**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549




**FORM
      10-KSB**




x**ANNUAL
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE**


**ACT
      OF 1934**




**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2005**




**o  
TRANSITION
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE**


**ACT
      OF 1934**




**FOR
      THE TRANSITION PERIOD FROM ______________ TO
      ________________**




**Commission
      File Number: 0-10147**




**DIATECT
      INTERNATIONAL CORPORATION**


(Name
      of
      small business issuer in its charter)




**California**
            **82-0513109**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)




**875
      South Industrial Parkway, Heber City, Utah 84032**


(Address
      of principal executive offices)





(435)
      654-4370


(Issuer’s
      telephone number)




Securities
      registered under Section 12(g) of the Exchange Act: COMMON STOCK NO PAR
      VALUE.





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange.  o




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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B not contained in this form, and no disclosure will be contained,
      to the best of the issuer’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o




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





For
      the fiscal year ended December 31,
      2005 the issuer’s revenues were $507,573.  As of Oct 31, 2007, the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliatesbased on the average of the bid and ask prices of such
      stock on that date of $6,869,348, as reported on the Pink Sheets.





On
      October 22, 2007 there were 152,652,140 shares of Registrant’s common stock, no
      par value, issued and outstanding.





Transitional
      Small Business Disclosure Format: Yes o No x














TABLE
      OF
      CONTENTS











Page
              NumberPART
                IItem
                1.
            Our
                Business
            2Item
                2.
            Properties
            4Item
                3.
            Legal
                Proceedings
            5Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            6PART
                IIItem
                5.
            Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity Securities
            7Item
                6.
            Management’s
                Discussion and Analysis or Plan of Operation
            9Item
                7.
            Financial
                Statements
            11Item
                8.
            Changes
                in and Disagreements with the Accountants on Accounting and Financial
                Disclosure
            11Item
                8A.
            Controls
                and Procedures
            11Item
                8B.
            Other
                Information
            11PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance With
                Section
                16(a) of the Exchange Act
            12Item
                10.
            Executive
                Compensation
            14Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management
            15Item
                12.
            Certain
                Relationships and Related Transactions
            15Item
                13.
            Exhibits
            16Item
                14.
            Principal
                Accountant Fees and Services
            17Signatures
            18






























































**FORWARD
      LOOKING STATEMENTS**




We
      are
      including the following cautionary statement in this Annual Report on Form
      10-KSB to make applicable and take advantage of the safe harbor provisions
      of
      the Private Securities Litigation Reform Act of 1995 for any forward-looking
      statements. All statements other than statements of historical fact, including
      statements concerning plans, objectives, goals, strategies, future events or
      performance and underlying assumptions, future results of operations or
      financial position, made in this Annual Report on Form 10-KSB are forward
      looking. In particular, the words “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “may,” “will,” variations of such words, and similar expressions
      identify forward-looking statements, but are not the exclusive means of
      identifying such statements and their absence does not mean that the statement
      is not forward-looking.




The
      forward-looking statements contained herein involve risks and uncertainties
      which could cause actual results or outcomes to differ materially from those
      expressed in the forward-looking statements. Our expectations, beliefs and
      projections are expressed in good faith and are believed by management to have
      a
      reasonable basis, including without limitation, management’s examination of
      historical operating trends, data contained in our records and other data
      available from third parties, but there can be no assurance that management’s
      expectation, beliefs or projections will result or be achieved or accomplished.
      In addition to other factors and matters discussed elsewhere herein, the
      following are important factors that, in our view, could cause actual results
      to
      differ materially from those discussed in the forward-looking statements: our
      losses from period to period; our current dependence on a limited number of
      key
      suppliers and investors; our ability to successfully market and sell our
      products in view of changing trends, acceptance of products and other factors
      affecting market conditions; technological advances by our competitors; capital
      needs to fund operations and development programs; delays in the manufacture
      of
      new and existing products by us or third party contractors; the loss of any
      key
      employee; the outcome of any litigation; changes in governmental regulations;
      and availability of capital on terms satisfactory to us. We disclaim any
      obligation to update any forward-looking statements to reflect events or
      circumstances after the date hereof.




For
      a
      discussion of some of the factors that may affect our business, results and
      prospects, see “ITEM 1.– OUR BUSINESS”.  Readers are urged to
      carefully review and consider the various disclosures made by us in this Report
      and in our other reports filed with the Securities and Exchange Commission,
      and
      those described from time to time in our press releases and other
      communications, which attempt to advise interested parties of the risks and
      factors that may affect our business, prospects and results of
      operations.
























































1





PART
      I





**ITEM1.
 Our
      Business**





Diatect
      International Corporation
      (“Company”) was incorporated under the laws of the State ofCaliforniain 1979 as San Diego Bancorp. In 1998
      we changed our name to Diatect International Corporation. During
      2002,we moved our administrative offices
      fromIdahoand our manufacturing facilities fromKansasand consolidated our operations inUtah.As
      of December 31, 2005,
      three of our creditorsfiled suit in Federal
      Bankruptcy Courtin an attemptto
      force the Company into Involuntary
      Chapter 7.  In February
      2006 the Company filed a
      counter-suit
      forlost profits and other
      damages.  In June
      2006the company and the
      creditors entered into a settlement agreement.See
      Part 1, Item 4 for additional
      informationabout
      this suit   The
      Company was not and did not enter Chapter 7.








***The
      Pesticide
      Market***





Our
      relative position in the market
      place for insecticides is very small. Major companies with sales significantly
      greater than ours represent our major competitors. These competitors have
      extensive resources that allow them to conduct research and development efforts
      that may lead to the introduction of new products. Any advantage that we may
      have over our competitorsis based onthe non-toxic
      nature of our products andwe believe this gives our products retail appeal.








***Manufacturing
      Process***





Wehavenine different insecticide products
      that utilize so called "natural-killing agents" which are non-toxic to the
      environment as well as humans and other warm-blooded animals. The active
      ingredients used in our products are diatomaceous earth (“DE”), pyrethrin (a
      natural extract chemical) and pypernyl butoxide (“PBO” a chemical agent). These
      raw materials are readily available and we do not depend on a single source
      to
      obtain them.





In
      our manufacturing process we combine
      the DE, pyrethrin and PBO by using surfactants to ensure a proper mix and
      resulting in an increased effectiveness and persistence of their insecticide
      properties over the natural state of the ingredients. In combination, these
      active ingredients substantially increase their effectiveness compared to their
      use individually. In our manufacturing process we blend the active ingredients
      resulting in a breakdown of the chitin from the DE, which allows the pyrethrin
      to act directly on an insect’s nerve cells. Our blended process prevents the
      pyrethrin from evaporating quickly and therefore its potency is released for
      hours rather than minutes.We believe the
      use of PBO acts as a synergist and
      increases effectiveness of the pyrethrin by as much as ten times
      overthenon-blended state.





The
      ingredients in our products have
      been used separately for years as adequate alternatives to hazardous chemical
      insecticides and therefore represent an alternative to synthetic products that
      often utilize hazardous chemical compounds. Synthetic insecticides were first
      used in the 1940's and most insect species have developed a resistance to many
      of these products. Unlike the synthetic insecticides that have resulted in
      a
      constant search for new formulations, our products have not changed since we
      first started production and commercial marketing in 2001.








**Our
      Intellectual Property, Patents and Proprietary Rights**





We
      rely on five registrations (42850-1
      through 5) that weobtained
      from the Environmental
      Protection Agency (EPA) that allowedus to formulate nine labels for retail
      sales. These registrations arerequiredfor the production and marketing of our
      insect control products. Pursuant to the Federal Insecticide, Fungicide and
      Rodenticide Act, all insecticides must be "registered" with the EPA, and
      specific conditions for their use must be stated on an approved label. These
      labels provide an extensive amount of information and indicate that the
      insecticide has been tested and evaluated, provide instructions for the proper
      handling, storage and disposal; and state that the EPA regulates the use
      thereof. The process of submitting a pesticide product to the EPA and obtaining
      approval through registration to label one or more products for retail sale
      may
      take a considerable amount of timeand require substantial
      expenditures.








2





Obtaining
      EPAregistrations andapproval
      of our labels represents an
      essential asset of the Company and is the result of a lengthy and expensive
      process. During 2003 we reevaluated the estimated useful life of our EPA labels
      and determined that competitive business conditions and the continued
      introduction of new products into the marketplace has resulted in a shortening
      of their estimated useful life. Consequently, in 2003 we elected to amortize
      the
      approximate $1.7 million carrying value of the EPA labels over a 7-year period
      using the straight-line method.  During 2006 the useful life of the
      labels was revisited in light of the growing concern with synthetic insecticides
      and it was concluded that the life of the labels would exceed 10
      years.  Further it has been estimatedby the American Crop
      Protection Society
      that replacing EPAlabels
      in today’s
      environment would cost between $160
      million and $250 million. Based on this analysisweconcluded that the label should notbeamortized
      further.





**Marketing
      and Sales**





We
      market our products under two
      differentproduct brandnames-Diatect and Results.





**Diatect**





DiatectII
      Multi-Purpose Insect Control
      issold in the agriculture
      market and is used in a wide variety of areas, primarily in conjunction with
      edible growing crops, animal quarters, livestock, and
      ornamentals.





Diatect
      III Insect Control
      issold in the commercial,
      industrial, and government markets and is also used in a wide variety of areas,
      primarily in conjunction with schools, parks, rest stops, roadways, childcare
      facilities, rest homes, eating establishments, and other public
      places.





Diatect
      V:isa product designed and formulated to
      meet the needs of the organic food industry, which requires insecticides with
      no
      synthetic ingredients.Our
      primary market for Diatect V isto commercial organic
      food growers,
      homeowners, and gardeners.





**Results**





**Results
      Ant &
Insect**issold primarily to the
      domestic homeowner for the control of ants, aphids, caterpillars, leafhoppers,
      lice, mites, mosquitoes, ticks, and other insects.





**Results
      Fire
      Ant**represents
      a
      specialized product that is directed towards the control of fire ants, found
      largely in the southernUnited States.
      This product is applied to fire ant
      mounds to quickly eliminate the fire ant population.




**Results
      Indoor**this
      product is designed for indoor use under sinks, behind furniture, in air vents,
      under tile, and in stairwells and basements for the control of roaches, fleas,
      ants, silverfish, crickets, bedbugs, box elder bugs, and other
      insects.





**Results
      Tomato &
Garden**is designed
      for outdoor use by protecting garden plants from many varieties of worms,
      beetles, leafhoppers, stink bugs, squash vine borers, and other
      insects.





**Results
      Rose &
Floral**is also an
      outdoor product designed to protect specific floral such as azaleas, begonias,
      African violets, chrysanthemums, dogwood, elm, roses, tulips, as well as a
      variety of plants. This product is designed to destroy such insects as mealy
      bugs, fruit flies, white flies, and caterpillars.





**Results
      Pet
      Powder**is
      specifically designed for use on domestic pets. This product is targeted to
      provide homeowners and veterinarians with a powder that is effective in kennels
      and other animal boarding facilities to control insects that become lodged
      in
      the skin and fur of animals.





A
      substantial part of our advertising
      and marketing efforts have been directed towards trade shows. Webelievethat
      one-on-one contact with our
      wholesale buyers allow us to explain the difference’sbetween our non-toxic products and
      competitive productswhoseactive ingredients may contain
      toxins or synthetics. We
      have avariety of wholesale
      customers and we are not dependent on any one or on a small group ofcustomersfor
      our product sales. Primarily our
      customersare comprised
      ofsmall to medium retail
      outlets that serve agriculture and gardening customers in theUnited
      States, where the insectpopulation is prevalent. We do not have
      any agreements with our customers for their purchase of our products over any
      period of time. Consequently, we contact our customers periodically to obtain
      orders from them or our customers must place orders prior toshipments.








3





At
      the start of 2004 westartedto sell our product in a single Big Box
      retail outlet and by the end of the year wehada retail vendor number allowing us to
      sell our productstoseventy oneretail outlets in the southeast
      region.These
      sales do not constitute a major
      customer. Furthermore, having a retail vendor numberisnot an agreement to purchase our
      product, butitallows us the opportunity to sell our
      product to their retail outlets.We believe that the attempted
      bankruptcy
      action restricted our ability to obtain more retail outlets from this
      chain.





In
      addition to trade shows, we
      usethe
      internet to make the retail market
      aware of our products.We also employ customer representatives
      at our office inUtahwhoperiodicallyour
      commercial customers.We
      supply to our commercial customers
      sales literature, banners, booths, and other materials to encourage active
      promotion ofour products. We produce substantially
      all of our sales and promotional materialsat our offices inUtah.





In
      2006 we made inroads in theorganic and sustainable
      agricultural
      arena.We
      believe ourDiatect product
      is cost effective when used onspecialtycrops
      and withanimal production facilities.  Thisproduct is in various stages of testing
      with a number of large commercial growers.





At
      the end of 2005 the company operated
      out of itsUtahoffice with contract personnel due to
      the Involuntary Chapter 7 filing. We have also retained from time to time
      consultants to help in our marketing efforts and we have two independent field
      representatives to help us sell our products.  At
      the end of 2004 we
      entered into a new agreement with a consultant who assisted in marketing our
      productsto large retailers.





***Employees***





As
      of December 31, 2005, the Company had
      no employees.





***Consultants***





As
      of December 31, 2005the
      Company ranits operations with a total of 12
      consultants, we used
      consultants because of the bankruptcy litigation.





**ITEM2.PROPERTIES**





Diatect
      International Corporation is
      located in an eleven-year-old 20,254 square foot class B masonry
      office/warehouse building at875 South Industrial
      Parkway,Heber
      City,Utah.HeberCityis located approximately 45 miles East
      of Salt Lake City, Utah, and is easily accessible by connecting freeways and
      highways. The building is located on a 1.928-acre parcel of ground that is
      part
      of theUtahIndustrial
      Parkand adequately serves
      as our corporate
      office,manufacturingand distributionfacility.
      The occupancycapacityof the business office portion of the
      building is 23 people. We arethe sole occupant of
      the
      building.





