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


Washington,
      D.C. 20549




**FORM
      10-QSB**


(Mark
      One)




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


**EXCHANGE
      ACT OF 1934**




For
      the
      Quarterly period ended December 31, 2007




**oTRANSITION
      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 
      xNo o







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




Yes oNo
x




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




Indicate
      the number of shares outstanding of each of the issuer's class of common stock,
      as of the latest practicable date: 18,309,194 shares of common stock, par value
      $0.0001 per share, as of February 19, 2008.







**VERSADIAL,
      INC.**


FORM
      10-QSB


QUARTERLY
      REPORT


For
      the Six Months Ended December 31, 2007





**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
              5-19Item
                  2. Management's Discussion and Analysis of Financial Condition
                  and Resultsof
                   Operations
              20-29Item
                  3. Controls and Procedures
              30Part
                  II. - Other Information
              31-32Signatures
              33Exhibit
                  31Exhibit
                  32







**Item
          1. Financial Statements**
 
 **VERSADIAL,
          INC.**
 
 **CONSOLIDATED
          BALANCE SHEET**
 **December
                    31,**
                  **2007****(unaudited)****ASSETS****Current
                    assets**Cash
                
                $
                172,177Due
                    from affiliates
                
                
                23,364Accounts
                    receivable
                
                
                712,185Sublease
                    and other receivable
                
                
                50,651Inventories
                
                
                543,901Prepaid
                    expenses and other current assets
                
                
                257,481Total
                    current assets
                
                
                1,759,759**Property
                    and equipment,**net
                
                
                4,233,078**Other
                    assets**Deposits
                    on production equipment
                
                
                4,653,392Deferred
                    financing costs
                
                
                367,776Deferred
                    registration costs
                
                
                63,069Security
                    deposit
                
                
                34,155Total
                    other assets
                
                
                5,118,392$
                11,111,229**LIABILITIES
                    AND STOCKHOLDERS' DEFICIT****Current
                    liabilities**Note
                    and interest payable, net of debt discount of $43,256
                
                $
                2,312,285Notes
                    and interest payable, related parties, net of debt discount of
                    $44,202
                
                
                3,832,622Interest
                    payable on convertible note
                
                
                106,771Due
                    to licensor
                
                
                634,534Accounts
                    payable and accrued expenses
                
                
                3,449,952Capital
                    lease obligations, current portion
                
                
                1,686,775Due
                    to related parties
                
                
                286,145Deferred
                    revenue
                
                
                231,406Customer
                    deposits
                
                
                18,911Total
                    current liabilities
                
                
                12,559,401**Long-term
                    liabilities**Convertible
                    note and interest payable, net of debt discount of
                    $280,659
                
                
                8,236,292Customer
                    advance
                
                
                1,700,000Capital
                    lease obligations
                
                
                785,881Derivative
                    financial instruments
                
                
                2,277,307Sublease
                    security deposit, affiliate
                
                
                6,83013,006,310**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, 15,309,194
                      issued
                      and outstanding
                
                
                1,531Additional
                    paid-in-capital
                
                
                4,285,390Accumulated
                    deficit
                
                
                (18,741,403
                )Total
                    stockholders' deficit
                
                
                (14,454,482
                )$
                11,111,229
  See
          accompanying condensed notes to unaudited consolidated financial
          statements
  1
  **VERSADIAL,
          INC.**
  **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **Six
                  Months Ended**
              
              **Three
                  Months Ended****December
                  31,**
              
              **December
                  31,****2007**
              
              **2006**
              
              **2007**
              
              **2006******
              
              **(unaudited)**
              
              **(unaudited)**
              
              **(unaudited)**
              
              **(unaudited)****Net
                  revenues**
              
              $
              1,171,974
              
              $
              440,970
              
              $
              1,023,287
              
              $
              421,495**Cost
                  of revenues**Direct
                  costs
              
              
              1,166,487
              
              
              413,691
              
              
              875,498
              
              
              391,926Indirect
                  costs
              
              
              850,711
              
              
              315,872
              
              
              429,208
              
              
              166,9322,017,198
              
              
              729,563
              
              
              1,304,706
              
              
              558,858**Gross
                  margin**
              
              
              (845,224
              )
              
              (288,593
              )
              
              (281,419
              )
              
              (137,363
              )**Operating
                  expenses**General
                  and administrative
              
              
              1,583,361
              
              
              1,483,709
              
              
              795,724
              
              
              786,531**Loss
                  from operations**
              
              
              (2,428,585
              )
              
              (1,772,302
              )
              
              (1,077,143
              )
              
              (923,894
              )**Other
                  income (expenses)**Sublease
                  income, affiliates
              
              
              24,330
              
              
              19,248
              
              
              11,415
              
              
              9,624Interest
                  expense
              
              
              (896,958
              )
              
              (586,306
              )
              
              (417,739
              )
              
              (325,301
              )Interest
                  expense, related parties
              
              
              (81,112
              )
              
              (55,874
              )
              
              (55,335
              )
              
              (23,997
              )Amortization
                  of debt discount
              
              
              (404,035
              )
              
