UNITED
STATES


SECURITIES
AND EXCHANGE
COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-KSB




xANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE


ACT
OF 1934




FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007




oTRANSITION 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. YesoNox





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). oNox





For the
fiscal year ended December 31, 2007 the issuer’s revenues were
$2,015,484.










As of
March 18, 2008 the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the average of the bid
and asked price of such stock on that date of $13,345,380 as reported on the
Pink Sheets.





On March
18, 2008 there were 191,452,583 shares of Registrant’s common stock, no par
value, issued and outstanding.





Documents
included by reference: None





Transitional
Small Business Disclosure Format: Yes x
No  o












































TABLE OF
CONTENTS







PagePART
      I
            
            
            NumberItem
      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
            
            8Item
      7.
            Financial
      Statements
            
            9Item
      8.
            Changes
      in and Disagreements with the Accountants on Accounting and Financial
      Disclosure
            
            9Item
      8A.
            Controls
      and Procedures
            
            10Item
      8B.
            Other
      Information
            
            10PART
      IIIItem
      9.
            Directors,
      Executive Officers, Promoters and Control Persons and Corporate
      Governance; Compliance With Section 16(a) of the Exchange
    Act
            
            11Item
      10.
            Executive
      Compensation
            
            12Item
      11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            14Item
      12.
            Certain
      Relationships and Related Transactions
            
            14Item
      13.
            Exhibits
            
            15Item
      14.
            Principal
      Accountant Fees and Services
            
            15Signatures
            
            
            16














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





ITEM
1.  Our Business





Diatect
International Corporation (“Company”) was incorporated under the laws of the
State of California in 1979 as San Diego Bancorp. In 1998 we changed our name to
Diatect International Corporation. During 2002, we moved our administrative
offices from Idaho and our manufacturing facilities from Kansas and consolidated
our operations in Utah.





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 competitors is based on
the non-toxic nature of our products and we believe this may give our products
retail appeal.





Manufacturing
Process





We have
nine 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 over the non-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 we obtained from the
Environmental Protection Agency (EPA) that allowed us to formulate nine labels
for retail sales. These registrations are required for 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, use, 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 time and require substantial
expenditures.







2


Obtaining
EPA registrations and approval of our labels represents an essential asset of
the Company and is the result of lengthy and costly effort. 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 2005 the useful life of the labels was reviewed for
impairment 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 estimated by the American Crop Protection
Society that replacing EPA labels in today’s environment would cost between $160
million and $250 million. Based on this analysis we concluded that the label
should not be amortized further.  No impairment was required from our
reviews in 2007 or 2006.





Marketing
and Sales





We market
our products under two different product brand names - Diatect and
Results.





Diatect





Diatect II Multi-Purpose Insect
Control is sold 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 is
sold 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: is a 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 is commercial organic food growers, homeowners, and
gardeners.





Results





Results Ant & Insect is
sold 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 southern United States. This product is applied to fire ant
mounds to 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 Garden & Floralis
designed for outdoor use by protecting garden plants from many varieties of
worms, beetles, leafhoppers, stink bugs, squash vine borers, and other
insects.





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.










3


Results Wasp & Hornetis
insect control for wasps and hornets that build unwanted nests in and on homes,
fences, bushes apartments, signs, doorjambs, electrical boxes and any other
place that they may build.





A
substantial part of our advertising and marketing efforts have been directed
toward direct marketing and trade shows. We believe that one-on-one contact with
our wholesale buyers allow us to explain the difference’s between our non-toxic
products and competitive products whose active ingredients may contain toxins or
synthetics. We have a variety of wholesale customers and we are not dependent on
any one or on a small group of customers for our product sales. Primarily our
customers are comprised of small to medium retail outlets that serve agriculture
and gardening customers in the United States, where the insect population is
prevalent. We do not have any agreements with our customers for their purchase
of our products over any period of time.





In 2004
we started to sell our product in a single Big Box retail outlet and by the end
of the year we had a retail vendor number allowing us to sell our products to 76
retail outlets in the southeast region. These sales do not constitute a
major customer. Furthermore, having a retail vendor number is not an agreement
to purchase our product, but it allows us the opportunity to sell our product to
their retail outlets.





We use
the internet to make the retail market aware of our products. We also employ
customer representatives at our office in Utah who periodically contact our
commercial customers.   We supply to our commercial customers sales
literature, banners, booths, and other materials to encourage active promotion
of our products. We produce substantially all of our sales and promotional
materials at our offices in Utah.