In
      March 2005, we sold this real estatefor $900,000 and entered
      into a verballeaseback
      arrangement thatas of
      December 31, 2005hadnot been finalized. Consequently,
      nolease payments were made
      subsequent to the sale.During the fourth quarter
      of 2006, the
      land and building where the Company maintains its offices and manufacturing
      facility was sold by a shareholder to an entity (“Landlord”) that is affiliated
      with a director of the Company. In conjunction with this sale, $187,060 of
      unpaid rent was forgiven. Commencing on January 1, 2007, the Company entered
      into a five year lease with the Landlord, requiring monthly rental payments
      of
      $12,000 plus taxes and maintenance. The lease is renewable for two additional
      5
      year terms with 10% increases of the rental payments to $13,200 per month and
      $14,250 per month, respectively.





We
      have insurance for the
      buildingand
      the inventory, in the amount which
      we believe are
      adequate.





The
      Company owns association placer diatomaceous earth mining claims and placer
      diatomaceous earth mining claims, in the State of Oregon. We have not engaged
      in
      any mining operations and we do not anticipate undertaking mining operations
      in
      the near future. The mining claims are at no cost.  Any future
      activities will be dependent on climactic conditions and resources
      available.








4





**ITEM
      3.  LEGAL
      PROCEEDINGS**




**Administrative
        Proceeding – U.S. Securities and Exchange Commission**
 
 One
        September 27, 2007, the Commission entered an order instituting a proceeding
        under Section 12(j) of the Securities Exchange Act of 1934 (“1934 Act”) naming
        us as a respondent.  This administrative proceeding has file no.
        3-12843.
 
 Section
        12(j) empowers the Commission to revoke a company’s registration under the 1934
        Act for not filing the required periodic reports such as Form 10-QSB’s and Form
        10-KSB’s.  The order states that we have not filed periodic reports
        since we filed a report on Form 10-QSB for the period ended March 31,
        2005.  The order also set a hearing date which has since been
        postponed.  We answered the allegations of the Order.  On
        November 1, 2007, Administrative Law Judge Kelly allowed the parties to proceed
        by summary disposition.  Recently we filed two of the delinquent
        reports and we intend to file the other delinquent reports with
        dispatch.  Our plan is to file the most delinquent reports
        first.
 
 Section
        12(j) provides that the Commission may suspend the trading of our shares
        for a
        period of up to twelve months.


***U.S.
      Securities and Exchange Commission***,  On October 1, 2007,
      the Company and its acting president and a director through their attorney
      accepted service of a Complaint filed on September 24, 2007, by the U.S.
      Securities and Exchange Commission in the U.S. District Court, District of
      Utah,
      Central Division having Case No.: 2:07cv00709.  The caption on the
      Complaint is *Securities and Exchange Commission v. Diatect International
      Corporation et al.*The four defendants are the acting president
      who is also a director, a former officer and director, a former director, and
      the Company.   The allegations of the Complaint claim that the
      Defendants engaged in a transaction in 2003 involving the sale of mining claims
      located in the State of Oregon which transaction was improperly recorded on
      the
      Company’s financial statements causing the overstatement of revenues and
      assets.   The allegations of the Complaint also claim that
      certain revenues were improperly recorded in the Company’s 2002 financial
      statements because the sales were consignment sales and not actual
      sales.   The Complaint alleges various violations of the federal
      securities laws and regulations promulgated thereunder including violations
      of
      the anti-fraud provisions and violations of regulations pertaining to periodic
      reports filed by the Company with the SEC in 2003 and 2004.   On
      April 14, 2005, the Company issued restated financial statement as of December
      31, 2004, which restated the sale of the mining claims and our
      revenues.  The Complaint seeks injunctive action against the
      defendants including the Company and seeks fines from the three individual
      defendants, and from two individual defendants disgorgement of stock sale
      proceeds and a bar as an officer and director.  We intend to
      vigorously defend the allegations of the Complaint.




***Complete
      Packaging, LLC d.b.a. Compax***–On October 17,
      2003, Complete
      Packaging, LLC, doing business as Compax,  filed a complaint in theThirdDistrictCourtofSaltLakeCounty,
      State ofUtah,
      naming the Company as the defendant.
      Compax claimeda trade payable, with interest and
      costsof$323,892.Compax
      obtaineda judgment against the Company. During
      2005,weentered into a settlement agreement
      with Compax that requiredusto make three monthly payments of
      $25,000 through May 2005 and a lump sum payment of $145,000 in June 2005.Weaccrued
      a $220,000 settlement obligation
      liability at December 31, 2004. The Company made two of the monthly payments but
      failed to make the remaining payments due under the terms of the settlement
      agreement. In July 2006, the Company and Compax reached a further agreement
      dated June 6, 2006
      under which Compax agreed to accept payment of $150,000astotal satisfaction ofourobligation.We made the payments
      and
      received ajudgmentreleaseon September1, 2007.




***La
      Jolla Cove Investors,
      Inc.***–On July12, 2004, La Jolla Cove
      Investors, Inc.
      (“La Jolla
      Cove”) filed a complaint in
      the Superior Court of California,CountyofSan Diego,
      naming the Company as the defendant.
      La Jolla Coveclaimed
      webreachedacontract with La Jolla Cove by failing
      to honor aconvertible
      debenture agreementinvolving a public offering.La Jolla Cove claimed
      damagesof$406,990.  We
      filed a registration
      statement but later withdrew it onNovember18,2004. Weaccrued
      a $286,263settlement obligation
      liability
      at December 31,
      2004 which was
      decreased to $278,500 at
      December 31, 2005.  In June 2006,wereached a settlement with La Jolla Coveandpaid La Jolla Cove $115,000 through
      July 2006,and we received
      afull release.




***David
      J. Stecher***– During 2002, the Company entered into a demand
      promissory note in the amount of $18,070, bearing interest at 15% per annum.
      During 2004 a suit was filed to collect the principal amount and accrued
      interest. At December 31, 2005, we accrued a settlement obligation of $28,325.
      During 2006, we paid $36,000 to satisfy this obligation.




***Litho-Flexo
      Graphics, Inc.***– On
      May 23, 2003,we were named
      as defendantin a complaint
      filed byLitho-Flexo
      Graphics, Inc. in the Fourth District Court in and forWasatchCounty,
      State ofUtah.Litho-Flexoclaimeda
      trade payable that,of$92,478.Wecontended
      that the packaging labelswe receivedfrom
      Litho-Flexo were defective and
      could not be used in the packaging ofourproducts.Wefiled
      a counterclaim claimingdamagesin
      excess of $100,000caused bythe
      defective labels.Weaccrued
      a $72,625settlement
      obligation liability at
      December 31, 2004.During the year ended December 31, 2005, we paid
      $9,342 to Litho-Flexo,which
      decreased the accrued settlement obligation liability to $63,283 at December
      31,
      2005.We
      intend to defend the
      complaint and pursue our counterclaim.














5





***Alleged******Bankruptcy -***In June 2005, three
      note holders, Bruce L. Shannon, Brent Larson and the Robinson Family LLC, filed
      suit in Federal Bankruptcy Court to force the Company into a Chapter 7
      receivership. In February 2006, the Company filed a damage suit against those
      note holders. In April 2006, a settlement was reach whereby the note-holder,
      bankruptcy suit was dismissed and we were awarded damages of $354,175 of notes
      payable and $142,367 of related accrued interest due to the note holders, the
      return of 207,275 shares of the Company’s common stock by the note holders, and
      the payment of $10,000 of our legal fees.





***L.
      Craig Hunt***– Pursuant to the non-payment of a $42,750 promissory
      note dated August 28, 1995, a judgment was entered against us on February 1,
      1999 in the amount of $61,543. The plaintiff did not pursue the collection
      of
      this judgment and we recorded this amount as a gain from extinguishment of
      debt
      during 2004. During 2006 the Plaintiff’s estate made demand on us for payment of
      the judgment amount. The Company contends that the period allowed for the
      collection of the judgment had expired and no further obligation exists. No
      amount has been accrued for this claim in the accompanying financial
      statements.





***The
      Robinson Family, L.L.C.***–The
      Robinson Family LLC
      filed suit in Fourth District Court in Wasatch County, State of Utah, to collect
      a $106,000 promissory note bearing interest at 12% per annum that was due on
      April 1, 2002. At December 31, 2004, we carried the note at $126,686. The
      Robinson Family LLC was party to a suit filed in Federal Bankruptcy Court
      seeking to force us into involuntary bankruptcy. During the fourth quarter
      of
      2005, we entered into a settlement agreement with the Robinson Family LLC,
      where
      they forgave their note and interest, in return we released Robinson Family
      LLC
      from any counter claims based on the involuntary bankruptcy suit.











**ITEM
      4.  SUBMISSION OF MATTERS TO A
      VOTE OF SECURITIES HOLDERS**





We
      did not submit any matters to a vote
      of our securities holders in the fourth quarter ended December 31,
      2005.



























































6





**PART
      II**





**ITEM
      5.MARKET FOR COMMON
      EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF
      EQUITY SECURITIES**





Our
      shares of common stock are presently quoted on the Pink Sheets under the symbol
      DTCT. Listed below are the high and low sale prices for the shares of our common
      stock during the years ended December 31, 2005 and 2004. These quotations
      reflect inter-dealer prices, without mark-up, mark-down or commission and may
      not represent actual transactions.








High
            
            
            LowFiscal
                2004First
                Quarter (ended March 31, 2004)
            
            $
            0.280
            
            
            $
            0.160Second
                Quarter (ended June 30, 2004)
            
            
            0.130
            
            
            
            0.221Third
                Quarter (ended September 30, 2004)
            
            
            0.075
            
            
            
            0.130Fourth
                Quarter (ended December 31, 2004)
            
            
            0.045
            
            
            
            0.080Fiscal
                2005First
                Quarter (ended March 31, 2005)
            
            $
            0.043
            
            
            $
            0.090Second
                Quarter (ended June 30, 2005)
            
            
            0.015
            
            
            
            0.090Third
                Quarter (ended September 30, 2005)
            
            
            0.009
            
            
            
            0.023Fourth
                Quarter (ended December 31, 2005)
            
            
            0.006
            
            
            
            0.030







We
      presently do not have any stock
      compensation plans.





As
      of
      December 31, 2005 there were 99,264,997 shares issued and outstanding and
      approximately 1,198 holders of record of our common stock. We believe that
      a
      significant number of beneficial owners of our common stock hold shares in
      street name. No dividends have ever been paid to holders of our common stock,
      and we do not anticipate paying dividends in the future.





**Sales
      of Unregistered Securities**





The
      following provides information regarding sales of equity securities by us during
      the fiscal year ended December 31, 2005 which were not registered under the
      Securities Act.  All issuances were of the Company’s no par common
      stock.





·
            On
                January 26, 2005 we issued 250,000 shares at a price of $0.05 per
                share
                based on the closing market price as of that date to our Chief Executive
                Officer and director in settlement of certain expenses totaling $12,500
                paid on our behalf.





·
            On
                January 26, 2005 we issued 250,000 shares at a price of $0.05 per
                share
                based on the closing market price as of that date to our Corporate
                Secretary as compensation of
                $12,500.





·
            On
                January 29, 2005 we issued 750,000 shares at a price of $0.05 per
                share
                based on the closing market price as of that date to a shareholder
                for
                financing fees totaling $37,500.





·
            On
                February 15, 2005 we issued 1,500,000 shares at a price of $0.10
                per share
                in a private placement of our stock to an
                investor.





·
            On
                February 18, 2005 we issued 75,000 shares at a price of $0.07 per
                share
                based on the closing market price as of that date to certain of our
                employees as compensation of
                $5,250.





·
            On
                February 24, 2005 we issued 22,222 shares at a price of $0.05 per
                share
                based on the closing market price as of that date to a vendor for
                services
                rendered totaling $1,111.






7




·
            On
                February 24, 2005 we issued 178,571 shares at a price of $0.07 per
                share
                in settlement of a note payable in the amount of
                $12,500.





·
            On
                March 2, 2005 we issued 1,400,000 shares at a price of $0.05 per
                share
                based on the closing market price as of that date as interest on
                a note
                payable in the amount of $69,901.





·
            On
                March 2, 2005 we issued 89,096 shares at a price of $0.05 per share
                based
                on the closing market price as of that date to a vendor for services
                rendered in the amount of $4,455.





·
            On
                March 11, 2005 we issued 3,500,000 shares at a price of $0.20 per
                share to
                an investor pursuant to a subscription agreement in the amount of
                $700,000.  As consideration, the investor converted a note and
                related accrued interest of $411,802, was paid for rent we owed in
                the
                amount of $22,940 and we received cash of
                $265,258.





·
            On
                March 11, 2005 we issued 177,034 shares at a price of $0.06 per share
                based on the closing market price as of that date to a vendor for
                services
                rendered in the amount of $10,622.





·
            On
                March 11, 2005 we issued 550,000 shares at a price of $0.06 per share
                based on the closing market price as of that date to members of our
                board
                of directors for director’s fees in the amount of
                $33,000.





·
            On
                March 15, 2005 we issued 400,000 shares at a price of $0.09 per share
                in
                settlement of interest due on a note payable in the amount of
                $36,000.





·
            On
                March 16, 2005 we issued 305,556 shares at a price of $0.06 per share
                based on the closing market price as of that date to a vendor for
                services
                rendered in the amount of $27,500.





·
            On
                April 1, 2005 we issued 400,000 shares at a price of $0.08 per share
                in a
                private placement of our stock to an investor for proceeds of
                $27,500.





·
            On
                September 5, 2005 we issued 250,000 shares at a price of $0.013 per
                share
                based on the closing market price as of that date to a director for
                services rendered in the amount of
                $3,250.





·
            On
                September 15, 2005 we issued 350,000 shares at a price of $0.013
                per share
                based on the closing market price as of that date to a two vendors
                for
                services rendered in the amount of
                $4,375.





