approximately $333,000 in 2008 due to
      increased debt obligations. These increases as related to net loss for the
      nine
      months ended March 31, 2008 were offset by a gain on derivative financial
      instruments of approximately $1.4 million due to the fluctuation of the market
      price or our stock. 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.





26




*Three
      Months ended March 31, 2008 and 2007*


**For
                  the three months ended March 31,**
              
              **2008**
              
              **2007**
              
              **CHANGE****Net
                  revenues**
              
              $
              1,251,010
              
              $
              727,386
              
              
              72
              %**Cost
                  of revenues**Direct
                  costs
              
              
              978,635
              
              
              687,057
              
              
              42
              %Indirect
                  costs
              
              
              619,513
              
              
              201,008
              
              
              208
              %1,598,148
              
              
              888,065
              
              
              80
              %**Gross
                  margin**
              
              
              (347,138
              )
              
              (160,679
              )
              
              116
              %**Operating
                  expenses**General
                  and administrative
              
              
              840,032
              
              
              829,362
              
              
              1
              %**Loss
                  from operations**
              
              
              (1,187,170
              )
              
              (990,041
              )
              
              20
              %**Other
                  income (expenses)**Sublease
                  income, affiliates
              
              
              11,415
              
              
              (13,848
              )
              
              -182
              %Interest
                  and other expense
              
              
              (391,965
              )
              
              (372,206
              )
              
              5
              %Interest
                  expense, related parties
              
              
              (52,309
              )
              
              (23,371
              )
              
              124
              %Amortization
                  of debt discount
              
              
              (140,085
              )
              
              (311,533
              )
              
              -55
              %Amortization
                  of financing costs
              
              
              (97,776
              )
              
              (181,548
              )
              
              -46
              %Gain
                  (loss) on derivative financial instruments
              
              
              1,254,395
              
              
              (58,434
              )
              
              -2247
              %Loss
                  on foreign currency exchange
              
              
              (155,047
              )
              
              (21,969
              )
              
              606
              %428,628
              
              
              (982,909
              )
              
              -144
              %**Net
                  loss**
              
              $
              (758,542
              )
              $
              (1,972,950
              )
              
              -62
              %





REVENUES.
      During the three months ended March 31, 2008, we had revenues of $1,251,010
      as
      compared to revenues of $727,386 during the three months ended March 31, 2007,
      an increase of approximately 72%. In 2008, 70% of the revenue was attributable
      to one customer in the cosmetic industry and 21% of the revenue was attributable
      to one customer in the suncare industry. In 2007, 100% of the revenue was
      attributable to two customers in the suncare industry. 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 $978,635 (78% of revenues) for the three months
      ended March 31, 2008 as compared to $687,057 (94% of revenues) for the three
      months March 31, 2007. The increase for 2008 is a result of the increase in
      revenues. The high percentage of direct costs as related to revenues in both
      periods is attributable to several factors which are discussed above and began
      to improve in the last fiscal quarter ended December 31, 2007 and have continued
      to improve in the current fiscal quarter as U.S. production commenced in
      November 2007. Cost of revenues – indirect costs, which consist of indirect
      labor, quality control costs, factory maintenance, product development and
      depreciation, were $619,513 for the three months ended March 31, 2008 as
      compared to $201,088 for the three months ended March 31, 2007. The increase
      was
      due primarily to increased depreciation of approximately $267,000 due to the
      purchase of more manufacturing equipment, for additional costs needed to
      validate the new U.S. equipment, and for additional labor for testing and
      development in 2008 as compared to 2007. Also included in indirect costs for
      the
      three months ended March 31, 2008 is a charge of approximately $110,000 for
      writedown of inventory and defective parts in Germany related to the 40mm and
      49mm product lines. As the majority of these operations are now U.S. based,
      these parts were no longer customer validated or considered compatible with
      U.S.
      resins or the manufacturing process. Gross margin was a deficit of $(347,138)
      for the three months ended March 31, 2008 as compared to a deficit of $(160,679)
      for the three months ended March 31, 2007 as of a result of revenues
      insufficient to cover indirect operating costs. 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 continue to decrease on a percentage of revenue
      basis as discussed above as our new U.S. facility became fully operational
      in
      February 2008 and our new 20mm facility in Germany will become operational
      in
      2008 and both our capacity and production capabilities will increase and we
      will
      become more cost efficient.