              (261,503
              )
              
              (213,808
              )
              
              (225,289
              )Amortization
                  of financing costs
              
              
              (220,644
              )
              
              (158,836
              )
              
              (95,322
              )
              
              (84,000
              )Gain
                  (loss) on derivative financial instruments
              
              
              189,898
              
              
              (44,136
              )
              
              716,799
              
              
              (44,136
              )Loss
                  on foreign currency exchange
              
              
              (94,625
              )
              
              (21,503
              )
              
              (61,451
              )
              
              (17,496
              )(1,483,146
              )
              
              (1,108,910
              )
              
              (115,441
              )
              
              (710,595
              )**Net
                  loss**
              
              $
              (3,911,731
              )
              $
              (2,881,212
              )
              $
              (1,192,584
              )
              $
              (1,634,489
              )**Weighted
                  average common shares outstanding**Basic
              
              
              14,813,696
              
              
              12,744,150
              
              
              15,309,194
              
              
              13,299,484Diluted
              
              
              17,054,321
              
              
              13,219,506
              
              
              17,549,819
              
              
              13,539,095**Loss
                  per common share**Basic
                  and Diluted
              
              $
              (0.26
              )
              $
              (0.23
              )
              $
              (0.08
              )
              $
              (0.12
              )
 *See
          accompanying condensed notes to unaudited consolidated financial
          statements*
  2
 **VERSADIAL,
          INC.**
 
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
  **Six
                    Months Ended**
                  **December
                    31,****2007**
                
                **2006****(unaudited)**
                
                **(unaudited)****Cash
                    flows from operating activities**Net
                    loss
                
                $
                (3,911,731
                )
                $
                (2,881,212
                )Adjustments
                    to reconcile net loss to net cash used
                    in operating activities:Depreciation
                    and amortization
                
                
                467,385
                
                
                168,343Amortization
                    of debt discount
                
                
                404,035
                
                
                261,503Amortization
                    of financing costs
                
                
                220,644
                
                
                158,836(Gain)
                    loss on derivative financial instruments
                
                
                (189,898
                )
                
                44,136Changes
                    in operating assets and liabilities:Due
                    from affiliates
                
                
                6,175
                
                
                808Accounts
                    receivable
                
                
                (487,201
                )
                
                (208,568
                )Sublease
                    and other receivable
                
                
                3,431
                
                
                -Inventories
                
                
                (50,651
                )
                
                (473,872
                )Prepaid
                    expenses and other current assets
                
                
                (193,193
                )
                
                (114,023
                )Due
                    to licensor
                
                
                202,414
                
                
                157,426Accounts
                    payable and accrued expenses
                
                
                1,819,413
                
                
                827,474Due
                    to related parties
                
                
                90,196
                
                
                8,945Deferred
                    revenue
                
                
                231,406Customer
                    deposits
                
                
                -
                
                
                (10,618
                )Interest
                    payable
                
                
                797,442
                
                
                746,573**Net
                    cash used in operating activities**
                
                
                (590,133
                )
                
                (1,314,249
                )**Cash
                    flows from investing activities**Purchase
                    of equipment
                
                
                (251,586
                )
                
                (1,379,506
                )Payments
                    of deposits on production equipment
                
                
                (2,232,879
                )
                
                -Payments
                    for merger costs
                
                
                -
                
                
                (142,919
                )Payments
                    for registration costs
                
                
                (38,054
                )Distributions
                    to investors
                
                
                -
                
                
                (12,663
                )Net
                    cash acquired from merger
                
                
                -
                
                
                95**Net
                    cash used in investing activities**
                
                
                (2,522,519
                )
                
                (1,534,993
                )**Cash
                    flows from financing activities**Proceeds
                    from issuance of convertible note
                
                
                -
                
                
                1,706,846Proceeds
                    from issuance of notes, related parties
                
                
                2,225,000Proceeds
                    from issuance of notes
                
                
                1,200,000Proceeds
                    from customer advance
                
                
                
                
                
                700,000Payment
                    on notes payable to related parties
                
                
                -
                
                
                (30,000
                )Payments
                    for financing costs
                
                
                (30,000
                )Payments
                    on equipment leases
                
                
                (244,532
                )**Net
                    cash provided by financing activities**
                
                
                3,150,468
                
                
                2,376,846**Net
                    increase (decrease) in cash**
                
                
                37,816
                
                
                (472,396
                )**Cash,
                    beginning of period**
                
                
                134,361
                
                
                917,296**Cash,
                    end of period**
                
                $
                172,177
                
                $
                444,900
  *See
          accompanying condensed notes to unaudited consolidated financial
          statements*
  3
  **VERSADIAL,
          INC.**
  **CONSOLIDATED
          STATEMENTS OF CASH FLOWS (CONTINUED)**
  **Six
                    Months Ended****December
                    31,****2007**
                
                **2006****(unaudited)**
                
                **(unaudited)****Supplemental
                    disclosure of cash flow information,**cash
                    paid during the period for interest
                