Employees





As of
December 31, 2007, the Company had 12 full time employees.





ITEM 2.   PROPERTIES





Diatect
International Corporation is located in an eleven-year-old 20,254 square foot
class B masonry office/warehouse building at 875 South Industrial Parkway, Heber
City, Utah. Heber City is 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 the Utah  
Industrial Park and adequately serves as our corporate office, manufacturing and
distribution facility. The occupancy capacity of the business office portion of
the building is 23 people. We are the sole occupant of the
building.





In March
2005, we sold this real estate for $900,000 and entered into a verbal leaseback
arrangement that was not finalized. Consequently, no lease 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 former director
of the Company. In conjunction with this sale, $117,060 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 building and inventory for amounts 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 carried at no value.  Any
future mining activities will be dependent on business and market conditions and
resources available.







4


ITEM
3.  LEGAL PROCEEDINGS




Administrative
Proceeding – U.S. Securities and Exchange Commission





On
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
the Company as a respondent.  This administrative proceeding has file
no. 3-12843.The administrative
proceeding sought to revoke the Company’s registration under the Securities
Exchange Act of 1934 (“Exchange Act”) under which the Company files quarterly
and annual financial reports.  The Company had not filed nine
quarterly and annual financial reports.  All of these reports have
been filed as of January 2, 2008.





On
January 30, 2008, Administrative Law Judge James Kelly issued an Initial
Decision. This decision denied the Division of Enforcement’s Motion for
revocation and granted the Company’s motion for summary disposition. The
Judge found that the Company violated rules promulgated under the Exchange Act
which required the filing of annual and quarterly reports.  In the
decision the Judge expressly stated that the sanctions of revocation or trading
suspension would not be imposed as such sanctions were not appropriate or
necessary and denied the Division’s motion for revocation.  The
initial decision dismissed the administrative proceeding.  The parties
had 21 days to appeal which has expired. Neither party appealed and on March 6,
2008 the Commission issued a notice to us making the Initial Decision the Final
Decision.




U.S. Securities
and Exchange Commission ,  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 May 17, 2004 the Company issued restated
financial statements as of December 31, 2003.  On April 14, 2005, the
Company issued restated financial statements as of December 31,
2004.  These filings restated the sale of the mining claims and our
revenues for those years.  The Complaint seeks injunctive action
against the defendants including the Company and seeks fines from the three
individual defendants, and from two individual defendant’s disgorgement of stock
sale proceeds and a bar as an officer and director.  In February, 2008
a scheduling conference was held and a tentative trial date has been set for
January, 2010.  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 the Third  
District   Court   of   Salt   Lake   County, State of
Utah, naming the Company as the defendant. Compax claimed a trade payable, with
interest and costs of $323,892. Compax obtained a judgment against the Company.
During 2005, we entered into a settlement agreement with Compax that required us
to make three monthly payments of $25,000 through May 2005 and a lump sum
payment of $145,000 in June 2005. We 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 as
total satisfaction of our obligation.   We made the payments and
received a judgment release on September 1, 2007.









5


Litho-Flexo
Graphics, Inc. – On May 23, 2003, we were named as defendant in a
complaint filed by Litho-Flexo Graphics, Inc. in the Fourth District Court in
and for Wasatch County, State of Utah. Litho-Flexo claimed a trade payable of
$92,478. We contended that the packaging labels we received from Litho-Flexo
were defective and could not be used in the packaging of our products. We filed
a counterclaim claiming damages in excess of $100,000 caused by the defective
labels. We accrued a $72,625 settlement 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, 2006 and 2005.   We intend to defend the complaint and
pursue our counterclaim.





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-holders’ bankruptcy suit was dismissed and the Company was
awarded damages through the relief of $248,175 of notes payable and $121,681 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.








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, 2007.



















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, 2007 and 2006. These quotations
reflect inter-dealer prices, without mark-up, mark-down or commission and may
not represent actual transactions.





High
            
            
            LowFiscal
      2007First
      Quarter (ended March 31, 2007)
            
            $
            0.055
            
            
            $
            0.030Second
      Quarter (ended June 30, 2007)
            
            
            0.043
            
            
            
            0.024Third
      Quarter (ended September 30, 2007)
            
            
            0.065
            
            
            
            0.035Fourth
      Quarter (ended December 31, 2007)
            
            
            0.070
            
            
            
            0.034Fiscal
      2006First
      Quarter (ended March 31, 2006)
            
            $
            0.034
            
            
            $
            0.007Second
      Quarter (ended June 30, 2006)
            
            
            0.028
            
            
            
            0.015Third
      Quarter (ended September 30, 2006)
            
            
            0.070
            
            
            
            0.023Fourth
      Quarter (ended December 31, 2006)
            
            
            0.056
            
            
            
            0.030








We
presently do not have any stock compensation plans.