27





OPERATING
      EXPENSES. General and administrative expenses totaled $840,032 for the three
      months ended March 31, 2008, as compared to $829,362 for the three months ended
      March 31, 2007, an increase of approximately 1%. This increase of approximately
      $11,000 is primarily attributable to an increase in the royalties due the
      licensor under contract of $25,000, and various increases and decreases in
      various other general and administrative costs.





NET
      LOSS.
      We had a net loss of $758,542 for the three months ended March 31, 2008 as
      compared to $1,972,950 for the three months ended March 31, 2007, a decrease
      of
      approximately $1,214,000. The decrease in net loss is attributable to the
      increases in general and administrative and cost of revenues as described above
      which are offset by a gain on derivative financial instruments which increased
      by approximately $1.254 million due to the fluctuation of the market price
      or
      our stock. In addition, interest expense and amortization of debt/financing
      costs decreased by approximately $207,000 in 2008 as there were higher fully
      expensed charges in the prior period for debt discount and financing fees due
      to
      the issuance of new debt obligations and warrants. 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 March 31, 2008:





At March 31,
              2008 “Unaudited”Current
                assets
            
            $
            1,264,388Current
                liabilities
            
            
            10,979,815Working
                capital deficit
            
            $
            (
                9,715,427
            )





At
      March
      31, 2008, we had incurred cumulative losses of approximately $19.5 million
      since
      inception and $4.7 million for the nine months ended March 31, 2008. We have
      a
      working capital deficit of approximately $9.7 million and a stockholders’
deficit of approximately $10.6 million as of March 31, 2008.





During
      the nine months ended March 31, 2008, we utilized cash of approximately $.4
      million for operating activities primarily due to the revenues not yet great
      enough to cover general and administrative expenses and indirect costs. We
      utilized cash of approximately $.8 million from investing activities primarily
      to purchase molds and equipment of approximately $3.5 million which was offset
      by our net capital raise of approximately $2.7 million. We received cash from
      financing activities of approximately $1.6 million, approximately $2.1 million
      from the secured credit line and net bridge loans under the securities purchase
      agreement offset by approximately $.5 million used to pay equipment leases.
      These funds were utilized to purchase equipment and cover operating costs.
      Our
      cash balance increased by approximately $.4 million for the nine months ended
      March 31, 2008.


28





At
      March
      31, 2008, current liabilities include $1.6 million due to shareholders on June
      30, 2008 which we believes will be extended if necessary prior to maturity.
      Accounts payable of approximately $3.8 million includes approximately $2.0
      million for the purchase and development of new equipment which we are seeking
      to obtain financing for under a leasing or possible sale/leaseback agreement
      or
      enter into an amortization deferral agreement with the supplier of the equipment
      for a portion of these costs. Current capital lease obligations of approximately
      $3.3 million are to be repaid through amortization of production over the next
      12 months based on the number of units produced. We anticipate that revenues
      from production will cover this obligation. In addition, approximately $1.2
      million of current liabilities relates to bridge loans which will be repaid
      out
      of the proceeds from our private placement as described below.