                $
                168,756
                
                $
                427,423**Supplemental
                    disclosure of non-cash investing and
                    financing, **activities:****Convertible
                    debentures converted to common stock
                
                $
                2,000,000
                
                $
                1,200,000Interest
                    paid in common stock
                
                $
                796,687
                
                $
                -Interest
                    converted to principal on convertible debenture
                
                $
                187,500
                
                $
                -Debt
                    discount related to convertible note
                
                $
                -
                
                $
                635,142Purchase
                    of equipment financed by lease obligation
                
                $
                2,465,730
                
                $
                -Reclassification
                    of deposit on equipment to equipment
                
                $
                147,493
                
                $Reclassification
                    of deferred financing cost to accounts payable
                
                $
                
                
                $
                175,000Issuance
                    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




**VERSAIDAL,
      INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2007**





**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 financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America, which
      contemplate continuation of the Company as a going concern. At December 31,
      2007, the Company has incurred cumulative losses of approximately $18.7 million
      since inception and utilized cash of approximately $.6 million for operating
      activities during the six months ended December 31, 2007. The Company has a
      working capital deficit of approximately $10.8 million and a stockholders’
deficit of approximately $14.5 million as of December 31, 2007.





At
      December 31, 2007, current liabilities include $1.6 million due to shareholders
      on February 28, 2008 which management believes will be extended if necessary
      prior to maturity. Current liabilities also include approximately $2.0 million
      (before debt discount) in notes due on February 1, 2008 which were converted
      to
      equity on January 28, 2008 (see Notes 10 and 18). Accounts payable of
      approximately $3.4 million includes approximately $840,000 for the purchase
      of
      equipment which the Company is seeking to obtain financing for under a leasing
      or possible sale/leaseback agreement and approximately $500,000 in accounts
      payable is related to development costs for the construction of new equipment
      for which the Company is seeking to enter into an amortization deferral
      agreement with the supplier of the equipment (see Note 16). Current capital
      lease obligations of approximately $1.5 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 12 and 16). In addition, approximately $2.4 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
      18).


5


**VERSAIDAL,
        INC.**
 **NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
        31, 2007**




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, (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. As of
      December 31, 2007, the Company has received net proceeds of $2.4 million in
      regards to the notes of which $2.2 million was received from a related party
      (see Notes 8 and 18).





On
      January 28 th ,
      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 will be used primarily for working capital
      purposes including (i) repayment of outstanding current indebtedness of the
      Company including approximately $2.5 million in bridge financing incurred with
      the Securities Purchase Agreement in 2007 inclusive of accrued interest and
      discount, (ii) payment of other outstanding obligations, and (iii) funding
      anticipated working capital requirements including product development,
      acquisition of tooling and molds. The private placement is currently extended
      through a final closing date of February 28, 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., 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 February 28,
      2008.





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 should be fully operational by February 2008. Management
      believes that the capital received to date from previous financings and
      anticipated to be received by February 28 th ,
      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 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 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 2007
      and 2006 refer to the fiscal years ended 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




**VERSAIDAL,
      INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2007**




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 15).





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
      six
      months ended December 31, 2007 and 2006. The results of operations for the
      first
      six 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 six months
      ended December 31, 2007 and 2006. For the six months ended December 31, 2007
      the
      operations of SCG consisted of approximately $(29,000) in net loss derived
      from
      an aggregate of $35,000 in royalty fees from the Company, net of interest and
      other operating expenses. For the six months ended December 31, 2006 the
      operations of SCG consisted of approximately $64,000 in net income derived
      from
      a $150,000 license fee from the Company, net of interest and other operating
      expenses. SCG’s assets at December 31, 2007 approximated $149,000 consisting
      mainly of sublease income receivable, royalties receivable from the Company
      and
      a security deposit on a lease. SCG’s liabilities at December 31, 2007
      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 December 31, 2007.


7


**VERSAIDAL,
          INC.**
 **NOTES
          TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
          31, 2007**


*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 December 31, 2007.


8


**VERSAIDAL,
        INC.**
 **NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
        31, 2007**




*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 financial statements.


9




**VERSAIDAL,
        INC.**
 **NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
        31, 2007**


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.





**4.**
            **Inventories**





Inventories
      consist of the following at December 31, 2007:




**December
                31,****2007**Raw
                materials
            
            $
            319,005Work-in-process
            
            
            35,739Finished
                goods
            
            
            189,157$
            543,901





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





Property
      and equipment consist of the following at December 31, 2007:




**December
                31,****2007**Machinery
                and equipment
            
            $
            2,183,594Molds
            
            
            3,514,836Computer
                equipment
            
            
            11,3565,709,786Less
                accumulated depreciation
            
            
            1,476,708$
            4,233,078





Depreciation
      and amortization expense amounted to approximately $467,000 and $168,000 for
      the
      six months ended December 31, 2007 and 2006, respectively and approximately
      $264,000 and $87,000 for the three months ended December 31, 2007 and 2006,
      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 December 31, 2007, the Company recognized no adjustments for
      uncertain tax provisions.