As of
December 31, 2007 there were 185,562,583 shares issued and outstanding and
approximately 1,247 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, 2007 which were not registered under the
Securities Act.  All issuances were of the Company’s no par common
stock.





During
2007, we issued 500,000 shares valued at $20,000 or $0.04 per share, 250,000
shares of common stock valued at $7,500 or $0.03 per share as compensation to
employees, 100,000 shares of common stock as compensation to an employee valued
at $4,500 or $0.045 per share and 250,000 shares to a vendor for services valued
at $11,250 or $0.045 per share. The value represents the market price of our
common stock on the dates of issuance.  An aggregate of 22,920,000
shares of common stock were issued upon the conversion of $1,146,000 of 12%
convertible notes and 2,490,443 shares of common stock valued at $99,618 or
$0.04 per share based on the closing market price on the date of
issuance.  In addition, 7,500,000 shares of common stock were issued
upon the exercise of warrants for cash of $75,000 or $0.01 per
share.  We sold 5,000,000 shares of common stock and three year
warrants to purchase 5,000,000 shares of common stock for total proceeds of
$250,000.











7


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. Excluding 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.  We sell directly to the consumer via our website at
www.diatect.com.





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 are described in Notes 4 and 6 in the
financial statements.





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, 2007 and 2006





Results of
Operations:





Revenue: We had
revenue of $2,015,484 for the year ended December 31, 2007 compared to
$1,031,608 for the year ended December 31, 2006.   Total revenue increased
in 2007 by $983,876 primarily due to increases in web based retail sales and
additional sales into the commercial agriculture market.





Cost ofrevenue:
  Our cost of revenue was $774,760 for the year ended December 31,
2007 as compared to $408,244 for the year ended December 31,
2006.  The increase of $366,516 is due increases in sales volumes and
decreases in our costs of production.





Marketing and SellingExpenses: Marketing
and selling expenses were $1,007,730 for the year ended December 31, 2007, as
compared to $443,204 for the year ended December 31, 2006.  The
increase of $564,526 is due primarily to increases in web based advertising and
increases in compensation expenses for marketing staff.  Fiscal 2006
reflects a non-cash charge representing the fair value of a warrant to purchase
7,000,000 shares of common stock at an exercise price of $0.01 per share using
the Black Scholes method of $116,935 issued to a marketing consultant for which
there is no expense in the current year.





General and AdministrativeExpenses: For the
year ended December 31, 2007 general and administrative expenses were $1,767,231
as compared to $2,360,688 for the year ended December 31, 2006.  The
decrease of $593,457 is primarily due to decreases in the value of common stock
issued in the year ended December 31, 2006 to our Chief Executive officer of
$189,207, common stock issued for professional fees in the aggregate amount of
$630,954 and common stock issued for employee bonuses in the amount if $70,000
for which no current year amounts exist.  These decreases are offset
somewhat by increases in the amortization of loan costs, occupancy costs and
general overheads.





8


Other Income and
Expense: Other income and expense is comprised of interest expense and
gain from termination of debt.   For the year ended December 31, 2007
interest expense was $676,249 as compared to $340,643 for the year ended
December 31, 2006, an increase of $335,606. The increase is due to higher debt
levels during the year and the amortization of loan discount. Interest expense
for the years ended December 31, 2007 and 2006 reflects the amortization of loan
discount in the amount of $313,536 and $48,801, respectively. Included in the
interest expense for the year ended December 31, 2006 is the value of a non-cash
charge representing the fair value of a warrant to purchase 4,500,000 shares of
common stock at an exercise price of $0.01 per share with a fair value using the
Black Scholes method of $76,410 issued in conjunction with a bridge loan for
which no comparable prior year expense exists.