Approximately
      $702,000 in liabilities, of which $240,000 are current, relates to minimum
      royalties due to the Licensor, pursuant to the License Agreement, which are
      in
      arrears. On September 18, 2007, the Licensor signed a waiver of defaults whereby
      royalty payments in arrears due through June 30, 2007 of $432,000 would be
      paid
      as follows: 5% of any proceeds received from a capital raise between $1 million
      and $2 million and 10% of everything over $2 million in proceeds until the
      entire amount of the past due royalty is paid in full. On January 21, 2008,
      the
      Licensor agreed to defer any payments for royalties in arrears until the
      completion of the capital raise which was to close on February 28, 2008 and
      has
      been extended to May 31, 2008. In addition, the Licensor agreed to accept
      royalties as calculated on actual shipments after June 30, 2007 through June
      30,
      2008 to be paid monthly and the cumulative difference between minimum monthly
      royalties and actual monthly royalties to be paid no later than June 30, 2008
      unless the Licensor and Licensee have entered into a written agreement prior
      to
      that date providing for an alternate payment schedule; and if the past due
      royalties are not fully paid prior to June 30, 2008, then the parties agree
      to,
      in good faith negotiations, negotiate a further arrangement to fully repay
      any
      such balance based on cash flow projections prior to June 30, 2008 as long
      as
      the technical consultant payments are made in accordance with the License
      Agreement.





On
      March
      14, 2008, the terms of the September 18, 2007 waiver of defaults were further
      amended. The Licensor agreed to receive royalty payments of a total of $7,500
      per month for the months of March, April and May 2008 and $22,500 per month
      through March 2009. No past due royalties were paid or will be due from any
      capital raise. We will continue to accrue either the minimum royalty or the
      actual royalty whichever is greater each month. Commencing April 1, 2009, we
      will resume payment of actual royalty payments which will be the greater of
      the
      minimum due for the month or the amount as calculated on actual sales. At that
      time, we will enter into discussions with the Licensor leading to a written
      agreement providing for payment terms for all past due royalties through March
      31, 2009. The technical consultant payments will continue to be paid timely
      each
      month. All technical consulting payments and royalties per the amended waiver
      were paid when due through March 31, 2008.





The
      balance of current liabilities consists primarily of accounts payable, interest,
      and other expenses.





On
      August
      30, 2007, we entered into a Securities Purchase Agreement whereby we could
      sell
      8% promissory notes in the principal amount of up to $2.5 million at a price
      of
      ninety seven (97%) percent of the


principal
      amount of notes. The notes are due upon the earlier of (a) six months following
      final closing date of November 27, 2007, (b) the date on which we receive no
      less than $4.0 million in gross proceeds from the closing of a private offering
      of our equity securities or (c) on the date we close on a rights offering.
      We
      received net proceeds of $2.4 million in regards to the notes of which $2.2
      million was received from a related party. On January 28, 2008, we repaid an
      aggregate of $1.3 million of these notes with the proceeds from a private
      offering inclusive of interest and discount of which $1.2 million was repaid
      to
      a related party.





On
      January 28, 2008 we received $2,800,000 for the purchase of 1,750,000 units
      of
      our securities consisting of 1,750,000 shares of common stock and stock purchase
      warrants (20% warrant coverage) in connection with a private placement offering.
      The proceeds of the private placement were used primarily for working capital
      purposes including (i) repayment of outstanding current indebtedness including
      approximately $1.3 million in bridge financing incurred with the Securities
      Purchase Agreement inclusive of accrued interest and discount, (ii) payment
      of
      other outstanding obligations, and (iii) funding anticipated working capital
      requirements including product development and the acquisition of tooling and
      molds. The private placement is currently extended through a final closing
      date
      of May 31, 2008 for a maximum aggregate placement of $5,500,000. We have
      received a letter from the Investor, the purchaser of 1,250,000 units in the
      private placement, committing the Investor to subscribe and pay $2,000,000
      for
      an additional 1,250,000 units by May 31, 2008.


29





We
      recognize that we must generate additional revenue and sufficient gross profit
      margins to achieve profitable operations. Management's plans to increase
      revenues include the continued building of its customer base capitalizing on
      successful product introductions in 2007 resulting in anticipated volume
      increases of more than 200%, or five (5) million pieces per annum for 2008
      and
      2009, from current customers; the addition of firm commitments from new
      customers totaling more than twenty (20) million units for the combined 2008
      and
      2009 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 commenced production at Jarden, a domestic manufacturing facility
      in the United States in November 2007, and will be commencing production in
      Germany at Seidel for our new 20mm size dispenser in the third calendar quarter
      of 2008. We believe that the capital received to date from previous financings
      and anticipated to be received by May 31, 2008 may not be sufficient to meet
      financial obligations in regard to the capital equipment commitments required
      to
      expand our product line and increase production capacity and to fund operations
      during the next twelve months. Additional debt or equity financing may be
      required which may include equipment financing under a sale or sale/leaseback
      agreement, receivables or purchase order financing, and possible amortization
      of
      a portion of construction costs through our production partners.