10




**VERSAIDAL,
        INC.**
 **NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
        31, 2007**


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





Deposits
      on production equipment consist of the following at December 31,
      2007:





**Amount at**
              **December 31, 2007**
            
            **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
            
            
            3,271,059
            
            
            4,150,000
                (b
            )$
            4,653,392
            
            $
            5,815,924




(a)
            Equipment
                was received in December 2007 and a net obligation of approximately
                $840,000 is included in current liabilities
                (see Note 16). (b)
            Upon
                completion of construction of molds, approximately $880,000 of balance
                will be financed through a capital lease to be paid monthly through
                March
                2009 (see Note 16).





**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 Master Global Event Driven, Fund, LP (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 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. At December 31, 2007, the Company had
      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 six and three months ended December 31, 2007,
      approximately $29,000 and $26,000 was charged to operations, respectively.
      Interest expenses approximated $39,000 and $36,000 for the six and three months
      ended December 31, 2007. (see Note 18).





**9.**
            **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 Notes
      10
      and 18).





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.


11


**VERSAIDAL,
        INC.**
 **NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
        31, 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.





**10.**
            **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 9) 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 Notes 9 and 18) at a conversion price of
      $1.60 per share, the offering price of the Company’s private
      placement.




**11.**
            **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.





**12.**
            **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 16).


12




**VERSAIDAL,
      INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2007**




These
      Agreements provide that the Supplier will fund the estimated $4.8 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 six months ended December 31, 2007, molds and equipment in the aggregate
      of
      approximately $2.464 million were completed, utilized in production and
      capitalized by the Company. For the six and three months ended December 31,
      2007, amortization of the molds and equipment approximated $156,000 and $14,000,
      respectively. The Company estimates that two thirds (2/3) or approximately
      $1.54
      million will be amortized over the next 12 months and the remaining balance
      of
      approximately $768,000 during fiscal 2009 based on production
      forecasts.





**13.**
            **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",
      warrants issued by the Company meet the requirements of and are accounted for
      as
      a liability since the warrants contain registration rights where Liquidated
      Damages Warrants would be required to be issued to the holder in the event
      the
      Company failed to receive and maintain an effective registration.





The
      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).





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 $2,277,307 at December 31, 2007. The derivative
      gain
      (loss) for the six and three months ended December 31, 2007 and the year ended
      June 30, 2007 approximated $190,000, $717,000 and $(992,000), respectively.





**14.**
            **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 is to close on February 28, 2008 (see Note 18). The Company will have
      the
      right to pre-pay any of the past due royalties at any time without premium
      or
      penalty.


13




**VERSAIDAL,
      INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2007**




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. All payments were
      paid when due through December 31, 2007. At December 31, 2007, the licensor
      is
      due royalties of approximately $629,000 and expense reimbursements of
      approximately $5,000.





*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 (see
      Note 18).





**15.**
            **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.





*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.


14




**VERSAIDAL,
      INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2007**




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 9 and 10).





On
      January 28 th ,
      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 February 28,
      2008 for a maximum aggregate placement of $5,500,000 (see Note 18).





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 9, 10 and
      18).




*Loss
      Per Share*





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





At
      December 31, 2007, the basic loss per common share does not include an aggregate
      of 3,778,834 warrants outstanding and 6,373,415 shares issuable under the terms
      of convertible debt. The effect of these securities would be antidilutive.
      These
      warrants are currently exercisable at prices that range between $.94-$2.475
      and
      expire between August 9, 2011 and February 1, 2012. At December 31, 2007,
      diluted loss per common share includes 2,240,625 shares as calculated using
      the
      treasury stock method for proceeds that would have been received from the
      exercise of convertible debt and warrants as if they were used to purchase
      common stock at the average market price during the period.





**16.**
            **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 $4.15
      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 December 31, 2007,
      the Company has an outstanding balance of approximately $162,000 due on the
      remaining capital lease. As of December 31, 2007, the Company has incurred
      total
      costs of approximately $2.541 million for the production molds which are
      included in deposits on production equipment (see Note 7) and has an outstanding
      current liability of approximately $730,000 due to the contractor. Upon
      completion of construction of the production molds, the remaining balance due
      the contractor of approximately $880,000 will be financed through a capital
      lease to be paid monthly through March 2009. In addition, the Company is trying
      to enter into an amortization agreement with the contractor to defer
      approximately $500,000 of the current obligation due until production commences.
      It is anticipated that production will commence by the second quarter of
      calendar 2008.


15




**VERSAIDAL,
      INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2007**




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 second 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 estimated $4.8 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 six months ended December 31, 2007, molds and equipment in the aggregate
      of
      approximately $2.464 million were completed, utilized in production and
      capitalized by the Company. For the six and three months ended December 31,
      2007, amortization of the molds and equipment approximated $156,000 and $14,000,
      respectively. The Company estimates that two thirds (2/3) or approximately
      $1.54
      million will be amortized over the next 12 months and the remaining balance
      of
      approximately $768,000 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.


16




**VERSAIDAL,
      INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2007**




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 second quarter of calendar of 2008.