Gain from
termination of debt was $1,046,547 for the year ended December 31, 2007 compared
to $734,030 for the year ended December 31, 2006, an increase of $312,517. The
amount for the year ended December 31, 2007 is comprised primarily of debt and
related accrued interest in the amount of $773,492 for which the statute of
limitations has expired. Also included are settlements of liabilities at less
than their recorded amounts. The amount for the year ended December 31, 2006 is
comprised primarily of settlements of debt related to the attempted Chapter 7
action against us resulting in gains of approximately $395,000 and gains from
the settlement of LaJolla Cove of $138,500 and gain from the settlement of rent
of $117,060.





Liquidity and Capital
Resources





Our cash
and cash equivalents of $9,864 as of December 31, 2007 are not considered
sufficient to support our current levels of operations for the next 12
months.





In May
2007 we entered into a Master Lease Line with Gulf Pointe Capital,
LLC.  The terms of the lease line are a credit limit of up to $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.





In
September 2007, we entered into an accounts receivable line of credit agreement
with Aspen Opportunity Fund LP, with a credit line of up to $500,000, subject to
the availability of eligible accounts receivable as defined in the
agreement.  We can draw advances against accounts receivable, in
$5,000 increments as needed.  We have a total of $185,000 drawn
against this accounts receivable line as of December 31, 2007.





We
believe that, with the Master Lease Line, the accounts receivable credit line
and our working capital that we will have sufficient resources for the next 12
months from the date of this report on Form 10-KSB.





Item
7.  Financial Statements





Our
financial statements are set forth immediately following the signature page to
this Form 10-KSB.








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





NONE








9


Item
8A.  Controls and Procedures





Disclosure
Control and Procedures





We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our filings under the Securities Exchange Act of
1934 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.





As
required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal year
covered by this Annual Report on Form 10-K, we have carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. This evaluation was carried out under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective at December 31, 2007.





There
have been no changes in our internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the fourth quarter of fiscal 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





Management’s
Annual Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act Rule
13a-15(f)).  Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of our internal control over financial reporting as
of December 31, 2007, based on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission.  Based on our evaluation under the framework in
Internal Control – Integrated Framework, management concluded that our internal
control over financial reporting was effective as of December 31,
2007.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.





This
Annual Report on Form 10-K does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this Annual Report on Form
10-K.





/s/ David H.
      AndrusDavid
      H. AndrusChief
      Executive OfficerChief
      Financial Officer








THE
FOREGOING MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING SHALL
NOT BE DEEMED TO BE “FILED” WITH THE SEC, NOR SHALL SUCH INFORMATION BE
INCORPORATED BY REFERENCE INTO ANY PAST OR FUTURE FILING UNDER THE SECURITIES
ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT WE SPECIFICALLY INCORPORATE IT BY
REFERENCE INTO SUCH FILING.





Item
8B.  Other Information





None


10


PART
III




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





Directors
and Executive Officers





The
following table sets forth as of December 31, 2007 the 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
      SinceDave
      H. Andrus
            
            42
            
            Director
            
            December
      1997President
            
            December
      2004Chairman
      of the Board
            
            December
      2004Javvis
      O. Jacobson
            
            35
            
            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 have no arrangements or understandings
written among 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.





Michael
O’Keefe resigned from the Board in April, 2007.





Audit
Committee Financial Expert





The
entire Board of Directors serves as our 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.







11


ITEM 10. EXECUTIVE
COMPENSATION





The
following table provides information about the compensation paid to, earned or
received during the last two fiscal years ended December 31, 2007 and 2006 by
our principal executive officer (the “Named Executive Officer”).





SUMMARY
COMPENSATION TABLE





Name
      and
              Principal
              Position
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
              Awards
              ($)
            Option
              Awards
      ($)
            Non-Equity
              Incentive
      Plan Compensation
              ($)
            Nonqualified
      Deferred Compensation Earnings
              ($)
            All
      Other
              Compensation
              ($)
            Total
              ($)David
      Andrus
            2007
            $75,000
            -
            -
            -
            -
            -
            -
            $
      75,000Chief
      Executive Officer, Principal Executive Officer, Chief Financial
      Officer
            2006
            $75,000
            -
            $189,207
            -
            -
            -
            -
            264,207






Narrative
Disclosure to Summary Compensation Table





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
3,000,000 shares of 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 received 50% of
the salary and no bonus due to the Chapter 7 proceedings during 2006 and 2005.
The employment agreement is presently expired and Mr. Andrus is being paid a
salary of $75,000 per year. In 2006, Mr. Andrus was issued 9,460,350 shares of
our common stock valued at $189,207 or $0.02 per share representing the closing
price on the date of issuance.