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.





The
      following is a table summarizing our significant commitments as of March 31,
      2008, consisting of equipment commitments, debt repayments, royalty payments
      and
      future minimum lease payments with initial or remaining terms in excess of
      one
      year for the next fiscal 5 years.





**Contractual Obligations**
              **(in
                millions):**
            
            **Total**
            
            **FYE 2008**
            
            **FYE**
              **2009-2010**
            
            **FYE**
              **2011-2012**
            
            **FYE 2013 and
                Thereafter**Convertible
                Debt and interest
            
            $
            10.6
            
            $
            0.2
            
            $
            10.4
            
            $
            -
            
            $
            -Notes
                and interest - related parties
            
            
            2.7
            
            
            2.7Other
                notes and interest
            
            
            0.2
            
            
            0.2Royalties
                including arrears
            
            
            15.9
            
            
            
            
            
            1.9
            
            
            1.3
            
            
            12.7Equipment
                obligations and leases
            
            
            2.5
            
            
            1.9
            
            
            0.6Tooling
                Amortization
            
            
            4.0
            
            
            0.4
            
            
            3.6Operating
                lease
            
            
            0.2
            
            
            0.1
            
            
            0.1$
            36.1
            
            $
            5.5
            
            $
            16.6
            
            $
            1.3
            
            $
            12.7





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.


30





There
      can
      be no assurance that we will be successful in building our customer base and
      product line or that the available capital will be sufficient to fund current
      operations and to meet financial obligations as related to capital expenditures
      until such time that the 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 the financial position, results of operations and cash flows.
      The unaudited consolidated financial statements do not include any adjustments
      that might be necessary if we are unable to continue as a going
      concern.


31


**ITEM
      3. CONTROLS AND PROCEDURES**





Under
      the
      supervision and with the participation of management, including our Chief
      Executive Officer, who serves as our Principle Executive Officer and Principle
      Financial Officer and our Controller, who serves as our Principle Accounting
      Officer, we conducted an evaluation of the Company's effectiveness of disclosure
      controls and procedures (as defined in Rule 13a-15(e) under the Securities
      Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
      period covered by this Quarterly Report on Form 10-QSB. Based upon that
      evaluation, our Chief Executive Officer and the Controller concluded that as
      of
      the end of the period covered by this report our disclosure controls and
      procedures are ineffective to ensure that information required to be disclosed
      in our reports filed or submitted under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the SEC's rules
      and
      forms and are also ineffective to ensure that information required to be
      disclosed in our reports filed or submitted under the Exchange Act is
      accumulated and communicated to the Company's management, including the
      principal executive and principal financial officers, to allow timely decisions
      regarding required disclosure.





In
      connection with the preparation of this Quarterly Report on Form 10-QSB,
      management identified a material weakness due to insufficient resources in
      the
      accounting and finance department. Due to the lack of resources that are
      appropriately qualified in the areas of U.S. GAAP and SEC financial reporting,
      and the potential impact on the consolidated financial statements and related
      disclosures and the importance of the interim financial closing and reporting
      process, in the aggregate, there is more than a remote likelihood that a
      material misstatement of the interim consolidated financial statement would
      not
      have been prevented or detected.


32




**PART
      II. OTHER INFORMATION**




**ITEM
      1. Legal Proceedings**




None




**ITEM
      2. Unregistered Sales of Equity Securities**




Previously
      reported on Form 8-K filed with the SEC on February 1, 2008.