·
            On
                December 9, 2005 we issued 3,000,000 shares at a price of $0.008
                per share
                based on the closing market price as of that date to a vendor for
                services
                rendered in the amount of $24,000.














8





**ITEM
      6. MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





The
      following discussion and analysis should be read in conjunction with the
      Consolidated Financial Statements and notes thereto appearing elsewhere in
      this
      Report. Except for historical information, the following discussion contains
      forward-looking statements within the meaning of the Private Securities
      Litigation Reform Act of 1995. See “Forward Looking Statements”





**Overview:**








Diatect
      International Corporation (the “Company”) is a California corporation operating
      in Utah as a developer and marketer of non-toxic pesticide products. We sell
      our
      products to wholesale distributors and retail customers in the United
      States.  As of the date of this filing, we sell directly to the
      consumer via our website at www.diatect.com.  The results from
      operations for the periods presented do not have any costs or results from
      the
      website for any period presented.





In
      June
      2005 three note holders of the Company filed suit in Federal Bankruptcy Court
      to
      force the Company into a Chapter 7 receivership and in February 2006 the Company
      filed a damage suit against those note holders.  In April 2006 a
      settlement was reach whereby the creditor suit was dismissed and the Company
      was
      awarded damages through the relief of $354,175 in notes payable and $142,367
      of
      accrued interest, the return to the Company of 207,275 shares of its common
      stock, which were cancelled, and the payment of $10,000. Accordingly, the
      Company was never under bankruptcy court supervision and the accompanying
      financial statements do not present any liabilities as subject to
      compromise.





In
      February 2006 the Company entered into a one year non exclusive Financial
      Advisory and Investment Banking Agreement (“Investment Banking Agreement”) with
      Pointe Capital L.L.C. (“Pointe”), and pursuant thereto, received $150,000. In
      addition, in June 2006 the Company, through Pointe, commenced a Convertible
      Promissory Note (“Convertible Note”) offering.  The terms of the
      Investment Banking Agreement, the Convertible Note, and other financial
      arrangements, we have entered into subsequent to June 30, 2005, are described
      in
      Note 11 to these financial statements. Through December 31, 2006, we have
      received $700,000 pursuant to the Convertible Note offering.





Our
      ability to continue operations is dependent upon obtaining additional financing
      and being able to generate net profits in the future. Management believes that
      these events are likely to occur, even though no assurance thereof can be
      given.





Results
      of Operations for the Fiscal Years ended December 31, 2005 and 2004





Results
      of
      Operations:





Revenue:We had revenue of $507,573for the year ended December 31,
      2005compared to $665,676
      forthe year ended December
      31, 2004.Total
      revenue decreased in 2005 by$158,103,
      as a result of the Involuntary Chapter
      7 Bankruptcy,reorganization
      of
      oursales force during 2005andofoursales effortstolarger retail outlets and in particular
      big box retail
      stores.





Cost
      ofrevenue:Ourcost
      ofrevenue was $435,346
      for the year ended
      December 31, 2005 as compared to $770,713 for the year ended December 31,
      2004.  The decrease of$335,367 is due in part
      toadecrease
      in amortization expense of
      $124,000for the year ended
      June 30, 2005compared to
      amortization expense of a year earlier. Subsequent to
      June 30, 2005, we
      determined that the EPA registrations had an indefinite life and we ceased
      amortization of the EPA registrations.





Marketing
      and SellingExpenses:Marketing
      andselling expenses were
      $328,003 for the
      year ended December 31, 2005,as compared to $389,692 for the year
      ended December 31, 2005.  The decrease of $61,689wasprimarily due to decreased advertising
      related to a media purchase made in 2004,
      and we hadno comparable 2005
      expense.








9





General
      and
      AdministrativeExpenses:Reducing
      operating expenses remains a major goal of management. For the year ended
      December 31, 2005general
      and administrativeexpenseswere$1,010,035as
      compared to$1,840,866for the year ended December 31,
      2004.  The decrease of $830,831 is primarily
      due to staff
      reductionsand reduced
      professional and legal fees because the bankruptcy
      proceedings.





Other
      Income and
      Expense:Other income and expense is comprisedof a gain from the sale
      of
      the building and interest expense.We had a gain
      fromthesale
      ofourbuildingof$70,822.For
      the year ended December 31,
      2004,Interest
      expense for the year ended
      December 31, 2005 was $356,677 as compared to $806,202 for the year ended December
      31
      2004.  The decrease of $449,525 is primarily due to reduced debt
      balances and reduced financing fees.





Gain
      from Termination of
      Debt:Gain fromtermination
      of debt was
      $154,013 for the year ended December 31, 2005 as compared to $323,214 for the year
      ended December 31,
      2004.  The decrease of $169,201 is primarily due to reduced cashavailable fornegotiated
      settlements in
      2005.





Liquidity
      and Capital
      Resources





Our
      cash and cash equivalentsof $6,382are not
      considered sufficient to support our current levels of operations for the next
      12 months.  According, we intend to seek additional financing through
      debt or equity offerings.





In
      February 2006 the Company entered into a one year non-exclusive Financial
      Advisory and Investment Banking Agreement with Pointe Capital L.L.C. (“Pointe”),
      and pursuant thereto, received $150,000.   In June 2006, Pointe
      commenced a Convertible Promissory Note (“Convertible Note”) offering for us. In
      conjunction with this offering, we paid $10,000 and issued 500,000 shares of
      its
      common stock in legal fees. The Convertible Notes issued pursuant to the
      offering bear interest at the rate of 12%, are unsecured and are due one year
      from the date of issuance.  The notes are convertible into units
      comprised of our common stock with a conversion price of $0.05 per share. For
      each share of common stock, the note holder will receive 1 warrant to purchase
      the Company’s common stock. The warrants that comprise the unit are exercisable
      into common stock at $.075 per share and are exercisable for a period of 3
      years.   We have the option to redeem the Convertible Note under
      certain conditions at its face value plus accrued interest if the average price
      of the Company’s common stock is 200% of the conversion price per share for a
      period of twenty consecutive days. Through December 31, 2006, we received gross
      proceeds of $700,000 pursuant to the Convertible Note
      offering.  Subsequent to December 31, 2006, the Company has received
      an aggregate of $771,000.  We will account for the proceeds and costs
      of the offering in the respective fiscal 2006 and 2007 periods in which the
      transactions occur.





















































10





**Item
      7.  Financial
      Statements**





Our
      financial statements are set forth
      immediately following the signature page to this Form 10-KSB.  (See Item
      13-Exhibits for Index to Financial
      Statements.)








**Item
      8.  Changes In and
      Disagreements With Accountants on Accounting and Financial
      Disclosures**





NONE





**Item
      8A.  Controls and Procedures**




As
      required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal
      year
      covered by this report, Mr. David
      Andrus, our Chief Executive Officer and Principal Accounting Officercarried out an evaluation of the effectiveness of the design and
      operation of our disclosure controls and procedures. Based upon that evaluation,
      our chief executive officer and chief financial officer concluded that our
      disclosure controls and procedures are effective at December 31, 2006. There
      have been no changes in our internal controls over financial reporting in
      connection with this evaluation that occurred during the fourth quarter of
      fiscal 2005 that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.




Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed in our reports filed or
      submitted under the Exchange Act is (1) recorded, processed, summarized and
      reported, within the time periods specified in the Securities and Exchange
      Commission’s rules and forms and (2) accumulated and communicated to
      management, including our chief executive officer and chief financial officer,
      as appropriate, to allow timely decisions regarding required
      disclosure.





**Item
      8B.  Other
      Information**





In
      June,
      2005 three note holders of the Company filed suit in Federal Bankruptcy Court
      to
      force the Company into a Chapter 7 receivership. In February, 2006 the Company
      filed a damage suit against those note holders.  In April, 2006 a
      settlement was reached whereby the creditors suit was dismissed and we were
      awarded damages through the relief of $354,175 in notes payable and $142,367
      in
      accrued interest, the return of 207,275 shares of our common stock, which were
      cancelled, and the payment of $10,000. Accordingly, we were never under
      bankruptcy supervision and the accompanying financial statements do not present
      any liabilities that are subject to compromise.




















11





PART
      III





**Item
      9.  Directors, Executive
      Officers, Promoters,Control PersonsAnd Corporate Governance;Compliance
      With Section 16(a) of the
      Exchange Act**





Directors
      and Executive
      Officers





The
      following table sets forth as ofDecember 31,
      2005the name, age and
      position of each of our executive officers and directors and their
      respective terms of
      office.





**Name**
            
            **Age**
            
            **Position**
            
            **Director
                and/or****Officer
                Since**Dave
                H Andrus
            
            41
            
            Director
            
            December
                1997President
            
            December
                2004Chairman
                of the Board
            
            December
                2004John
                L. Runft
            
            69
            
            Director
            
            February
                1995Margie
                Humphries
            
            55
            
            Corporate
                Secretary
            
            October
                2002M.
                Stewart Hyndman
            
            49
            
            Director
            
            December
                1997Frank
                Priestly
            
            57
            
            Director
            
            November
                2002Javvis
                O Jacobson
            
            34
            
            Director
            
            March
                2004





Our
directors
      serve for a term of one year
      or until his or her successor is elected at the next shareholders meeting.
      All
      officers serve at the pleasure of the Board of Directors or until his or her
      successor is elected at the annual meeting of the Board of Directors.We haveno
      arrangements or
      understandingswrittenamong any of our
      officers or directors.





The
      principal occupations and brief summary of the background of each of our
      directors and executive officers during the past five years is as
      follows:





**David
      H. Andrus**, CEO/President and CFO began an affiliation with Diatect
      International in 1992.  Dave served in the U.S. Marine Corps for 10
      years in the logistics and intelligence field, and was medically retired in
      1991.  He formed Venture Creations, which performed contract research
      and development for EnviroGuard (now Diatect).  As R&D Project
      Manager, Dave supervised extensive field trials of the Diatect Insect Control
      within the Poultry industry and for fire ant concerns in that
      region.  In 1998 Dave was appointed technical manager for
      Diatect.  Since then, Dave has been VP Operations and was elected
      president in December of 2004 to current.





**Javvis
      O. Jacobson,**director, audit committee chairman, is a certified public
      accountant and is the CFO of Beehive Credit Union in Salt Lake City,
      Utah.  He has held this position for the last two
      years.  Formerly he was with Deloitte and Touche, as audit manager for
      six years.  Javvis graduated from Weber State University with a
      Masters of Professional Accountancy.





**Margie
      Humphries** was appointed Corporate Secretary in November of
      2002.  She relocated to Heber, Utah, in September of
      2002.  She comes with 25 years of professional work
      experience.  Starting in December of 1991, until July of 1998, she
      worked for Wasatch Medical Center.  Her responsibilities included the
      billing and collection process for five physicians and monitoring accounts
      receivable.  In March 2002, she joined Diatect
      International.





**Michael
      O’Keefe** is an executive with over 30 years of experience leading
      companies in the telecommunications, technology, optical, heavy equipment,
      and
      packaged goods sectors. He managed private companies as a COO
      and  served as VP/CFO at major corporations, ranging in revenues from
      $1 million to over $13 billion. He held positions with foreign owned firms,
      served on boards, has manufacturing experience as well as turn around skill
      and
      worked with developmental and startup organizations. Mike was a director from
      April 2006 to April 2007.








12





**Frank
      Priestly**has
      operatedafarming business inIdahosince 1970.  He currentlyisPresident of the Idaho Farm Bureau
      Federation, and is a member of the governing board of the Farm Bureau Finance
      Co., the Agricultural and Educational Research Foundation and the Farm Bureau
      Insurance Companies ofIdaho.
 He
      also serves on the Board of
      Directors for the American Farm Bureau Federation, with an appointment to the
      executive committee.Frank resigned from the
      board in April 2006.





**John
      L. Runft**has been
      practicing law since 1965, emphasizing business organizationsand litigation.  He received his
      BA from Albertson'sCollegeofIdahoin 1962, and his J.D. from the
      University of Chicago School of Law in 1965 John is a member of the Idaho Bar,
      and has appeared as lead counsel in litigation or appeals before the
      UnitedStates Court of Appeals for the Federal
      Circuit, and the United States Supreme Court.  He is a member of the Board
      of Litigation of the Mountain States Legal Foundation, is a member of the Idaho
      Law Foundation, served as a Director of the Idaho CommunityFoundation
      (1989-1996), and has served
      as Civilian Aide to the Secretary of the Army of theUnited Statesfor the State ofIdaho(1988-1996).John Resigned from the
      board
      in April 2006.





**M.
      Stewart
      Hyndman**is the
      President of Magic Miles Ltd; Inc.,Meridian,Idaho,
      an export trading company established
      in 1995 specializing in the export of agricultural commodities and industrial
      products.  Following his graduation from theUniversityofIdaho,
      Stewartcontinuedto play an active role in industry,
      agriculture, marketing and
      business development.Stewart resigned from
      the
      board in April 2006





**Audit
      Committee Financial Expert**





The
      entire Board of Directors serves as
      the Company’s
      Audit Committee.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
      and directors and persons who own more than 10% of a registered class of our
      equity securities to file reports of ownership on Form 3 and changes in
      ownership on Form 4 or 5 with the Securities and Exchange Commission (the
“SEC”). Such officers, directors, and 10% stockholders are also required by SEC
      rules to furnish us with copies of all Section 16(a) reports they
      file.  The Company believes all necessary reports were made on a
      timely basis for the period of this report on Form 10-KSB.
































13





**Item
      10.  Executive
      Compensation**





The
      following table provides information about the compensation paid to, earned
      or
      received during the last three fiscal years ended December 31, 2005, 2004 and
      2003 by the executive officers listed below (the “Named Executive
      Officers”).