**17.**
            **Major
                customers and segment
                information**





*Major
      customers*





Customers
      accounting for 10% or more of revenue for the six and three months ended
      December 31, 2007 and 2006 are as follows:





**Six
                months**
              **ending**
              **December 31,**
              **2007**
            
            **Six
                months**
              **ending**
              **December 31,**
              **2006**
            
            **Three
                months**
              **ending**
              **December 31,**
              **2007**
            
            **Three
                months**
              **ending**
              **December 31,**
              **2006**Customer
                A
            
            $
            1,039,000
            
            $
            -
            
            $
            1,012,000
            
            $
            -Customer
                B
            
            
            -
            
            
            305,000
            
            
            -
            
            
            305,000Customer
                C
            
            
            -
            
            
            94,000
            
            
            -
            
            
            94,000$
            1,039,000
            
            $
            399,000
            
            $
            1,012,000
            
            $
            399,000


17


**VERSAIDAL,
      INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2007**


Accounts
      receivable from customer A for 2007 aggregated approximately $624,000 at
      December 31, 2007.





*Segment
      information*





Assets,
      classified by geographic location are as follows at December 31,
      2007:





United
                States
            
            $
            4,224,431Other
                countries
            
            
            6,886,798$
            11,111,229





Assets
      in
      other countries are primarily inventory and equipment which are located at
      subcontractor production facilities in Germany and amounts classified as
      deposits on production equipment.





Revenue,
      classified by the major geographic areas was as follows:




Six months ending
              December 31, 2007
            
            Six months ending
              December 31, 2006
            
            Three months ending
              December 31, 2007
            
            Three months ending
              December 31, 2006United
                States
            
            $
            1,113,131
            
            $
            418,704
            
            $
            1,012,161
            
            $
            399,229Other
                countries
            
            
            58,843
            
            
            22,266
            
            
            11,126
            
            
            22,266$
            1,171,974
            
            $
            440,970
            
            $
            1,023,287
            
            $
            421,495




**18.**
            **Subsequent
                events**





*Additional
      Financing - Private Placement*





On
      January 28 th ,
      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 proceeds of the private
      placement will be used primarily for working capital purposes including (i)
      repayment of outstanding current indebtedness of the Company including
      approximately $2.5 million in bridge financing incurred with the Securities
      Purchase Agreement in 2007 inclusive of accrued interest and discount, (ii)
      payment of other outstanding obligations, and (iii) funding anticipated working
      capital requirements including product development, acquisition of tooling
      and
      molds.





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 February 28, 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.,
      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 February 28, 2008.





A
      5%
      commitment fee will be payable to Fursa Master Global Event Driven Fund, L.P.,
      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 Fursa
      Master Global Event Driven Fund, L.P.


18


**VERSAIDAL,
      INC.**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2007**




*Debt
      Extension*




The
      Company has an outstanding note in the principal amount of $104,284 which bears
      interest at 8% and matured, as amended, on December 31, 2007. The lender has
      agreed to extend the maturity date, under the same terms and conditions as
      the
      original note, to February 28, 2008.





*Debt
      Conversion*





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 Notes 9 and 10) at a conversion price of
      $1.60 per share, the offering price of the Company’s private
      placement.





*Sublicense
      Agreement*





On
      January 15, 2008 the sublicense agreement between SCG and the Company was
      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
      (see Note 14).


19




**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 2007 and 2006
      refer to the fiscal years ended 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 six months
      ended December 31, 2007 and subsequent to December 31, 2007:


20


·
            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 thetermsof
                a Securities Purchase Agreement in exchange for $7.5 million in cash.
                The
                Convertible Debt matures 30 months after the date of issuance (“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% ($9.2 million at December 31, 2007) 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 $4.15 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 December 31, 2007, we
                have an
                outstanding balance of approximately $162,000 due on the remaining
                capital
                lease. As of December 31, 2007, we have incurred total costs of
                approximately $2.541 million for the production molds and we have
                an
                outstanding current liability of approximately $730,000 due to the
                contractor.Upon
                completion of construction of the production molds, the remaining
                balance
                due the contractor of approximately $880,000 will be financed through
                a
                capital lease to be paid monthly through March 2009. In addition,
                the
                Company is trying to enter into an amortization agreement with the
                contractor to defer approximately $500,000 of the current obligation
                due
                until production commences. It is anticipated that production will
                commence by the second 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 second 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 is due on February 1, 2008
                but may be extended for an additional 3 months. The line bears interest
                at
                a rate equal to the three month LIBOR rate plus 700 basis points
                (12.4% at
                June 30, 2007). 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. As of December 31, 2007, we had an outstanding
                balance
                of $2.0 million due on the credit line. 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.




21


These
      Agreements provide that the Supplier will fund the estimated $4.8 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.