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 and Reports on Form 8-K**




(A)
      Exhibits


4.17
            Amendment
                No. 1 dated July 9, 2007 to the Line of Credit Agreement between
                the
                Company and Fursa Alternative Strategies, LLC.
                (2)


4.18
            Form
                of Note issued in connection with Amendment No. 1 to the Line of
                Credit
                (2)


4.19
            Securities
                Purchase Agreement dated as of August 30, 2007 between the Company
                and the
                Lenders Named Herein. (3)


4.20
            Agreement
                dated February 28, 2008 between the Versadial, Inc. and Fursa Master
                Global Event Driven Fund, L.P. (5)


4.21
            Agreement
                dated March 31, 2008 between the Versadial, Inc. and Fursa Master
                Global
                Event Driven Fund, L.P. (6)


10.15
            Master
                Supply Agreement dated July 10, 2007 between Versadial, Inc. and
                Avon
                Products, Inc. (1)


10.16
            Amendment
                No. 3 dated September 18, 2007 to the Sublicense, Development and
                Technology Transfer Agreement dated May 1, 2005 between Innopump,
                Inc. and
                Sea Change Group, LLC. (3)


10.17
            Amendment
                No. 2 as to Payment Terms dated September 18, 2007 to the Amended
                and
                Restated License Agreement dated January 1, 2003 between Sea Change
                Group,
                LLC and Gerhard Brugger. (3)


10.18
            Credit
                Memo dated May 8, 2007 between Versadial, Inc. and Avon Products,
                Inc.
                (4)


10.19
            Amendment
                No. 4 dated January 15, 2008 to the Sublicense, Development and Technology
                Transfer Agreement dated May 1, 2005 between Innopump, Inc. and Sea
                Change
                Group, LLC.(4)


10.20
            Amendment
                No. 3 as to Payment Terms dated March 14, 2008 to the Amended and
                Restated
                License Agreement dated January 1, 2003 between Sea Change Group,
                LLC and
                Gerhard Brugger. *




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.*


33




*
      Filed
      herewith





(1)
            Incorporated
                by reference to Exhibit 10.1 of Form 8-K of the Company filed on
                July 16,
                2007.


(2)
            Incorporated
                by reference to Exhibit 10.1 and Exhibit 10.2 of Form 8-K of the
                Company
                filed on July 12, 2007.


(3)
            Incorporated
                by reference to same Exhibit No. on Form 10-KSB of the Company filed
                on
                October 15, 2007.


(4)
            Incorporated
                by reference to same Exhibit No. on Form SB-2/A of the Company filed
                on
                January 23, 2008.


(5)
            Incorporated
                by reference to Exhibit 1 of Form 8-K of the Company filed on March
                4,
                2008.


(6)
            Incorporated
                by reference to Exhibit 1 of Form 8-K of the Company filed on April
                8,
                2008.





(B)
      Reports on Form 8-K





Current
      reports on Form 8-K during the quarter ended March 31, 2008 are as
      follows:





·
            Report
                on Form 8-K filed with the SEC on February 1, 2008, announcing under
                Item
                3.02 the issuance of equity securities pursuant to a private placement
                offering and for the conversion of secured line of credit notes between
                the Registrant and Fursa Alternative Strategies, LLC.





·
            Report
                on Form 8-K filed with the SEC on March 4, 2008, reporting under
                Items
                1.01 and 3.02 the entering into an agreement between the Registrant
                and
                Fursa Master Global Event Driven Fund, L.P. (“Fursa”) reconfirming Fursa’s
                obligation of its commitment to participate in the Registrant’s private
                placement offering and extending the due date of the obligation and
                extending the maturity date of the Company’s 10% Senior Convertible
                Redeemable Promissory Debentures held by Fursa.





·
              Report
                  on Form 8-K filed with the SEC on April 8, 2008, reporting under
                  Items
                  1.01 and 3.02 the entering into an agreement between the Registrant
                  and
                  Fursa Master Global Event Driven Fund, L.P. reconfirming Fursa’s
                  obligation of its commitment to participate in the Registrant’s private
                  placement offering and extending the due date of the obligation.


34





**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 20th day of May 2008.





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


35