Outstanding
Equity Awards at Fiscal Year-End





Option
      Awards
            
            
            Stock
      AwardsName
            
            Number
      of Securities Underlying Unexercised Options
              (#)
              Exercisable
            
            
            Number
      of Securities Underlying Unexercised Options
              (#)
              Unexercisable
            
            
            Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
              (#)
            
            
            Option
      Exercise Price
              ($)
            
            
            Option
      Expiration Date
            
            
            Number
      of Shares or Units of Stock That Have Not Vested
              (#)
            
            
            Market
      Value of Shares or Units of Stock That Have Not Vested
              ($)
            
            
            Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other
      Rights That Have Not Vested
              (#)
            
            
            Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares,
      Units or Other Rights That Have Not Vested
              ($)David
      AndrusChief
      Executive Officer, Principal Executive Officer, Chief Financial
      Officer
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --






12





Compensation
of Directors





The
following table summarizes data concerning the compensation of our directors for
the fiscal year ended December 31, 2007.








Name
            Fees
      Earned or Paid in Cash
              ($)
            
            Stock
      Awards
              ($)
            
            Option
              Awards
      ($)
            
            Non-Equity
      Incentive Plan Compensation ($)
            
            Nonqualified
      Deferred Compensation Earnings
              ($)
            
            All
      Other Compensation
              ($)
            
            Total
              ($)David
      Andrus
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Javvis
      O. Jacobson
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -































13


ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




The table
below sets forth certain information regarding the beneficial ownership of our
common stock as of March 18, 2008, 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;


·
            the
      Named Executive Officer; and


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





As of
March 18, 2008, there were 191,452,627 shares of common stock issued and
outstanding.








Name
      and Position
              of
      Beneficial Owner
            
            Number
      of
              Shares
              Beneficially
              Owned
            
            Percent
              of
      ClassAspen
      Capital Partners
            
            15,000,000
            
            7.83%David
      H Andrus, Director/President, Chairman of the Board
            
            9,466,350
            
            4.94%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 Equity Compensation Plans.





Item
12.  Certain Relationships and Related Transactions





In
February 2006, we entered into a one year Investment Banking Agreement with
Pointe. The terms of the Investment Banking Agreement required that we pay
$25,000 upon completion of $150,000 in bridge financing. The Company
subsequently received $150,000 under the terms of a convertible promissory note
that was arranged by Pointe and we made the $25,000 payment to Pointe.
Additionally, we issued Pointe 8,000,000 warrants to purchase common stock at
$0.01 per share for a period of 3 years. The warrants issued pursuant to this
agreement were valued at $125,892. This amount was recorded as a prepaid expense
and is being amortized over the one-year term of the agreement. We further
agreed to pay Pointe a 7% commission and a 1% unaccountable expense allowance
upon receipt of financing brought to us by Pointe, agreed to pay Pointe a fee
equal to 5% of the value of the transaction as defined in the agreement in the
event of a merger or acquisition of the Company.







14


In
February 2006, we entered into a renewable two-year non-exclusive engagement
letter ( the “Engagement Letter”) with Aspen Capital Partners, LLC, an entity
that employs a person that was on our board of directors at that time for
consulting services in a variety of areas relating to our financial, strategic
and developmental growth. The financial terms of the Engagement Letter required
a non-refundable retainer fee of $25,000, the issuance of 2,500,000 shares of
common stock and payments of $15,000 per month for a two-year period. Additional
provisions of the Engagement Letter provide that we 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, we issued 4,500,000 warrants to
purchase common stock at $.01 per share for a period of five years. The
8,000,000 warrants issued pursuant to the Engagement Letter were valued at
$125,892. This amount was recorded as a prepaid expense and will be amortized
over the two year term of the agreement. The 4,500,000 warrants were valued at
$76,410 and were recorded as interest expense. 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. These warrants were issued in May, 2007.  We intend to renew
this agreement.





During
2006, we issued 500,000 shares of our common stock valued at $8,500 to one of
our directors as compensation for the guarantee provided to us of our line of
credit with a bank.





During
2006, we issued 9,460,350 shares of common stock valued at $189,207 to our Chief
Executive Officer as compensation pursuant to his employment
agreement.





During
the fourth quarter of 2006, the land and building where we maintain our offices
and manufacturing facility was sold by a shareholder to Aspen Capital
Management, LLC (“Landlord”) an entity that is affiliated with a one of our
directors. In conjunction with this sale, $117,060 of unpaid rent was forgiven.
Commencing on January 1, 2007, we 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.