Annual
                Compensation
            
            Long
                Term
              Compensation
                AwardsName
                and
              Principal
                Position
            
            Fiscal
                Year
            
            Salary
                ($)
            
            Bonus
                ($)
            
            Restricted
                Stock Awards ($)
            
            Securities
                Underlying Options SARs (#)
            
            All
                Other Compensation($)David
                AndrusCEO
            
            2005
            
            75,000
            
            -
            
            12,500
            
            -
            
            -Vice-President
            
            2004
            
            58,712
            
            6,657
            
            146,150
            
            -
            
            170,290Vice-President
            
            2003
            
            99,639
            
            9,000
            
            -
            
            -
            
            134,255Jay
                W. Downs
            
            2005
            
            -
            
            -
            
            -
            
            -
            
            -CEO
            
            2004
            
            114,170
            
            -
            
            108,797
            
            350,000
            
            19,810CEO
            
            2003
            
            128,980
            
            9,000
            
            -
            
            -
            
            170,710








Employment
      Agreements





David
      Andrus signed an employment
      agreement effective December 1, 2004 for a term of two years at an
      annual salary of $150,000
      per year, with a signing bonus of 3,000,000sharesof our restricted common stock.
 The agreement includes provisions for reasonable allowances and a bonus
      based on 1% of gross sales receipts as determined on a quarterly
      basis.Mr.
      Andrus received50%
      of the salary and no
      bonusdue
      to the Chapter 7
      proceedings.





Jay
      W. Downsresigned as a officer
      and directorduring the year 2004.
      All
      payments and stock options pursuant to his employment agreement were terminated
      upon his resignation.








**Compensation
      of Directors**




In
      2005,
      we issued a total of550,000sharesof our common stock for
      serviceson ourboard
      ofdirectors as
      follows:





Director
            
            SharesJohn
                L. Runft
            
            
            150,000M.
                Stewart Hyndman
            
            
            50,000Michael
                P. McQuade
            
            
            150,000Frank
                S. Priestley
            
            
            50,000Javvis
                O. Jacobson
            
            
            150,000








In
      addition, we issued 250,000 shares of
      common stock to our director John L. Runft for legal services
      rendered.








14





**Item
      11.  Security Ownership of
      Certain Beneficial Owners and Management and Related Stockholder Matters**





The
      table
      below sets forth certain information regarding the beneficial ownership of
      our
      common stock as of October 31, 2007, based on information available to us by
      the
      following persons or groups:





·
            each
                person who is known by us to
                own more than 5% of the outstanding common
                stock;


·
            each
                of our
                directors;


·
            each
                of the Named Executive
                Officers; and


·
            all
                of our officers and
                directors, as a group.





As
      of October31,
      2007, there were152,652,140shares of common stock issued and
      outstanding.








**Name
                and Position**
              **of
                Beneficial Owner**
            
            **Number
                of**
              **Shares**
              **Beneficially**
              **Owned**
            
            **Percent**
              **of
                Class**Aspen
                Capital Partners
            
            15,000,000
            
            9.83%David
                H Andrus, Director/President, Chairman of the Board
            
            9,466,350
            
            6.20%Javvis
                Jacobson, Director
            
            169,000
            
            0.00%








Beneficial
      ownership is determined in accordance with the rules of the SEC and generally
      includes voting or investment power with respect to the shares. A person is
      also
      deemed to be a beneficial owner of any securities of which the person has the
      right to acquire beneficial ownership within 60 days. Unless otherwise indicated
      in the footnotes to this table and subject to community property laws where
      applicable, we believe that the each of the stockholders named in this table
      has
      sole voting and investment power with respect to the shares shown as
      beneficially owned by him. To our knowledge, there are no voting arrangements
      among our stockholders.





**Securities
      Authorized for Issuance Under Equity Compensations Plans**





The
      Company does not have any
      EquityCompensation
      Plans.





**Item
      12.  Certain Relationships and
      Related Transactions**








One
      of our Directors performed legal
      services for us during thefiscalyear
      2005 and 2004and charged us at his usual and
      customary rate.During
      2005, 250,000 shares of commonstock valued at market
      ($3,250) and
      during 2004, 43,750 shares
      of common stock valued at market ($7,875) were issued in payment for these
      services.During
      2006 the Director resigned from the board, and because ofapotential conflict his services have
      not been
      engaged.





At
      December 31, 2005 and 2004 we had
      total notes payable in the amounts of $3,053,526and $4,057,770, respectively. Some of
      these notes are payable to our stockholders; however, none of these stockholdersisknown by us to own of record
      orbeneficially more than
      5% of our common stock.





On
      March
      9, 2005 we entered into a memorandum of understanding with Paul Morrell, Inc.,
      d.b.a. The Event Source (“TES”). Under the terms of the memorandum of
      understanding, as subsequently modified, we agreed to purchase the business
      operations and the intangible assets of TES ;
      however, TES withdrew from the transaction on June 6, 2005, with no further
      obligations or commitments on the part of  the
      Company.








15





On
      March 9, 2005, we sold our real
      property located inHeber
      City,Utahfor $900,000 to Morrell &
Associates, LLC, an entity in which Mr. Morrell is also a principal stockholder
      and the Chief Executive Officer. Furthermore, we issued 1,400,000 shares of
      our
      common stock as prepaid interest on the $402,000
      Note.At
      the time of the sale, the Company
      entered into a verbal lease agreement with the purchaser of the land and
      building to lease the land and building on a month-to-month basis for $10,000
      per month.





During
      March 2005,weentered into a stock subscription
      agreement withMr.
      Morrell(“Subscriber”) and
      issued 3,500,000 shares of common stock to the Subscriber for $700,000
      receivable from the Subscriber. During March 2005,wealso sold its real property, consisting
      of its manufacturing facilities located inHeber City,Utah,
      to the Subscriber and in conjunction
      therewith entered into a note payable in the amount of $402,000 bearing interest
      at 10% per annum. Upon the sale of this real estate, the Company entered into
      a
      verbal rental agreement with the Subscriber whereby the Company would pay
      $10,000 per month rent for the real estate that was sold. In addition to the
      foregoing, the Company issued 1,500,000 shares of its common stock to the
      Subscriber in February 2005 for $150,000 and issued 1,577,034 shares to the
      Subscriber in March 2005 as financing fees, valued at $80,523, the market value
      of the Company’s common stock on the date of issuance.





During
      2005, the Company collected
      $265,258 of the receivable from the Subscriber and in June 2005, the
      Company was informed by the
      Subscriber that the balance of the receivable would not be paid. The
      subscription agreement provideduswith the right to offset any and all
      obligations that the Company may have to the Subscriber against the amount
      due
      from the Subscriber. Upon
      notification that the balance of the subscription agreement would not be paid,
      the Company offset the $402,000 note payable to the Subscriber and related
      accrued interest of $9,802 against the unpaid balance of $434,742 receivable
      from the Subscriber.
      The remaining $22,940 was
      offset against the $10,000 per month rental payments. The Company has not made
      any payments since the inception of the verbal rental agreement expect for
      the
      amount offset.





**Item
      13.
 Exhibits**





Index
      to Exhibits:






31.1
            Rule
                13a-14(a)/15d-14(a) Certification of David Andrus, Principal Executive
                Officer and Principal Financial
                Officer




32.1
            Certification
                of David Andrus, Principal Executive Officer and Principal Financial
                Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of
                2002

























16





**Item
      14.  Principal Accountant Fees
      and Services**





Audit
      Fees:





The
      following is a summary of the aggregate fees billed to us by Hansen, Barnett
      & Maxwell, P.C.  for the fiscal years ended December 31, 2005 and
      2004:




Fiscal
                2005
            
            
            Fiscal
                2004Audit
                Fees
            
            $
            72,394
            
            
            $
            54,655Audit
                Related Fees
            
            
            1,550
            
            
            
            —Tax
                Fees (1)
            
            
            10,956
            
            
            
            8,000All
                Other Fees
            
            
            —
            
            
            
            —TOTAL
                Fees
            
            $
            84,900
            
            
            $
            62,655_________









Pre-Approval
      Policies and
      Procedures:





Our
      Board of Directors reviews and
      approves audit and permissible non-audit services performed by our registered
      public accounting firm. In its review of non-audit service fees and in its
      appointment ofa registered
      public accounting firm, our Board of Directors considered whether such services
      are compatible with maintaining the authorized independence, objectivity and
      impartial judgment on all issues encompassed within our public
      accountants’engagement. As part of their review,
      they have
      given due consideration to Rule 2-01 of Regulation S-X. All fees for audit
      and
      non-audit services that may be charged by our registered public accounting
      firm
      will be pre-approved by the board of directors.
























































17





**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.








Diatect
                International Corporation(Registrant)Dated:
                November 6, 2007By:
            /s/
                David AndrusDavid
                S. AndrusPrincipal
                Executive OfficerPrincipal
                Financial Officer





In
      accordance with the Securities Exchange Act of 1934, this Report on Form 10-KSB
      has been signed below by the following persons on behalf of the Registrant
      in
      the capacities and on the dates indicated.








***Signature***
            ***Capacity***
            ***Date***/s/
                Javvis O.
                Jacobsen
            Director
            November
                6, 2007Javvis
                O. Jacobsen





























































18





**DIATECT
      INTERNATIONAL
      CORPORATION**


**TABLE
      OF
      CONTENTS**








INDEX
                TO FINANCIAL
                STATEMENTS
            PAGEReport
                of Independent Registered Public Accounting Firm
            F-1Balance
                Sheets as of December 31, 2005 and  2004
            F-2Statements
                of Operations for the Years Ended December 31, 2005 and
                2004
            F-3Statements
                of Stockholders’ Deficit for the Years Ended December 31, 2004 and
                2005
            F-4Statements
                of Cash Flows for the Years Ended December 31, 2005 and
                2004
            F-5Notes
                to the Financial Statements
            F-7



















































































**HANSEN,
                BARNETT& MAXWELL,
                P.C.**A
                Professional CorporationCERTIFIED
                PUBLIC ACCOUNTANTS
            
            **Registered
                with the Public Company**5
                Triad Center, Suite 750
            
            **Accounting
                Oversight Board**Salt
                Lake City, UT 84180-1128Phone:
                (801) 532-2200
              Fax:
                (801) 532-7944www.hbmcpas.com











**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors and the Stockholders


Diatect
      International Corporation





We
      have
      audited the balance sheets of Diatect International Corporation as of December
      31, 2005 and 2004, and the related statements of operations, stockholders’
deficit, and cash flows for the years then ended. These financial statements
      are
      the responsibility of the Company’s management. Our responsibility is to express
      an opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (U.S). Those standards require that we plan and
      perform the audits to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements.  An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation.  We believe
      that our audits provide a reasonable basis for our opinion.





In
      our
      opinion the financial statements referred to above present fairly, in all
      material respects, the financial position of Diatect International Corporation
      as of December 31, 2005 and 2004, and the results of its operations and its
      cash
      flows for the years then ended, in conformity with accounting principles
      generally accepted in the United States of America.








**HANSEN,
                BARNETT & MAXWELL,
                P.C.**


Salt
      Lake
      City, Utah


February
      21, 2007


























F-1





DIATECT
      INTERNATIONAL CORPORATION


BALANCE
      SHEETS





***December
                31,***
            
            **2005**
            
            
            **2004****ASSETS****Current
                Assets**Cash
            
            $
            6,382
            
            
            $
            85,260Trade
                accounts receivable, net of allowance for doubtful accounts of $24,300
                and
                $95,624, respectively
            
            
            17,031
            
            
            
            54,919Inventory
            
            
            365,188
            
            
            
            461,911Prepaid
                expenses and other current assets
            
            
            4,618
            
            
            
            150,000**Total
                Current Assets**
            
            
            393,219
            
            
            
            752,090**Property
                and Equipment**, net of accumulated depreciation of $237,839 and
                $233,499, respectively
            
            
            144,631
            
            
            
            1,009,323**Intangible
                Assets - EPA Labels**, net of accumulated amortization of $620,000
                and $496,000, respectively
            
            
            1,116,322
            
            
            
            1,240,322**Total
                Assets**
            
            $
            1,654,172
            
            
            $
            3,001,735**LIABILITIES
                AND STOCKHOLDERS' DEFICIT****Current
                Liabilities**Trade
                accounts payable
            
            $
            59,090
            
            
            $
            88,442Accrued
                liabilities
            
            
            405,721
            
            
            
            268,728Checks
                drawn in excess of cash in bank
            
            
            10,481
            
            
            
            13,619Accrued
                payroll and related liabilities
            
            
            102,318
            
            
            
            285,590Accrued
                interest payable
            
            
            646,064
            
            
            
            506,924Accrued
                settlement obligations
            
            
            360,540
            
            
            
            418,541Current
                portion of notes payable
            
            
            1,267,963
            
            
            
            2,272,207**Total
                Current Liabilities**
            
            
            2,852,177
            
            
            
            3,854,051**Long-Term
                Notes Payable,**net of current portion
            
            
            1,785,563
            
            
            
            1,785,563**Stockholders'
                Deficit**Common
                stock, no par value; 300,000,000 shares authorized;
              99,264,997
                shares and 88,817,518 shares outstanding, respectively
            
            
            21,836,822
            
            
            
            20,784,858Warrants
                outstanding
            
            
            148,033
            
            
            
            148,033Accumulated
                deficit
            
            
            (24,968,423
            )
            
            
            (23,570,770
            )**Total
                Stockholders' Deficit**
            
            
            (2,983,568
            )
            
            
            (2,637,879
            )**Total
                Liabilities and Stockholders' Deficit**
            
            $
            1,654,172
            
            
            $
            3,001,735








The
      accompanying notes are an integral part of these financial
      statements.