During
      the six months ended December 31, 2007, molds and equipment in the aggregate
      of
      approximately $2.464 million were completed, utilized in production and
      capitalized. For the six and three months ended December 31, 2007, amortization
      of the molds and equipment approximated $156,000 and $14,000, respectively.
      We
      estimate that two thirds (2/3) or approximately $1.54 million will be amortized
      over the next 12 months and the remaining balance of approximately $768,000
      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 second 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
                of the
                Notes, (b) the date on which the 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. At December
                31, 2007, 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 28th,
                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 a private placement offering. The proceeds
                of
                the private placement will be used primarily for working capital
                purposes
                including (i) repayment of outstanding current indebtedness including
                approximately $2.5 million in bridge financing incurred with the
                Securities Purchase Agreement in 2007 inclusive of accrued interest
                and
                discount, (ii) payment of other outstanding obligations, and (iii)
                funding
                anticipated working capital requirements including product development,
                acquisition of tooling and molds. 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 February 28, 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.,
      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 February 28, 2008.


22


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 six months ended
      December 31, 2007 and 2006:





Overall,
      our revenue grew substantially by 166% during the six months ended December
      31,
      2007 as compared to the six months ended December 31, 2006 as our operations
      began to grow in the skincare and cosmetic sectors. Our direct costs were 99%
      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 became
      operational in late 2007. 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 second 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.


23


*Six
      Months Ended December 31, 2007 and 2006*





**For
                the six months ended December 31,**
            
            **2007**
            
            **2006**
            
            **CHANGE****Net
                revenues**
            
            $
            1,171,974
            
            $
            440,970
            
            
            166
            %**Cost
                of revenues**Direct
                costs
            
            
            1,166,487
            
            
            413,691
            
            
            182
            %Indirect
                costs
            
            
            850,711
            
            
            315,872
            
            
            169
            %2,017,198
            
            
            729,563
            
            
            176
            %**Gross
                margin**
            
            
            (845,224
            )
            
            (288,593
            )
            
            193
            %**Operating
                expenses**General
                and administrative
            
            
            1,583,361
            
            
            1,483,709
            
            
            7
            %**Loss
                from operations**
            
            
            (2,428,585
            )
            
            (1,772,302
            )
            
            37
            %**Other
                income (expenses)**Sublease
                income, affiliates
            
            
            24,330
            
            
            19,248
            
            
            26
            %Interest
                and other expense
            
            
            (896,958
            )
            
            (586,306
            )
            
            53
            %Interest
                expense, related parties
            
            
            (81,112
            )
            
            (55,874
            )
            
            45
            %Amortization
                of debt discount
            
            
            (404,035
            )
            
            (261,503
            )
            
            55
            %Amortization
                of financing costs
            
            
            (220,644
            )
            
            (158,836
            )
            
            39
            %Gain
                (loss) on derivative financial instruments
            
            
            189,898
            
            
            (44,136
            )
            
            -530
            %Loss
                on foreign currency exchange
            
            
            (94,625
            )
            
            (21,503
            )
            
            340
            %(1,483,146
            )
            
            (1,108,910
            )
            
            34
            %**Net
                loss**
            
            $
            (3,911,731
            )
            $
            (2,881,212
            )
            
            36
            %




REVENUES.
      During the six months ended December 31, 2007, we had revenues of $1,171,974
      as
      compared to revenues of $440,970 during the six months ended December 31, 2006,
      an increase of approximately 166%. In 2007, 89% of the revenue was primarily
      attributable to one customer in the cosmetic industry. In 2006, 90% 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 $1,166,487 (99% of revenues) for the six months
      ended December 31, 2007 as compared to $413,691 (94% of revenues) for the six
      months December 31, 2006. The increase 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. Cost of revenues - indirect costs, which
      consist of indirect labor, quality control costs, factory maintenance, product
      development and depreciation, were $850,711 for the six months ended December
      31, 2007 as compared to $315,872 for the six months ended December 31, 2006.
      The
      increase was due primarily to increased depreciation of approximately $300,000
      due to the purchase of more manufacturing equipment, for additional costs for
      runoff testing of parts of approximately $82,000 needed to validate the new
      U.S.
      equipment, and for additional labor for testing and development in 2007 as
      compared to 2006. Gross margin was a deficit of $(845,224) for the six months
      ended December 31, 2007 as compared to a deficit of $(288,593) for the six
      months ended December 31, 2006 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 operational in late 2007 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.


24


OPERATING
      EXPENSES. General and administrative expenses totaled $1,583,361 for the six
      months ended December 31, 2007, as compared to $1,483,709 for the six months
      ended December 31, 2006, an increase of approximately 7%. This increase of
      approximately $100,000 is primarily attributable to an increase in the technical
      consultant fee and royalties due the licensor under contract of $50,000, and
      an
      increase in consulting fees of $50,000 as more general consultants were used
      in
      2007 for sales, design work and other administrative functions.





NET
      LOSS.
      We had a net loss of $3,911,731 for the six months ended December 31, 2007
      as
      compared to $2,881,212 for the six months ended December 31, 2006, an increase
      of approximately $1,031,000. The increase in net loss is attributable to the
      increases in general and administrative and cost of revenues as described above.
      In addition, interest expense and amortization of debt/financing costs increased
      by approximately $539,000 in 2007 due to increased debt obligations. 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.