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





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, 2007 and
2006:





Fiscal
      2007
            
            
            Fiscal
      2006Audit
      Fees
            
            $
            75,347
            
            
            $
            —Audit
      Related Fees
            
            
            —
            
            
            
            —Tax
      Fees
            
            
            —
            
            
            
            —All
      Other Fees
            
            
            —
            
            
            
            —TOTAL
      Fees
            
            $
            75,347
            
            
            $
            —





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 of a 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.


15


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:
      March 18, 2008By:
            /s/ David H.
      AndrusDavid
      H. 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/
      David H. Andrus
            Director
            March
      18, 2008David
      H. Andrus/s/
      Javvis O. Jacobsen
            Director
            March
      18, 2008Javvis
      O. Jacobsen






























16


DIATECT
INTERNATIONAL CORPORATION


INDEX
TO FINANCIAL STATEMENTS








PageReport
      of Independent Registered Public Accounting Firm
            F-1Balance
      Sheets as of December 31, 2007 and  2006
            F-2Statements
      of Operations for the Years Ended December 31, 2007 and
    2006
            F-3Statements
      of Stockholders’ Deficit for the Years Ended December 31, 2006 and
      2007
            F-4Statements
      of Cash Flows for the Years Ended December 31, 2007 and
    2006
            F-5Notes
      to Financial Statements
            F-7

















17




HANSEN,BARNETT& MAXWELL,
      P.C.A
      Professional CorporationCERTIFIED
      PUBLIC ACCOUNTANTS
              
              Registered
      with the Public CompanyAccounting
      Oversight Board5
      Triad Center, Suite 750Salt
      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, 2007 and 2006, 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 (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2007 and 2006, 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


March 18,
2008




F-1





DIATECT
INTERNATIONAL CORPORATION


BALANCE
SHEETS





December
      31,2007
            
            
            2006ASSETSCurrent
      AssetsCash
            
            $
            9,864
            
            
            $
            61,743Trade
      accounts receivable, net of allowance for doubtful accounts of $16,000 and
      $25,397, respectively
            
            
            242,406
            
            
            
            26,502Inventory
            
            
            66,688
            
            
            
            235,889Prepaid
      expenses and other current assets
            
            
            306,206
            
            
            
            147,219Total
      Current Assets
            
            
            625,164
            
            
            
            471,353Property and Equipment,
      net of accumulated depreciation of $140,673 and $268,275,
      respectively
            
            
            258,229
            
            
            
            90,006Intangible
      Assets - EPA Labels
            
            
            1,116,322
            
            
            
            1,116,322Total
      Assets
            
            $
            1,999,715
            
            
            $
            1,677,681LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesTrade
      accounts payable
            
            $
            224,213
            
            
            $
            267,840Accrued
      liabilities
            
            
            155,125
            
            
            
            289,322Accrued
      interest payable
            
            
            456,626
            
            
            
            723,545Accrued
      settlement obligations
            
            
            89,187
            
            
            
            259,381Deferred
      gain on sale and leaseback of assets
            
            
            86,806
            
            
            
            -Current
      portion of notes payable, net of unamortized discount of $135,855 and
      $191,094, respectively
            
            
            2,578,265
            
            
            
            1,393,822Current
      portion of capital lease obligations
            
            
            60,021
            
            
            
            -Total
      Current Liabilities
            
            
            3,650,243
            
            
            
            2,933,910Long-Term
      LiabilitiesNotes
      payable, net of current portion
            
            
            -
            
            
            
            1,785,563Capital
      lease obligations, net of current portion
            
            
            120,212
            
            
            
            -Total
      Long-Term Liabilities
            
            
            120,212
            
            
            
            1,785,563Stockholders'
      DeficitCommon
      stock, no par value; 300,000,000 shares authorized;190,562,583 shares and
      151,552,140 shares outstanding, respectively
            
            
            24,587,396
            
            
            
            23,120,610Warrants
      outstanding
            
            
            1,561,367
            
            
            
            593,162Accumulated
      deficit
            
            
            (27,919,503
            )
            
            
            (26,755,564
            )Total
      Stockholders' Deficit
            
            
            (1,770,740
            )
            