F-2





DIATECT
      INTERATIONAL CORPORATION


STATEMENTS
      OF OPERATIONS





***For
                the Years Ended December 31,***
            
            **2005**
            
            
            **2004****Sales**
            
            $
            507,573
            
            
            $
            665,676**Cost
                of Goods Sold**
            
            
            435,346
            
            
            
            770,713**Gross
                Profit**
            
            
            72,227
            
            
            
            (105,037
            )**Expenses**Marketing
                and selling
            
            
            328,003
            
            
            
            389,692General
                and administrative
            
            
            1,010,035
            
            
            
            1,840,866**Total
                Expenses**
            
            
            1,338,038
            
            
            
            2,230,558**Other
                Income (Expense)**Gain
                from sale of building
            
            
            70,822
            
            
            
            -Interest
                expense
            
            
            (356,677
            )
            
            
            (806,202
            )**Net
                Other Expense**
            
            
            (285,855
            )
            
            
            (806,202
            )**Loss
                from Operations**
            
            
            (1,551,666
            )
            
            
            (3,141,797
            )**Gain
                from Termination of Debt**
            
            
            154,013
            
            
            
            323,214**Net
                Loss**
            
            $
            (1,397,653
            )
            
            $
            (2,818,583
            )**Basic
                and Diluted Loss Per Share**
            
            $
            (0.01
            )
            
            $
            (0.04
            )**Weighted-Average
                Common Shares Outstanding**
            
            
            95,643,362
            
            
            
            75,292,935





























The
      accompanying notes are an integral part of these financial
      statements.








F-3





DIATECT
      INTERATIONAL CORPORATION


STATEMENTS
      OF STOCKHOLDERS’ DEFICIT


For
      the
      Years Ended December 31, 2004 and 2005





**Common
                Stock**
            
            
            **Warrants**
            
            
            **Accumulated**
            
            
            **Total**
              **Stockholders'****Shares**
            
            
            **Amount**
            
            
            **Outstanding**
            
            
            **Deficit**
            
            
            **Deficit****Balance,
                December 31, 2003**
            
            
            61,877,910
            
            
            $
            18,099,833
            
            
            $
            -
            
            
            $
            (20,752,187
            )
            
            $
            (2,652,354
            )Issuance
                for cash
            
            
            4,473,600
            
            
            
            589,500
            
            
            
            -
            
            
            
            -
            
            
            
            589,500Issuance
                of common stock and 4,368,750 warrants for cash
            
            
            2,912,500
            
            
            
            84,890
            
            
            
            148,033
            
            
            
            -
            
            
            
            232,923Conversion
                of notes payable and accrued interest
            
            
            4,831,013
            
            
            
            416,973
            
            
            
            -
            
            
            
            -
            
            
            
            416,973Conversion
                of accounts payable
            
            
            948,574
            
            
            
            139,748
            
            
            
            -
            
            
            
            -
            
            
            
            139,748Issuance
                for accrued settlement obligation
            
            
            189,000
            
            
            
            31,455
            
            
            
            -
            
            
            
            -
            
            
            
            31,455Issuance
                for services
            
            
            10,848,356
            
            
            
            1,068,443
            
            
            
            -
            
            
            
            -
            
            
            
            1,068,443Issuance
                for financing costs
            
            
            2,736,565
            
            
            
            354,016
            
            
            
            -
            
            
            
            -
            
            
            
            354,016Net
                loss for the year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,818,583
            )
            
            
            (2,818,583
            )**Balance,
                December 31, 2004**
            
            
            88,817,518
            
            
            
            20,784,858
            
            
            
            148,033
            
            
            
            (23,570,770
            )
            
            
            (2,637,879
            )Issuance
                for cash
            
            
            1,900,000
            
            
            
            170,000
            
            
            
            
            
            
            
            
            
            
            
            170,000Issuance
                for services
            
            
            4,147,222
            
            
            
            79,111
            
            
            
            
            
            
            
            
            
            
            
            79,111Issuance
                for a receivable from shareholder
            
            
            3,500,000
            
            
            
            700,000
            
            
            
            
            
            
            
            
            
            
            
            700,000Issuance
                for financing costs
            
            
            2,677,034
            
            
            
            122,398
            
            
            
            
            
            
            
            
            
            
            
            122,398Settlement
                of accrued liabilities and conversion of notes payable
            
            
            1,223,223
            
            
            
            92,955
            
            
            
            
            
            
            
            
            
            
            
            92,955Forfeiture
                of unvested common shares upon cancellation of consulting
                agreement
            
            
            (3,000,000
            )
            
            
            (112,500
            )
            
            
            
            
            
            
            
            
            
            
            (112,500
            )Net
                loss for the year
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            (1,397,653
            )
            
            
            (1,397,653
            )**Balance,
                December 31, 2005**
            
            
            99,264,997
            
            
            $
            21,836,822
            
            
            $
            148,033
            
            
            $
            (24,968,423
            )
            
            $
            (2,983,568
            )





























The
      accompanying notes are an integral part of these financial
      statements.








F-4





DIATECT
      INTERATIONAL CORPORATION


STATEMENTS
      OF CASH FLOWS





***For
                the Years Ended December 31,***
            
            **2005**
            
            
            **2004****Cash
                Flows from Operating Activities**Net
                loss
            
            $
            (1,397,653
            )
            
            $
            (2,818,583
            )Adjustments
                to reconcile net loss to net cash used inoperating
                activities:Depreciation
            
            
            59,035
            
            
            
            87,703Amortization
            
            
            124,000
            
            
            
            248,000Gain
                from debt termination
            
            
            (154,013
            )
            
            
            (323,214
            )Net
                loss (gain) on disposal of property and equipment
            
            
            (68,212
            )
            
            
            20,756Issuance
                of stock for services
            
            
            79,111
            
            
            
            918,443Issuance
                of stock for finance charges and interest
            
            
            122,398
            
            
            
            354,016Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            37,888
            
            
            
            38,232Inventory
            
            
            96,723
            
            
            
            114,736Prepaid
                expenses and other current assets
            
            
            32,882
            
            
            
            111,000Accounts
                payable
            
            
            51,953
            
            
            
            92,229Accrued
                liabilities
            
            
            132,338
            
            
            
            -Accrued
                payroll and related liabilities
            
            
            (179,100
            )
            
            
            (125
            )Accrued
                interest payable
            
            
            238,225
            
            
            
            248,157**Net
                Cash Used in Operating Activities**
            
            
            (824,425
            )
            
            
            (908,650
            )**Cash
                Flows from Investing Activities**Disposal
                of property and equipment
            
            
            (26,130
            )Purchases
                of property and equipment
            
            
            -
            
            
            
            (4,972
            )**Net
                Cash Used in Investing Activities**
            
            
            (26,130
            )
            
            
            (4,972
            )**Cash
                Flow from Financing Activities**Proceeds
                from borrowings under notes payable
            
            
            434,500
            
            
            
            273,324Principal
                payments on notes payable
            
            
            (50,560
            )
            
            
            (102,886
            )Accrued
                settlement obligations
            
            
            (58,002
            )
            
            
            -Proceeds
                from issuance of common stock and warrants
            
            
            170,000
            
            
            
            822,423Collection
                of receivable from shareholder
            
            
            265,258
            
            
            
            -Proceeds
                from checks drawn in excess of cash in bank
            
            
            10,481
            
            
            
            -**Net
                Cash Provided by Financing Activities**
            
            
            771,677
            
            
            
            992,861**Net
                Increase (Decrease) in Cash**
            
            
            (78,878
            )
            
            
            79,239**Cash
                at Beginning of Year**
            
            
            85,260
            
            
            
            6,021**Cash
                at End of Year**
            
            $
            6,382
            
            
            $
            85,260











The
      accompanying notes are an integral part of these financial
      statements.





F-5





DIATECT
      INTERATIONAL CORPORATION


STATEMENTS
      OF CASH FLOWS (continued)





***For
                the Years Ended December 31,***
            
            **2005**
            
            
            **2004****Supplemental
                Disclosure of Cash Flow Information**Cash
                paid during the year for interest
            
            $
            1,000
            
            
            $
            17,431**Supplemental
                Schedule of Noncash Investing and Financing
                Activities**Mortgage
                note payable and accrued liabilities paid directly from the proceeds
                from
                the sale of land and building
            
            $
            900,000
            
            
            $
            -Common
                stock issued for a recievable from shareholder
            
            
            700,000
            
            
            
            -Receivable
                from shareholder offset against note payable, accrued interest and
                accrued
                liabilities
            
            
            434,742
            
            
            
            -Settlement
                of accrued liabilitites with and conversion of notes payable into
                common
                stock
            
            
            92,955
            
            
            
            416,973Forfeiture
                of unvested common shares upon concellation of consulting
                agreement
            
            
            112,500Conversion
                of accounts payable into common stock
            
            
            -
            
            
            
            139,748Satisfaction
                of accrued settlement obligations with common stock
            
            
            -
            
            
            
            31,355Conversion
                of accounts payable into notes payable
            
            
            -
            
            
            
            564,626Conversion
                of royalties payable into notes payable
            
            
            -
            
            
            
            113,623


















































The
      accompanying notes are an integral part of these financial
      statements.











F-6





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





*Organization
      and Description of Business –*Diatect International Corporation (the
“Company”) is a California corporation operating as a developer and marketer of
      non-toxic pesticide products. The Company sells its products to both wholesale
      distributors and retail customers in the United States. The financial statements
      reflect the increase in the number of shares of common stock that the Company
      is
      authorized to issue from 100,000,000 to 300,000,000 shares in February of
      2006.





*Use
      of Estimates*– The financial statements are prepared in conformity with
      accounting principles generally accepted in the United States of America and
      require management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and the disclosure of contingent assets and
      liabilities at the date of the financial statements. Estimates may also affect
      the reported amounts of revenues and expenses during the reporting periods.
      Actual results could differ from those estimates upon subsequent resolution
      of
      identified matters.





*Business
      Condition*– The Company generated revenue of $507,573 during the year ended
      December 31, 2005 compared to $665,676 during the year ended December 31, 2004,
      resulting in a gross profit of $72,227 and gross loss of $105,037, respectively.
      For the years ended December 31, 2005 and 2004, the Company incurred a loss
      from
      operations of $1,551,666 and $3,141,797, respectively, and a net loss of
      $1,397,653 and $2,818,583, respectively. At December 31, 2005 the Company had
      a
      total stockholders’ deficit of $2,983,568 and its current liabilities exceeded
      current assets by $2,458,957.





In
      June
      2005 three note holders of the Company filed suit in Federal Bankruptcy Court
      to
      force the Company into a Chapter 7 receivership and in February 2006 the Company
      filed a damage suit against those creditors. In April 2006 a settlement was
      reach whereby the creditor suit was dismissed and the Company was awarded
      damages through the relief of $354,175 in notes payable and $142,367 of accrued
      interest, the return to the Company of 207,275 shares of its common stock,
      which
      were cancelled, and the payment of $10,000. Accordingly, the Company was never
      under bankruptcy supervision of the court and the accompanying financial
      statements do not present any liabilities as subject to compromise.





In
      February 2006 the Company entered into a one year non-exclusive Financial
      Advisory and Investment Banking Agreement (“Investment Banking Agreement”) with
      Pointe Capital L.L.C. (“Pointe”), and pursuant thereto, received $150,000. In
      addition, in June 2006 the Company, through Pointe, commenced a Convertible
      Promissory Note (“Convertible Note”) offering.  The terms of the
      Investment Banking Agreement, the Convertible Note, and other financial
      arrangements that the Company has entered into subsequent to June 30, 2005,
      are
      described in Note 11 to these financial statements. Through December 31, 2006,
      the Company has received $700,000 pursuant to the Convertible Note offering
      and
      through July of 2007, the Company has received an additional $771,000 at which
      time the offering was closed.





The
      ability of the Company to continue operations is dependent upon obtaining
      additional financing and being able to generate net profits in the future.
      Management believes that these events are likely to occur in the near future,
      even though no assurance thereof can be given. Additional financing arrangements
      have been negotiated and are discussed further in Note 11.





***Cash
      and Cash Equivalents*** - Cash and cash equivalents include interest
      bearing and non-interest bearing bank deposits, money market accounts, and
      short-term certificates of deposit with original maturities of three months
      or
      less.





***Credit
      Risk*** - The carrying amounts of trade accounts receivable included
      in the balance sheets represent the Company’s exposure to credit risk in
      relation to its financial assets. The Company performs ongoing credit
      evaluations of each customer’s financial condition. The Company maintains
      allowances for doubtful accounts and such allowances in the aggregate did not
      exceeded management’s estimations.








F-7





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





***Trade
      Accounts Receivable and Allowance for Doubtful Accounts*** - Trade
      accounts receivables and other receivables are carried at original invoiced
      amounts less an allowance for doubtful accounts.





***Inventory***–
      By the end of the second quarter of 2005, the Company determined that its
      finished goods inventory, as it was then constituted, required additional raw
      materials to bring it to the level of Company standards. Consequently, the
      existing finished goods inventory was reclassified as raw materials having
      a
      cost that is less than the cost of disposing of the product and acquiring new
      raw materials. Furthermore, the Company continues to sell the now reconstituted
      product at a price in excess of the cost of production. The Company’s current
      inventory consists primarily of raw materials and is valued at the lower of
      cost
      or market, with cost being determined by the average cost method. Raw materials
      consist of the various active ingredients that comprise the Company’s products
      and shipping and packaging materials. When there is evidence that inventory
      values are less than original cost, the inventory is reduced to market value.
      The Company determines market value based on current prices and whether
      obsolescence exists.





***Property
      and Equipment –*** Property and equipment are stated at cost.
      Expenditures for normal repairs and maintenance are charged to operations as
      incurred. The cost of an asset and related accumulated depreciation are also
      charged to operations when retired or otherwise disposed. Depreciation is
      computed based on the estimated useful life of the assets using straight-line
      and accelerated methods. Useful lives for equipment range from 3 to 10 years
      and
      30 years for buildings.





***Intangible
      Assets*****– The Company’s intangible assets consist of
      the labels that are placed on its products and that have been registered as
      non-toxic insecticide products with the United States Environmental Protection
      Agency pursuant to the Federal Insecticide, Fungicide and Rodenticide Act.
      The
      Company recorded these labels at cost; however, it impaired the value thereof
      by
      $2,869,570 in 2003. During 2004 and for the first 6 months of 2005, the Company
      amortized the unimpaired value over an estimated useful life of 7 years using
      the straight-line method. In July 2005, the Company concluded that the estimated
      useful life of the labels was indefinite and will henceforth subject the labels
      to impairment if and when appropriate. The Company has not impaired the value
      of
      the labels since making this determination.