*Three
      Months ended December 31, 2007 and 2006*





**For
                the three months ended December 31,**
            
            **2007**
            
            **2006**
            
            **CHANGE****Net
                revenues**
            
            $
            1,023,287
            
            $
            421,495
            
            
            143
            %**Cost
                of revenues**Direct
                costs
            
            
            875,498
            
            
            391,926
            
            
            123
            %Indirect
                costs429,208
            
            
            166,932
            
            
            157
            %1,304,706
            
            
            558,858
            
            
            133
            %**Gross
                margin**
            
            
            (281,419
            )
            
            (137,363
            )
            
            105
            %**Operating
                expenses**General
                and administrative
            
            
            795,724
            
            
            786,531
            
            
            1
            %**Loss
                from operations**
            
            
            (1,077,143
            )
            
            (923,894
            )
            
            17
            %**Other
                income (expenses)**Sublease
                income, affiliates
            
            
            11,415
            
            
            9,624
            
            
            19
            %Interest
                and other expense
            
            
            (417,739
            )
            
            (325,301
            )
            
            28
            %Interest
                expense, related parties
            
            
            (55,335
            )
            
            (23,997
            )
            
            131
            %Amortization
                of debt discount
            
            
            (213,808
            )
            
            (225,289
            )
            
            -5
            %Amortization
                of financing costs
            
            
            (95,322
            )
            
            (84,000
            )
            
            13
            %Gain
                (loss) on derivative financial instruments
            
            
            716,799
            
            
            (44,136
            )
            
            -1724
            %Loss
                on foreign currency exchange
            
            
            (61,451
            )
            
            (17,496
            )
            
            251
            %(115,441
            )
            
            (710,595
            )
            
            -84
            %**Net
                loss**
            
            $
            (1,192,584
            )
            $
            (1,634,489
            )
            
            -27
            %




25


REVENUES.
      During the three months ended December 31, 2007, we had revenues of $1,023,287
      as compared to revenues of $421,495 during the three months ended December
      31,
      2006, an increase of approximately 143%. In 2007, 99% of the revenue was
      primarily attributable to one customer in the cosmetic industry. In 2006, 95%
      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 $875,498 (86% of revenues) for the three months ended
      December 31, 2007 as compared to $391,926 (93% of revenues) for the three months
      December 31, 2006. The increase 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 began
      to improve in the last fiscal quarter ended December 31, 2007 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 $429,208 for the three months ended December 31, 2007
      as
      compared to $166,932 for the three months ended December 31, 2006. The increase
      was due primarily to increased depreciation of approximately $177,000 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 2007 as compared to 2006. Gross margin was a deficit of
      $(281,419) for the three months ended December 31, 2007 as compared to a deficit
      of $(137,363) for the three months ended December 31, 2006 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 operational
      in
      late 2007 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.





OPERATING
      EXPENSES. General and administrative expenses totaled $795,724 for the three
      months ended December 31, 2007, as compared to $786,531 for the three months
      ended December 31, 2006, an increase of approximately 1%. This increase of
      approximately $9,000 is primarily attributable to an increase in the technical
      consultant fee and 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 $1,192,584 for the three months ended December 31, 2007
      as
      compared to $1,634,489 for the three months ended December 31, 2006, a decrease
      of approximately $441,000. 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 $761,000 as a result of the decrease in the market price of
      our
      common shares at December 31, 2007 as compared to December 31, 2006. In
      addition, interest expense and amortization of debt/financing costs increased
      by
      approximately $124,000 in 2007 due to increased debt obligations. 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 December 31, 2007:





At December 31,
              2007 “Unaudited”Current assets
            
            $
            1,759,759Current
                liabilities
            
            
            12,559,401Working
                capital deficit
            
            $
            (10,799,642
            )


26


At
      December 31, 2007, we had incurred cumulative losses of approximately $18.7
      million since inception and $3.9 million for the six months ended December
      31,
      2007. We have a working capital deficit of approximately $10.8 million and
      a
      stockholders’ deficit of approximately $14.5 million as of December 31, 2007.





During
      the six months ended December 31, 2007, we utilized cash of approximately $.6
      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 $2.5 million from investing activities primarily
      to purchase molds and equipment. We received cash from financing activities
      of
      approximately $3.2 million from the secured credit line and bridge loans under
      the securities purchase agreement. These funds were utilized to purchase
      equipment and cover operating costs. Our cash balance increased by approximately
      $.1 million for the six months ended December 31, 2007.





At
      December 31 2007, current liabilities are approximately $12.6 million which
      includes $1.6 million due to shareholders on February 28, 2008 which we believe
      will be extended if necessary prior to maturity. Current liabilities also
      include approximately $2.0 million (before debt discount) in notes due on
      February 1, 2008 which were converted to equity on January 28, 2008. Accounts
      payable of approximately $3.4 million includes approximately $840,000 for the
      purchase of equipment which we are seeking to obtain financing for under a
      leasing or possible sale/leaseback agreement and approximately $.5 million
      in
      accounts payable is related to development costs for the construction of new
      equipment for which we are seeking to enter into am amortization deferral
      agreement with the supplier of the equipment. Current capital lease obligations
      of approximately $1.5 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. In
      addition, approximately $2.4 million of current liabilities relates to bridge
      loans which will be repaid out of the proceeds form our private placement as
      described below.