            
            (3,041,792
            )Total
      Liabilities and Stockholders' Deficit
            
            $
            1,999,715
            
            
            $
            1,677,681











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





F-2





DIATECT
INTERNATIONAL CORPORATION


STATEMENTS
OF OPERATIONS





For
      the Years EndedDecember
      31,2007
              
              
              2006Sales
              
              $
              2,015,484
              
              
              $
              1,031,608Cost
      of Goods Sold
              
              
              774,760
              
              
              
              408,244Gross
      Profit
              
              
              1,240,724
              
              
              
              623,364ExpensesMarketing
      and selling
              
              
              1,007,730
              
              
              
              443,204General
      and administrative
              
              
              1,767,231
              
              
              
              2,360,688Total
      Expenses
              
              
              2,774,961
              
              
              
              2,803,892Loss
      from Operations
              
              
              (1,534,237
              )
              
              
              (2,180,528
              )Other
      Income (Expense)Interest
      expense
              
              
              (676,249
              )
              
              
              (340,643
              )Gain
      from termination of debt
              
              
              1,046,547
              
              
              
              734,030Net
      Other Income
              
              
              370,298
              
              
              
              393,387Net
      Loss
              
              $
              (1,163,939
              )
              
              $
              (1,787,141
              )Basic
      and Diluted Loss Per Share
              
              $
              (0.01
              )
              
              $
              (0.01
              )Weighted-Average
      Basic and Diluted Common Shares Outstanding
              
              
              160,887,061
              
              
              
              129,784,100











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


F-3





DIATECT
INTERNATIONAL CORPORATION


STATEMENTS
OF STOCKHOLDERS' DEFICIT


For
the Years Ended December 31, 2006 and 2007





TotalCommon
      Stock
            
            
            Warrants
            
            
            Accumulated
            
            
            Stockholders'Shares
            
            
            Amount
            
            
            Outstanding
            
            
            Deficit
            
            
            DeficitBalance,
      December 31, 2005
            
            
            99,264,997
            
            
            $
            21,836,822
            
            
            $
            148,033
            
            
            $
            (24,968,423
            )
            
            $
            (2,983,568
            )Issuance
      for services
            
            
            37,894,418
            
            
            
            898,660
            
            
            
            -
            
            
            
            -
            
            
            
            898,660Issuance
      upon conversion of note payable
            
            
            15,000,000
            
            
            
            150,000
            
            
            
            -
            
            
            
            -
            
            
            
            150,000Beneficial
      notes payable conversion option
            
            
            -
            
            
            
            239,895
            
            
            
            -
            
            
            
            -
            
            
            
            239,895Warrants
      issued for services
            
            
            -
            
            
            
            -
            
            
            
            445,129
            
            
            
            -
            
            
            
            445,129Cancellation
      of stock
            
            
            (607,275
            )
            
            
            (4,767
            )
            
            
            -
            
            
            
            -
            
            
            
            (4,767
            )Net
      loss for the year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,787,141
            )
            
            
            (1,787,141
            )Balance,
      December 31, 2006
            
            
            151,552,140
            
            
            
            23,120,610
            
            
            
            593,162
            
            
            
            (26,755,564
            )
            
            
            (3,041,792
            )Issuance
      to consultants for services
            
            
            1,100,000
            
            
            
            43,250
            
            
            
            -
            
            
            
            -
            
            
            
            43,250Issuance
      of 19,000,000 warrants to consultantsfor services
            
            
            -
            
            
            
            -
            
            
            
            501,373
            
            
            
            -
            
            
            
            501,373Issuance
      of 5,000,000 warrants with convertible notes payable for
      cash
            
            
            -
            
            
            
            -
            
            
            
            89,038
            
            
            
            -
            
            
            
            89,038Issuance
      of common stock and 5,000,000warrants for cash
            
            
            5,000,000
            
            
            
            126,617
            
            
            
            123,383
            
            
            
            -
            
            
            
            250,000Beneficial
      notes payable conversion option
            
            
            -
            
            
            
            169,258
            
            
            
            -
            
            
            
            -
            
            
            
            169,258Issuance
      upon conversion of notes payable intocommon stock and 22,920,000
      warrants
            
            
            22,920,000
            
            
            
            687,260
            
            
            
            458,740
            
            
            
            -
            
            
            
            1,146,000Issuance
      upon conversion of accrued interest into common stock and
      2,490,443 warrants
            
            
            2,490,443
            
            
            
            99,618
            
            
            
            61,454
            
            
            
            -
            
            
            
            161,072Issuance
      upon exercise of warrants
            
            
            7,500,000
            
            
            
            192,750
            
            
            
            (117,750
            )
            