***Long
      Lived Assets***– Long-lived assets are reviewed for impairment when
      events or changes in circumstances indicate that the carrying amount may not
      be
      recoverable. Recoverability of assets to be held and used is measured by
      comparison of the carrying amount of an asset to future net cash flows expected
      to be generated by the asset. If such assets are considered to be impaired,
      the
      impairment to be recognized is measured by the amount that the carrying amount
      of the assets exceeds the fair value of the assets. Assets to be disposed of
      are
      reported at the lower of the carrying amount or fair value less costs to
      sell.





***Fair
      Value of Financial Instruments***– Due to the short maturity of trade
      receivables and current liabilities, including trade payables, the carrying
      amount approximates fair value. The carrying amount reported for notes payable
      approximates fair value and interest rates on these notes approximate current
      interest rates given the current business condition of the Company.





***Revenue
      Recognition***– The Company recognizes revenue from the sale of its
      products when (a) persuasive evidence of an arrangement exists, (b) delivery
      has
      occurred and no significant obligations remain, (c) the sales price is fixed
      and
      determinable and (d) collection is determined to be probable. Sales credits
      and
      price concessions are treated as a reduction of revenue. Product returns are
      permitted, but historically have occurred within a short period after the sale
      and are recognized as a reduction of revenue.








F-8





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





***Shipping
      and Handling Costs***– Shipping and handling costs are billed to
      customers and are recorded as revenue and the associated costs are included
      in
      cost of revenues.





***Marketing
      and Selling Expenses***– Marketing and selling expenses include the
      salaries and wages of its in-house sales force, rent, advertising, product
      samples and promotional expenses. The Company designs and prints literature
      and
      marketing materials for its products, as well as promotional materials used
      in
      trade shows.




***Income
      Taxes –***No income taxes have been paid or accrued for Federal tax
      purposes because the Company has had no net taxable income since inception.
      The
      Company recognizes the amount of income taxes payable or refundable for the
      current year and recognizes deferred tax assets and liabilities for the future
      tax consequences attributable to differences between the financial statement
      amounts of certain assets and liabilities and their respective tax bases.
      Deferred tax assets and deferred liabilities are measured using enacted tax
      rates expected to apply to taxable income in the years those temporary
      differences are expected to be recovered or settled. Deferred tax assets are
      reduced by a valuation allowance to the extent that uncertainty exists as to
      whether the deferred tax assets will ultimately be realized.





***Basic
      and Diluted Loss Per Share*****– Basic loss per share is
      computed by dividing the net loss by the weighted average number of shares
      outstanding during the period presented. At December 31, 2005 and 2004, there
      were potentially dilutive common shares outstanding relating to outstanding
      warrants to purchase 4,650,000 shares of common stock, that were not included
      in
      the computation of diluted net loss per share as their effect would have been
      anti-dilutive.





***Marketing
      and Selling Expenses***– Marketing and selling expenses include the
      salaries and wages of its in-house sales force, rent, advertising, product
      samples and promotional expenses. The Company designs and prints literature
      and
      marketing materials for its products, as well as promotional materials used
      in
      trade shows.





***Stock-Based
      Compensation Plans*** -The Company accounts for its stock-based
      compensation issued to non-employees by using the fair value method in
      accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” Under
      SFAS No. 123, stock-based compensation is determined as either the fair value
      of
      the consideration received or the fair value of the equity instruments issued,
      whichever is more reliably measurable. The measurement date for these issuances
      is the date that the securities were issued, which approximates the date at
      which a commitment for performance by the recipient to earn the equity
      instruments is reached or the date at which the recipient’s performance is
      complete.





At
      December 31, 2005, the Company did not have any stock-based employee
      compensation plans. The Company has accounted for stock options granted in
      the
      past under the recognition method and measurement principles of APB Opinion
      No.
      25, *Accounting for Stock Issued to Employees*, and the related
      interpretations. Under APB Opinion No. 25, compensation related to stock
      options, if any, is recorded if an option’s exercise price on the measurement
      date is below the fair value of the Company’s common stock, and amortized to
      expense over the vesting period. Compensation expense for stock awards or
      purchases, if any, is recognized if the award or purchase price on the
      measurement date is below the fair value of the Company’s common stock, and is
      recognized on the date of award or purchase.  These accounting
      policies resulted in the Company not recognizing any stock-based employee
      compensation cost during the years ended December 31, 2005 or 2004. The effect
      on net loss and net loss per common share if the Company had applied the fair
      value recognition provisions of SFAS No. 123 to employee stock-based
      compensation would have resulted in no difference from reported
      amounts.








F-9





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





***Recently
      Enacted Accounting Standards***– On January 1, 2006, the Company
      adopted SFAS No. 151, *Inventory Costs – An Amendment of ARB
      No. 43, Chapter 4* (“SFAS 151”). SFAS 151 amends the guidance
      in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting
      for abnormal amounts of idle facility expense, freight, handling costs, and
      wasted material (spoilage). Among other provisions, the new rule requires that
      items such as idle facility expense, excessive spoilage, double freight, and
      re-handling costs be recognized as current-period charges. Additionally,
      SFAS 151 requires that the allocation of fixed production overhead to the
      costs of conversion be based on the normal capacity of the production
      facilities. The effects of adoption of SFAS 151 were not material.





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based
      Payment*, which is an amendment to SFAS No. 123, *Accounting for
      Stock-Based Compensation* and supersedes Accounting Principles Board (“APB”)
      Opinion No. 25, “Accounting for Stock Issued to Employees.” This new standard
      eliminates the ability to account for share-based compensation transactions
      using APB No. 25 and requires such transactions to be accounted for using a
      fair-valued-based method, with the resulting cost recognized in the Company’s
      financial statements. This new standard is effective for annual periods
      beginning after June 15, 2005. The adoption of this standard is not expected
      to
      have a material impact on the Company’s financial statements until such time as
      stock options are granted.





In
      December 2004, the FASB issued SFAS No. 153, *Exchanges of
      Non-monetary Assets—An Amendment of APB Opinion No. 29*, Accounting for
      Non-monetary Transactions (“SFAS 153”). SFAS 153 eliminated the exception
      from fair value measurement for non-monetary exchanges of similar productive
      assets in paragraph 21(b) of APB Opinion No. 29, *Accounting for
      Non-monetary Transactions*, and replaces it with an exception for exchanges
      that do not have commercial substance. SFAS 153 specifies that a
      non-monetary exchange has commercial substance if the future cash flows of
      the
      entity are expected to change significantly as a result of the exchange. The
      effects of adoption of SFAS 153 were not material.





In
      June
      2005, the FASB issued SFAS No. 154, *Accounting Changes and Error
      Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
      No. 3, Reporting Accounting Changes in Interim Financial
      Statements*.  Statement 154 applies to all voluntary changes in
      accounting principle, and changes the requirements for accounting for and
      reporting of a change in accounting principle. Statement 154 requires
      retrospective application to prior periods' financial statements of a voluntary
      change in accounting principle unless it is impracticable. It is effective
      for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Earlier application is permitted for accounting changes
      and corrections of errors made occurring in fiscal years beginning after June
      1,
      2005. The effects of adoption of SFAS 154 were not material.





In
      June
      2005, the FASB Emerging Issues Task Force (the “EITF”) reached a consensus on
      Issue No. 05-6, *Determining the Amortization Period for Leasehold
      Improvements*. The guidance requires that leasehold improvements acquired in
      a business combination or purchased subsequent to the inception of a lease
      be
      amortized over the lesser of the useful life of the assets or a term that
      includes renewals that are reasonably assured at the date of the business
      combination or purchase. The guidance is effective for periods beginning after
      June 29, 2005. The effects of adoption of EITF No. 05-6 were not
      material.








F-10





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





In
      February 2006, the FASB issued
      SFAS No. 155,*Accounting for Certain
      Hybrid
      Financial Instruments — an amendment of FASB Statements No. 133 and
      140*(“SFAS 155”).
      SFAS 155 amends SFAS No. 133,*Accounting for Derivative
      Instruments and Hedging Activities*and SFAS No. 140,*Accounting
      for Transfers and
      Servicing of Financial Assets and Extinguishments of
      Liabilities,*and
      related interpretations.
      SFAS 155 permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation and clarifies which interest-only strips and principal-only strips
      are not subject to recognition as liabilities. SFAS 155 eliminates the
      prohibition on a qualifying special-purpose entity from holding a derivative
      financial instrument that pertains to a beneficial interest other than another
      derivative financial instrument. SFAS 155 is effective for the Company for
      all financial instruments acquired or issued beginning January 1, 2007.The impact of adoption of this statement on the Company’s consolidated
      financial statements, if any, has not yet been determined.





In
      March
      2006, the FASB issued SFAS No. 156, *Accounting for Servicing of Financial
      Assets – an amendment of FASB Statement No. 140*(SFAS 156). SFAS 156 amends
      SFAS 140 requires an entity to recognize a servicing asset or servicing
      liability each time it undertakes an obligation to service a financial asset.
      It
      also requires all separately recognized servicing assets and servicing
      liabilities to be initially measured at fair value, if practicable. SFAS 156
      permits an entity to use either the amortization method or the fair value
      measurement method for each class of separately recognized servicing assets
      and
      servicing liabilities. SFAS 156 is effective for the Company as of January
      1,
      2007. The impact of adoption of this statement on the Company’s consolidated
      financial statements, if any, has not yet been determined.





In
      June
      2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainties in
      Income Taxes*, (FIN 48).  FIN 48 clarifies the accounting for
      uncertainty in income taxes and prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return.  FIN 48
      is effective for fiscal years beginning after December 15,
      2006.  Management believes that adoption of this standard will not
      have a material impact on the Company's financial statements.





In
      September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(SFAS 157), to eliminate the diversity in practice that exists due
      to the
      different definitions of fair value and the limited guidance for applying those
      definitions in GAAP that are dispersed among the many accounting pronouncements
      that require fair value measurements. SFAS No. 157 retains the exchange price
      notion in earlier definitions of fair value, but clarifies that the exchange
      price is the price in an orderly transaction between market participants to
      sell
      an asset or liability in the principal or most advantageous market for the
      asset
      or liability. Moreover, the SFAS states that the transaction is hypothetical
      at
      the measurement date, considered from the perspective of the market participant
      who holds the asset or liability. Consequently, fair value is defined as the
      price that would be received to sell an asset or paid to transfer a liability
      in
      an orderly transaction between market participants at the measurement date
      (an
      exit price), as opposed to the price that would be paid to acquire the asset
      or
      received to assume the liability at the measurement date (an entry
      price).




SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity’s own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition. Entities are encouraged to
      combine the fair value information disclosed under SFAS No. 157 with the fair
      value information disclosed under other accounting pronouncements, including
      SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where
      practicable. The guidance in this Statement applies for derivatives and other
      financial instruments measured at fair value under SFAS No.133, “Accounting for
      Derivative Instruments and Hedging Activities,” at initial recognition and in
      all subsequent periods. The impact of adoption of this statement on the
      Company’s consolidated financial statements, if any, has not yet been
      determined.







F-11





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





In
      September 2006, the FASB issued “Statement of Financial Accounting Standards No.
      158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R)” (SFAS 158),
      which will require employers to fully recognize the obligations associated
      with
      single-employer defined benefit pension, retiree healthcare and other
      postretirement plans in their financial statements. Under past accounting
      standards, the funded status of an employer’s postretirement benefit plan (i.e.,
      the difference between the plan assets and obligations) was not always
      completely reported in the balance sheet. Past standards only required an
      employer to disclose the complete funded status of its plans in the notes to
      the
      financial statements. SFAS No. 158 applies to plan sponsors that are public
      and
      private companies and nongovernmental not-for-profit organizations. The
      requirement to recognize the funded status of a benefit plan and the disclosure
      requirements are effective as of the end of the fiscal year ending after
      December 15, 2006, for entities with publicly traded equity securities, and
      at
      the end of the fiscal year ending after June 15, 2007, for all other entities.
      The requirement to measure plan assets and benefit obligations as of the date
      of
      the employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. The Company does not expect that
      the adoption of SFAS No. 158 will have a significant impact on the consolidated
      results of operations or financial position of the Company.





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin 108 (SAB 108), *Considering the Effects of Prior year Misstatements
      When Quantifying Misstatements in Current Year Financial Statement*”. SAB
      108 clarifies the staff’s view regarding the process of quantifying financial
      statement misstatements. More specifically, the staff noted that certain
      registrants do not consider the effects of prior year errors on current year
      financial statements, thereby allowing improper assets or liabilities to remain
      unadjusted. The staff believes this approach is not in the best interests of
      the
      users of the financial statements. SAB 108 is effective for fiscal years ending
      on or after November 15, 2006 with earlier adoption encouraged. The Company
      is
      currently evaluating the impact that the adoption of SAB 108 will have, if
      any,
      on its financial statements and notes thereto.








**NOTE
      2 – PROPERTY AND EQUIPMENT**





Property
      and equipment are stated at cost. Expenditures for normal repairs and
      maintenance are charged to operations as incurred. The cost of an asset and
      related accumulated depreciation are also charged to operations when retired
      or
      otherwise disposed. Depreciation is computed based on the estimated useful
      life
      of the assets using straight-line and accelerated methods. Depreciation expense
      for the years ended December 31, 2005 and 2004 was $59,035 and $87,703,
      respectively. The components of property and equipment are as
      follows:




















F-12





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





**Estimated**
              **Useful
                Life**
            
            **December
                31,****in
                Years**
            
            **2005**
            
            
            **2004**Land
            
            
            $
            -
            
            
            $
            150,000Building
            30
            
            
            -
            
            
            
            725,500Computer
                equipment
            3
                to 5
            
            
            103,585
            
            
            
            88,437Office
                furniture and equipment
            5
            
            
            33,275
            
            
            
            33,275Manufacturing
                equipment
            5
                to 10
            
            
            245,610
            
            
            
            245,610Total
                Property and Equipment
            
            
            
            382,470
            
            
            
            1,242,822Less:
                Accumulated depreciation
            
            
            
            (237,839
            )
            
            
            (233,499
            )Net
                Property and Equipment
            
            
            $
            144,631
            
            
            $
            1,009,323





On
      March
      9, 2005, the Company sold its land
      and building inHeber
      City,Utahto a shareholder of the Company. The
      land and building were sold for$900,000 and the proceeds from the sale
      were paid directly by the purchaser to satisfy the balance due under the related
      mortgage note payable. The sale of the land and building resulted in the
      recognition of a gain of $70,822. At the time of the sale, the Company entered
      into a verbal lease agreement with the purchaser of the land and building to
      lease the land and building on a month-to-month basis for $10,000 per month.
      The Company uses the building
      as
      its manufacturing and office facilities.