Approximately
      $629,000 in current liabilities 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. In calculating the proceeds of a capital
      raise, (i) any bridge loans raised prior to completion of a capital raise and
      actually paid out of the capital raise, and (ii) any debt converted into the
      capital raise shall 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 is to close on February 28, 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. All payments were
      paid when due through December 31, 2007.





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





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, (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. As of
      December 31, 2007, the Company has 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 th ,
      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 will be used primarily for working capital purposes
      including (i) repayment of outstanding current indebtedness including
      approximately $2.5 million in bridge financing incurred with the Securities
      Purchase Agreement in 2007 inclusive of accrued interest and discount, (ii)
      payment of other outstanding obligations, and (iii) funding anticipated working
      capital requirements including product development, acquisition of tooling
      and
      molds. The private placement is currently extended through a final closing
      date
      of February 28, 2008 for a maximum aggregate placement of $5,500,000. We have
      received a letter from Fursa Master Global Event Driven Fund, L.P., 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 February 28, 2008.


27


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 second calendar quarter
      of 2008. We believe that the capital received to date from previous financings
      and anticipated to be received by February 28 th ,
      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 December
      31,
      2007, 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
            
            $
            10.2
            
            $
            0.5
            
            $
            9.7
            
            $
            -
            
            $
            -Notes
                and interest - related parties
            
            
            3.9
            
            
            3.9Secured
                Line of Credit and interest (a)
            
            
            2.1
            
            
            2.1Other
                notes and interest
            
            
            0.4
            
            
            0.4Royalties
                including arrears
            
            
            16.0
            
            
            0.9
            
            
            1.1
            
            
            1.3
            
            
            12.7Equipment
                obligations and leases
            
            
            1.7
            
            
            1.2
            
            
            0.5Tooling
                Amortization
            
            
            4.6
            
            
            1.6
            
            
            3.0Operating
                lease
            
            
            0.2
            
            
            0.1
            
            
            0.1$
            39.1
            
            $
            10.7
            
            $
            14.4
            
            $
            1.3
            
            $
            12.7





(a)
      Converted to equity January 28, 2008.


28





Based
      on
      the current operating plan and available cash and cash equivalents currently
      available, we may need to obtain additional financing through the sale of equity
      securities, private placements, funding from new or existing production
      partners, and/or bridge loans within the next 12 months. Additional financing,
      whether through public or private equity or debt financing, arrangements with
      stockholders or other sources to fund operations, may not be available, or
      if
      available, may be on terms unacceptable to us. The ability to maintain
      sufficient liquidity is dependent on our ability to successfully build our
      customer base and product line with the required capital equipment. If
      additional equity securities are issued to raise funds, the ownership percentage
      of existing stockholders would be reduced. New investors may demand rights,
      preferences or privileges senior to those of existing holders of common stock.
      Debt incurred by us would be senior to equity in the ability of debt holders
      to
      make claims on our assets. The terms of any debt issued could impose
      restrictions on our operations.





There
      can
      be no assurance that we will be successful in building our customer base and
      product line or that 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 accompanying unaudited consolidated financial statements do not include
      any
      adjustments that might be necessary if we are unable to continue as a going
      concern.


29


**ITEM
      3. CONTROLS AND PROCEDURES**





We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our Chief Executive Officer, who serves as our
      Principal Executive Officer and Principal Financial Officer and our Controller,
      who serves as our Principal Accounting Officer, of the effectiveness of the
      design and operation of our disclosure controls and procedures pursuant to
      Exchange Act Rules 13a-15(e) and 15d-15(e). 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
      effective 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 effective 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. During this fiscal quarter, there has been no change in our internal
      control over financial reporting that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.


30


**PART
      II. OTHER INFORMATION**




**ITEM
      1. Legal Proceedings**




None




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




There
      have been no changes in the instruments defining the rights or rights evidenced
      by any class of registered securities.




There
      have been no dividends declared.




**ITEM
      3. Defaults Upon Senior Securities**




None




**ITEM
      4. Submission of Matters to Vote of Security Holders**




None




**ITEM
      5. Other Information**




None




**ITEM
      6. Exhibits 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)


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)




31
      Certification of CEO and CFO pursuant to Securities Exchange Act rules 13a-15
      and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act
      of
      2002.*




32
      Certification of Chief Executive Officer and Chief Financial Officer, pursuant
      to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
      Sarbanes-Oxley Act of 2002.*




*
      Filed
      herewith


31


(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.





(B)
      Reports on Form 8-K





Current
      reports on Form 8-K during the quarter ended December 31, 2007 are as
      follows:





None


32





**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Company has duly caused this report to be signed on its behalf by
      the
      undersigned, thereunto duly authorized on the 19th day of February
      2008.





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


33