The
      Company owns association placer diatomaceous earth mining claims and placer
      diatomaceous earth mining claims, in the State of Oregon. The Company has not
      engaged in any mining operations and does not anticipate undertaking mining
      operations in the near future. The mining claims are carried at no
      cost.





**NOTE
      3 – NOTES PAYABLE**





***December
                31,***
            
            **2005**
            
            
            **2004**Revolving
                lines of credit with financial institutions, past due
            
            $
            2,808
            
            
            $
            15,404Cash
                advances from shareholder, unsecured
            
            
            97,000
            
            
            
            97,000Mortage
                note payable, secured by real property
            
            
            -
            
            
            
            847,000Convertible
                debenture payable to La Jolla Investment , LLC
            
            
            278,500
            
            
            
            286,263Unsecured
                10% notes payable to investors, in default
            
            
            353,155
            
            
            
            392,155Unsecured
                12% notes payable to investors, in default
            
            
            240,000
            
            
            
            366,685Unsecured
                15% notes payable to investors, in default
            
            
            256,500
            
            
            
            260,000Unsecured
                24% notes payable to investors, in default
            
            
            40,000
            
            
            
            -Unsecured
                5% notes payable to shareholders, due in 2008
            
            
            1,220,937
            
            
            
            1,220,937Unsecured
                5% notes payable to vendors, due in 2008
            
            
            564,626
            
            
            
            564,626Non-interest
                cash advances
            
            
            -
            
            
            
            7,700Total
                Notes Payable
            
            
            3,053,526
            
            
            
            4,057,770Less:
                Current portion
            
            
            1,267,963
            
            
            
            2,272,207Long-Term
                Notes Payable
            
            $
            1,785,563
            
            
            $
            1,785,563








F-13





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





***Revolving
      Lines of Credit*** – As of December 31, 2005 the Company has
      unsecured, revolving credit notes with a financial institution totaling $2,808.
      Officers and shareholders of the Company guarantee the credit notes payable.
      The
      amounts borrowed under revolving credit notes at December 31, 2004 were from
      another bank and subsequently were paid and closed.





***Cash
      Advances from Shareholder***– Prior to 2004, a shareholder advanced
      $97,000 of cash to the Company. The Company was obligated to issue 250,000
      shares of common stock to the shareholder every six months as payment of
      interest on the cash advances. During 2005, the Company issued 750,000 shares
      of
      common stock to this shareholder in payment of the $37,500 of accrued interest
      on the advances through that date and the shareholder agreed to not require
      any
      further interest payments in common stock or otherwise. The cash advances are
      unsecured and have no stated maturity date.





***Mortgage
      Note Payable*** – The Company was obligated under the terms of a
      mortgage note payable in the amount of $847,000. The note bore interest at
      13%
      per annum and was secured by land and building. Interest only payments were
      due
      monthly beginning February 17, 2003 through January 17, 2005 when the mortgage
      note was due. During March 2005, the land and building were sold to a
      shareholder of the Company and the proceeds from the sale were use to satisfy
      the balance due under the mortgage note and other short-term
      liabilities.





***La
      Jolla Cove Investors*** – During December 2002, the Company
      entered into a convertible debenture agreement with La Jolla Cove Investors,
      Inc., who at the time was the named underwriter (the “Underwriter”) for a
      planned public offering of the Company’s common stock. The Underwriter advanced
      the Company $150,000 in 2002 and $100,000 in 2003, which advances were evidenced
      by a convertible debenture agreement that was to be repaid out of a portion
      of
      the proceeds from the public offering.On July 12, 2004, the Underwriter
      filed
      a complaint for breach of contract in the State ofCaliforniaclaiming a default under the terms of
      the convertible debenture in the amount of $406,990 plus interest and penalties.
      On November 18, 2004, prior to the registration statement relating to
      the
      public offering being declared effective, the Company withdrew the registration statement. During
      2005, the
      Company made principal payments to the Underwriter of $7,763. DuringJuly,2006,the
      Company reached a
      settlement agreement with the Underwriter whereby the Company paid the
      Underwriter $140,000 in full satisfaction of all amounts due under the
      convertible debenture and related interest and penalties.





***Unsecured
      12% Notes Payable to Investors***– The Robinson Family LLC filed suit
      in Fourth District Court in Wasatch County, State of Utah, to collect a $106,000
      promissory note bearing interest at 12% per annum that was due on April 1,
      2002.
      At December 31, 2004, the note was carried at $126,686. Subsequently, the
      Robinson Family LLC became a party to a suit filed in Federal Bankruptcy Court
      to force the Company into involuntary bankruptcy. During the fourth quarter
      of
      2005, the Company entered into a settlement agreement with the Robinson Family
      LLC and a shareholder of the company, whereby the shareholder made a settlement
      payment to the Robinson Family LLC and the Company was released from any
      obligations.  The Company released Robinson Family LLC from any
      damages resulting from the involuntary bankruptcy suit. The settlement resulted
      in the Company recognizing a $126,686 gain from termination of
      debt.





On
      August
      1, 2001, the Company executed a $200,000 note payable to Bruce L. Shannon with
      interest at 12% per annum, due August 1, 2002 and extended (with dispute) to
      May
      1, 2005. In April 2006, all amounts of principal and interest due under the
      note
      were forgiven as part of a settlement discussed further in Note 4.








F-14





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





***Unsecured
      Notes Payable***– The Company has borrowed money from several
      entities, including shareholders of the Company, with various terms including
      demand promissory notes. The notes are unsecured and bear interest at rates
      from
      5% to 24% payable at different times. As additional consideration for certain
      loans, the Company issued common stock to the lenders. The shares of common
      stock issued to the lenders were valued at the market value of the common stock
      on the date issued and were recognized as interest expense on that date. During the years ended December
      31, 2005
      and 2004, the Company issued 1,100,000and 2,736,565 shares of common stock,
      respectively, at prices ranging from $0.013 to $0.06 and $0.06 to $0.20 per
      share, respectively, having a total market value of $41,875and $354,106, respectively, that were recognized
      as interest
      expense upon issuance.





During
      the year ended December 31, 2004, promissory notes that were not previously
      convertible were modified to make them convertible and the Company issued
      4,831,013 shares of common stock valued from $0.05 to $0.23 per share upon
      conversion of $416,973 of notes payable, which included $40,035 of accrued
      interest. The effective conversion prices were in excess of the market value
      of
      the common stock on the dates issued; thus, the investors did not receive a
      beneficial conversion option.





***5%
      Notes Payable*** – In 2004, the Company executed modified notes
      payable to several note holders to extend the terms of the notes to be due
      in
      2008 and accrue interest at an annual rate of 5%.





***Notes
      Payable to Vendors*** – In 2004, vendors agreed to extend the
      terms of outstanding accounts payables by converting them into promissory notes
      that are due in 2008 and accrue interest at 5% per annum.





**NOTE
      4 – SETTLEMENT OBLIGATIONS AND LITIGATION CLAIMS**





The
      Company has obligations due to creditors that arose from cash loans and the
      receipt of goods or services in the amount of $360,540 and $418,541 at December
      31, 2005 and 2004, respectively. The Company is in default in its payment of
      each of these obligations. The obligations are unsecured and are currently
      due.
      Certain of the obligations are in dispute as further described below. The
      obligations have not been reduced by any amounts that may be compromised by
      the
      creditors in the future, but include all amounts due and include default
      judgments obtained by the creditors. The accrued settlement obligations include
      the following:





December
                31,Other
                Short-term Liabilities
            
            2005
            
            
            2004Complete
                Packaging, LLC d.b.a. Compax
            
            $
            144,622
            
            
            $
            220,000David
                J. Stecher
            
            
            28,325
            
            
            
            16,814Litho-Flexo
                Graphics, Inc.
            
            
            63,283
            
            
            
            72,625Williams
                & Webster
            
            
            54,564
            
            
            
            54,564Xerox
            
            
            17,590
            
            
            
            -National
                Bulk
            
            
            20,418
            
            
            
            21,418Others
                (Downs and Parkinson)
            
            
            31,738
            
            
            
            33,120Total
            
            $
            360,540
            
            
            $
            418,541








F-15





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





***Complete
      Packaging, LLC d.b.a. Compax***–On October 17,
      2003, Complete
      Packaging, LLC, doing business as Compax,  filed a complaint in
      theThirdDistrictCourtofSaltLakeCounty,
      State ofUtah,
      naming the Company as the defendant.
      Compax contended that the Company failed to make payment of a trade payable
      that, with interest and costs amounted to $323,892, whichamount
      continued to accrue interest from
      November 30, 2004. The complaint concluded in Compax obtaining a judgment
      against the Company. During 2005, the Company entered into a settlement
      agreement with Compax that required the Company to make three monthlypayments of $25,000 through May 2005
      and a lump sum payment of $145,000 in June 2005. As a result, the Company
      accrued a $220,000 settlement obligation liability at December 31, 2004. The
      Company made two of the monthly payments but failed to make the remaining
      payments due under the terms of
      the settlement agreement. In July 2006, the Company and Compax reached a further
      agreement dated June 6, 2006 under which Compax agreed to accept payment of
      $150,000 in total satisfaction of the Company’s
      obligation.This
      amount was paid at prescribed
      intervals with the final payment made on September 1, 2007, which resulted
      in
      the Company being released from the judgment.





***La
      Jolla Cove Investors,
      Inc.***–On July 12, 2004, La Jolla Cove
      Investors, Inc. (“La Jolla
      Cove”) filed a complaint in
      the Superior Court of California,CountyofSan Diego,
      naming the Company as the defendant.
      La Jolla Cove contended that the Company breached its contract with La Jolla
      Cove by failing to honor a convertible debenture agreement entered
      into when La Jolla Cove was named as
      an underwriter for the Company in a planned public offering of the
      Company’s
      common stock. La Jolla Cove claimed
      damages in the amount of $406,990, which resulted in part from $150,000 of
      advances to the Company in2002
      and $100,000 in 2003, which amounts
      were to be repaid out of a portion of the proceeds from the planned public
      offering. The Company withdrew the registration statement for the public
      offering on November 18, 2004 and claimed that La Jolla Cove made unreasonable
      demands on the Company with
      respect to the registration statement. The Company accrued a $286,263settlement obligation liability at
      December 31, 2004 which wasdecreased
      to $278,500 at December 31,
      2005.  In June 2006, the Company reached a settlement with La Jolla
      Cove under which
      the Company paid La Jolla Cove $115,000 through July 2006, which resulted in
      the
      full release of the Company.





***David
      J. Stecher***– During 2002, the Company entered into a promissory
      note in the amount of $18,070, bearing interest at 15% per annum, due on demand.
      During 2004 a suit was filed to collect the principal amount due including
      accrued interest. At December 31, 2005, the accrued settlement obligation was
      $28,325 including accrued interest. During 2006, the Company paid $36,000 in
      full satisfaction of this obligation.





***Litho-Flexo
      Graphics, Inc.***– On
      May 23, 2003, Litho-Flexo Graphics, Inc. filed a complaint in the Fourth
      District Court in and forWasatchCounty,
      State ofUtah,
      naming the Company as the
      defendant. Litho-Flexo
      contended that the Company failed to make payment of a trade payable that,
      with
      interest and costs amounted to $92,478. The Company contended that the packaging
      labels purchased from Litho-Flexo were defective and could not be used in the
      packaging
      of the Company’s
      products. The Company filed a
      counterclaim claiming in excess of $100,000 for damages resulting from the
      use
      of the defective labels. The Company accrued a $72,625 accrued settlement
      obligation liability at December 31, 2004.During the year ended December
      31, 2005, the Company paid $9,342 to the vendor,which decreased the recorded
      accrued
      settlement obligation liability to $63,283 at December 31, 2005.No
      resolution has been reached under the claims, which continue to be in
      litigation.





***Bruce
      L.
      Shannon******Attempted Bankruptcy
      Action***– On February
      28, 2005, Bruce L. Shannon, an individual doing business as K-Net, filed a
      complaint in the Fourth District Court in and forWasatchCounty,
      State ofUtah,
      naming the Company as the
      defendant. Mr. Shannon
      contended that a $200,000 note dated August 1, 2001 and bearing interest at
      12%
      per annum was due on August 1, 2002. The Company contended that Mr. Shannon
      entered into a note extension with the Company and thereby delayed the payment
      due date
      of this note until May 1, 2005. The
      Company accrued a $280,500 settlement obligation at December 31, 2004 and
      2005.








F-16





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





In
      June
      2005, three note holders, Bruce L. Shannon, Brent Larson and the Robinson Family
      LLC, filed suit in Federal Bankruptcy Court to force the Company into a Chapter
      7 receivership. In February 2006, the Company filed a damage suit against those
      note holders. In April 2006, a settlement was reach whereby the note-holders’
bankruptcy suit was dismissed and the Company was awarded damages through the
      relief of $354,175 of notes payable and $142,367 of related accrued interest
      due
      to the note holders, the return of 207,275 shares of the Company’s common stock
      by the note holders, and the payment of $10,000 of legal fees for the
      Company.





***L.
      Craig Hunt***– Pursuant to the non-payment of a $42,750 promissory
      note dated August 28, 1995, a judgment was entered against the Company on
      February 1, 1999 in the amount of $61,543. The plaintiff did not pursue the
      collection of this judgment and the Company recorded this amount as a gain
      from
      extinguishment of debt during 2004. During 2006 the Plaintiff’s estate made
      demand on the Company for payment of the judgment amount. The Company contends
      that the period allowed for the collection of the judgment had expired and
      no
      further obligation exists. No amount has been accrued for this claim in the
      accompanying financial statements.





**NOTE
      5 - COMMON STOCK**





In
      February 2006, the shareholders approved an increase of the authorized common
      stock of the Company from 100,000,000 shares to 300,000,000 shares. The
      accompanying balance sheets have been restated to reflect the increase in the
      authorized number of shares.





During
      the year ended December 31, 2004, the Company issued 10,848,356 shares of its
      common stock valued at $1,068,443 for current and future services, as well
      as
      948,574 shares of common stock valued at $139,748 in satisfaction of existing
      account payable.The
      shares were valued at their market value on the date of issuance.  The
      Company also issued 4,473,600 shares of its common stock for $589,500 in cash,
      or $0.13 per share.  Also, 189,000 shares of common stock valued at
      $31,455 were issued as partial payment of an accrued settlement
      obligation.





During
      2004, the Company issued 2,912,500 shares of common stock, warrants to purchase
      2,912,500 shares of common stock at $0.20 per share and warrants to purchase
      1,456,250 shares of common stock at $0.35 per share for net proceeds of
      $232,923. The proceeds were allocated to the common stock and the warrants
      base
      upon their relative fair value, with $84,890 allocated to the common stock,
      $100,631 allocated to the $0.20 warrants and $47,402 allocated to the $0.35
      warrants. The Company determined the fair value of the warrants using the
      Black-Scholes Option Pricing Model. The fair value of the $0.20 and the $0.35
      warrants was $295,079 and $138,991, respectively, based upon the following
      assumptions: risk-free interest rates of 3.0%, expected dividend yield of 0%,
      expected volatility of 172% and expected life of 3 years.





During
      March 2005, the Company entered
      into a stock subscription agreement with a shareholder of the Company
      (“Subscriber”) and issued 3,500,000 shares of common stock to the Subscriber for
      $700,000 receivable from the Subscriber. During March 2005, the Company also
      sold its real property, consisting of its manufacturing facilities located
      inHeber City,Utah,
      to the Subscriber. The Subscriber paid
      $402,000 of liens
      on the property in excess of the $900,000 sales price, which resulted in the
      Company issuing the Subscriber a promissorynote payable in the
      amount of $402,000
      bearing interest at 10% per annum. Upon the sale of this real estate, the
      Company entered into a verbal rental agreement with the Subscriber whereby
      the
      Company would pay $10,000 per month rent for the real estate that was sold.
      In
      addition to the foregoing, the Company issued 1,500,000 shares of its common
      stock to the Subscriber in February 2005 for $150,000 and issued 1,577,034
      shares to the Subscriber in March 2005 as financing fees, valued at $80,523,
      the
      market value of the Company’s common stock on the date of
      issuance.








F-17





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





During
      March, April and May of 2005, the
      Company collected $265,258 of the receivable from the Subscriber and in June
      2005, the Company was informed by the Subscriber that the balance of the
      receivable would not be paid. The subscription agreement provided the Company
      with the right to offset any and all obligations that the Company may have
      to
      the Subscriber against the amount due from the Subscriber. Upon notification
      that the balance of the subscription agreement would not be paid, theCompany offset the $402,000
      note payableto the
      Subscriber and related accrued interest of $9,802 against the unpaid balance
      of
      $434,742 receivable from the Subscriber. The remaining $22,940 was offset
      against the $10,000 per month rental payments. The Company has not made any
      payments since the inception of the verbal rental agreement expect for the
      amount offset. During 2007, the Subscriber forgave the amounts due pursuant
      to
      the verbal rental agreement, in conjunction with the Subscriber’s sale of the
      real estate described herein.





During
      2005 the Company issued 1,478,571
      shares of its common stock to related parties consisting of 550,000 shares
      for
      director fees valued at $33,000, or $0.06 per share, 250,000 shares as an
      officer’s bonus valued at $12,500, or $0.05 per share, 428,571 shares for the
      settlement of $12,500 of accrued liabilities and $12,500 of notes payable,
      at
      $0.06 per share, and 250,000 shares for services valued at $3,250, or $0.01
      per
      share. In addition, the Company issued 400,000 shares for $20,000 of cash,
      or
      $0.05 per share, 3,097,222 shares for $30,361 of consulting fees and employee
      bonuses valued at $0.01 per share, and 794,652 shares in settlement of $67,955
      of accrued liabilities. The shares were valued at their market value on the
      date
      of issuance. As further discussed in Note 3, the Company issued 1,100,000 shares
      of common stock for $41,875 of financing costs.





In
      connection with the termination of a
      consulting agreement, a consultant returned 3,000,000 unvested shares of common
      stock to the Company on June 1, 2005. The 3,000,000 shares were issued in 2004
      and were valued at $150,000, or $0.05 per share. The cancellation of the shares
      resulted in the reversal of the related $112,500 of prepaid consulting
      expense.





**NOTE
      6 - STOCK WARRANTS**





As
      discussed in Note 5, during 2004 the
      Company issued warrants to purchase 2,912,500 shares of common stock at $0.20
      per share and warrants to purchase 1,456,250 shares of common stock at $0.35
      per
      share.





The
      following summarizes the outstanding warrants as of December 31,
      2005:





**Exercise**
              **Price**
            
            **Warrants**
              **Outstanding**
            
            **Weighted-Average**
              **Remaining
                Contractual**
              **Life
                (Years)**
            
            **Number**
              **Exercisable**$0.20
            
            2,912,500
            
            1.5
            
            2,912,500$0.50
            
            281,250
            
            1.5
            
            281,250$0.35
            
            1,456,250
            
            1.5
            
            1,456,2504,650,000
            
            
            
            4,650,000








F-18





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





**NOTE
      7 – CONTINGENCIES**





The
      production of pesticides is subject to complex environmental regulations. As
      of
      the date of these financial statements and the date of this report, the Company
      is unaware of any pending environmentally related litigation or of any specific
      past or prospective matters involving environmental concerns, which could impair
      the marketing of its products.





**NOTE
      8 – INCOME TAXES**





Income
      taxes are provided based upon the
      liability method of accounting pursuant to SFAS No. 109,*Accounting for Income
      Taxes.*Under this
      approach, deferred income taxes are recorded to reflect the tax consequences
      on
      future years of differences between the tax basis of assets and liabilities
      and
      their financial reporting amounts at each year-end. A valuation allowance is
      recorded against deferred tax assets if management does not believe the Company
      has met the "more likely than not" standard imposed by SFAS No. 109. The tax
      effects of temporary differences and carry forwards which give rise to the
      deferred income tax assets as of December 31, 2005 and 2004 are as
      follows:





***December
                31,***
            
            **2005**
            
            
            **2004**Net
                Operating Loss Carryforwards:Federal
            
            $
            7,854,968
            
            
            $
            7,193,500State
            
            
            1,215,939
            
            
            
            1,113,545Impairment
                of inventory
            
            
            -
            
            
            
            173,020Allowance
                for doubtful accounts
            
            
            9,064
            
            
            
            15,183Total
                deferred income tax assets
            
            
            9,079,971
            
            
            
            8,495,248Valuation
                allowance
            
            
            (8,955,467
            )
            
            
            (8,430,130
            )Deferred
                income tax liability - intangible assets
            
            
            (124,504
            )
            
            
            (65,118
            )**Net
                Deferred Income Tax Assets**
            
            $
            -
            
            
            $
            -





A
      reconciliation of the income tax
      expense from continuing operations and the amount that would be computed using
      statutory federal income tax rates is as follows:





***Years
                Ended December 31,***
            
            **2005**
            
            
            **2004**Federal
                tax benefit at statutory rate (34%)
            
            $
            (475,202
            )
            
            $
            (1,750,287
            )State
                tax benefit, net of federal effect
            
            
            (46,123
            )
            
            
            (169,881
            )Non-deductible
                and other items
            
            
            (4,012
            )
            
            
            89,282Change
                in valuation allowance
            
            
            525,337
            
            
            
            1,830,886**Provision
                for Income Taxes**
            
            $
            -
            
            
            $
            -





At
      December 31, 2005, the Company has
      net operating loss carry forwards for Federal income tax purposes of
      approximately $24million, which expire in the years 2011
      through 2025.





**NOTE
      9 – ACQUISITION AGREEMENT**





On
      March
      9, 2005 the Company entered into a memorandum of understanding with Paul
      Morrell, Inc., d.b.a. The Event Source (“TES”). Under the terms of the
      memorandum of understanding, as subsequently modified, the Company agreed to
      purchase the business operations and the intangible assets of TES ; however,
      TES
      withdrew from the transaction on June 6, 2005, with no further obligations
      or
      commitments on the part of the Company.








F-19





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





**NOTE
      10 – MARKETING AGREEMENT**





In
      November 2005, the Company started marketing its products under an Internet
      marketing program and verbally entered into an agreement with Saber Management
      for its Internet marketing services. The Company agreed to set aside 12 million
      shares of common stock to be issued to Saber Management as compensation for
      its
      services, of which four million shares were delivered to Saber Management in
      April 2006 for a down payment on the project. Diatect was unable to reach a
      written agreement with Saber Management and during the third quarter of 2006,
      the verbal agreement with Saber Management was cancelled, with the four million
      shares of common stock remaining issued to Saber Management. The Company’s
      ongoing efforts under its Internet marketing program were thereafter brought
      in-house and managed by contract personal.





**NOTE
      11 – SUBSEQUENT EVENTS**





In
      February 2006, the Company entered into a one year non-exclusive Investment
      Banking Agreement with Pointe. The terms of the Investment Banking Agreement
      required that the Company pay $25,000 upon completion of $150,000 in bridge
      financing. Additionally, the Company issued Pointe 8,000,000 warrants to
      purchase common stock at $0.01 per share for a period of 3 years; agreed to
      pay
      a 7% commission, 1% unaccountable expenses; a 5% fee in the event of a merger
      or
      acquisition of the Company; and 2% of gross sales of the Company’s products
      initiated by Pointe. The Company subsequently received  a $150,000
      convertible promissory note that was arranged by Pointe. This note was later
      converted into 15,000,000 shares of the Company’s common stock.





In
      February 2006, the Company also entered into a renewable two-year non-exclusive
      engagement letter (“Engagement Letter”) with an entity that employs one of the
      Company’s directors, for consulting services in a variety of areas relating to
      financial, strategic and developmental growth of the Company. The financial
      terms of the Engagement Letter require a non-refundable retainer fee of $25,000
      and the issuance of 2,500,000 shares of the Company’s common stock and $15,000
      per month for two year period. Additional provisions of the Engagement Letter
      provide that the Company issue 8,000,000 warrants to purchase common stock
      at
      $0.01 per share for a period of five years and upon the completion of the
      $150,000 bridge financing, the Company issued 4,500,000 warrants to purchase
      common stock at $.01 per share for a period of five years. The agreement also
      provides for the issuance of 5,000,000 warrants to purchase common stock at
      $0.05 per share for a period of five years upon the completion of one million
      dollars of funding.





In
      June
      2006, the Company commenced a private placement offering of convertible
      promissory notes and warrants. Through December 31, 2006, the Company issued
      $700,000 of convertible promissory notes. The notes bear interest at 12% per
      annum, are unsecured and are due one year from the date of issuance. The notes
      are convertible into units at $0.05 per unit, each unit consisting of one share
      of common stock and a warrant to purchase one share of common stock at $0.075
      per share for a period of three years. The Company has the option to redeem
      the
      notes at their face value plus accrued interest if the average price of the
      Company’s common stock is 200% of the conversion price for a period of twenty
      consecutive days. In conjunction with this offering, the Company paid Pointe
      $33,500.





Subsequent
      to December 31, 2006 and under the terms of the on-going private placement
      offering, the Company issued an additional $771,000 of 12% convertible
      promissory notes. These notes are also convertible into units of common stock
      and warrants under the terms described above.








F-20





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO FINANCIAL STATEMENTS**





During
      the fourth quarter of 2006, the land and building where the Company maintains
      its offices and manufacturing facility was sold by a shareholder to an entity
      (the “Landlord”) that is affiliated with a director of the Company. In
      conjunction with this sale, $187,060 of unpaid rent was forgiven. Commencing
      on
      January 1, 2007, the Company entered into a five year lease with the Landlord,
      requiring monthly rental payments of $12,000 plus taxes and maintenance. The
      lease is renewable for two additional 5 year terms with 10% increases of the
      rental payments to $13,200 per month and $14,250 per month,
      respectively.





During
      2006, the Company issued 10,737,350 shares of common stock valued at $276,617.
      The Company issued 2,500,000 shares of the common shares as employee bonus
      valued at $70,000. The Company issued 500,000 shares of common stock valued
      at
      $8,500 to a director as compensation for his guarantee of a line of credit
      of
      the Company.





In
      May
      2007 the Company entered into a Master Lease Line with Gulf Pointe Capital,
      LLC.  The terms of the lease line are a credit limit of $500,000 that
      can be used for various new and used tier one production, material handling,
      computer, technology and fixture related equipment.  To date the
      company has drawn $209,000 of the available credit.  Lease payments
      various, but are based on the following 24 months 5.163%, 30 Months 4.338%,
      36
      month 2.793%.





In
      September 2007 the company was granted an accounts receivable line of credit
      from Aspen Opportunity Fund LP, with a credit line of $500,000.  The
      company can draw advances against accounts receivable, in $100,000 increments
      as
      needed.





On
      October 31, 2007 the company started a campaign to reduce debt in the company,
      it has offered all note holders with a note to stock conversation feature to
      do
      so until Nov 15th
      2007.  Management believes that the total of debt to be converted will
      be under $1,500,000.





















































F-21