            
            -
            
            
            
            75,000Expiration
      of 4,650,000 warrants
            
            
            -
            
            
            
            148,033
            
            
            
            (148,033
            )
            
            
            -
            
            
            
            -Net
      loss for the year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,163,939
            )
            
            
            (1,163,939
            )Balance,
      December 31, 2007
            
            
            190,562,583
            
            
            $
            24,587,396
            
            
            $
            1,561,367
            
            
            $
            (27,919,503
            )
            
            $
            (1,770,740
            )
















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


F-4




DIATECT
INTERNATIONAL CORPORATION


STATEMENTS
OF CASH FLOWS





For
      the Years EndedDecember
      31,2007
            
            
            2006Cash
      Flows from Operating ActivitiesNet
      loss
            
            $
            (1,163,939
            )
            
            $
            (1,787,141
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
            
            
            63,106
            
            
            
            53,068Amortization
      of discount on notes payable
            
            
            313,536
            
            
            
            48,801Amortization
      of loan costs
            
            
            142,455
            
            
            
            17,114Gain
      from debt termination
            
            
            (1,046,547
            )
            
            
            (734,030
            )Net
      (gain) loss on disposal of property and equipment
            
            
            (21,554
            )
            
            
            6,728Issuance
      of stock for services
            
            
            43,250
            
            
            
            898,660Issuance
      of warrants for services
            
            
            208,409
            
            
            
            354,762Issuance
      of stock and warrants for interest
            
            
            36,550
            
            
            
            -Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (215,905
            )
            
            
            (9,471
            )Inventory
            
            
            169,201
            
            
            
            129,299Prepaid
      expenses and other current assets
            
            
            (8,478
            )
            
            
            (5,748
            )Accounts
      payable
            
            
            65,724
            
            
            
            336,267Accrued
      liabilities
            
            
            (32,687
            )
            
            
            (166,555
            )Accrued
      interest payable
            
            
            273,096
            
            
            
            200,389Net
      Cash Used in Operating Activities
            
            
            (1,173,783
            )
            
            
            (657,857
            )Cash
      Flows from Investing ActivitiesPayments
      for purchases of property and equipment
            
            
            (77,372
            )
            
            
            (5,170
            )Proceeds
      from sale of property and equipment
            
            
            160,000
            
            
            
            -Net
      Cash Used in Investing Activities
            
            
            82,628
            
            
            
            (5,170
            )Cash
      Flow from Financing ActivitiesProceeds
      from borrowings under notes payable
            
            
            958,871
            
            
            
            1,055,628Proceeds
      from exercise of warrants
            
            
            75,000
            
            
            
            -Proceeds
      from issuance of stock and warrants
            
            
            250,000
            
            
            
            -Cash
      paid for loan costs
            
            
            -
            
            
            
            (63,600
            )Principal
      payments on notes payable
            
            
            (111,230
            )
            
            
            (162,000
            )Principal
      payments on lease obligation
            
            
            (25,365
            )
            
            
            -Payments
      for accrued settlement obligations
            
            
            (108,000
            )
            
            
            (101,159
            )Payments
      on checks drawn in excess of cash in bank
            
            
            -
            
            
            
            (10,481
            )Net
      Cash Provided by Financing Activities
            
            
            1,039,276
            
            
            
            718,388Net
      Increase (Decrease) in Cash
            
            
            (51,879
            )
            
            
            55,361Cash
      at Beginning of Period
            
            
            61,743
            
            
            
            6,382Cash
      at End of Period
            
            $
            9,864
            
            
            $
            61,743
















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


F-5





DIATECT
INTERNATIONAL CORPORATION


STATEMENTS
OF CASH FLOWS (continued)





For
      the Years EndedDecember
      31,2007
            
            
            2006Supplemental
      Disclosure of Cash Flow InformationCash
      paid for interest
            
            $
            54,328
            
            
            $
            9,113Supplemental
      Schedule of Noncash Investing and Financing ActivitiesConversion
      of notes payable into common stock
            
            $
            -
            
            
            $
            150,000Conversion
      of notes payable and interest into common stock and
    warrants
            
            
            1,307,072
            
            
            
            -Purchase
      of equipment under capital lease obligations
            
            
            45,599
            
            
            
            -





































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”) develops and markets
non-toxic pesticide products. The Company is located in Heber, Utah and sells
its products to both wholesale distributors and retail customers in the United
States.





Use of
Estimates–
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America which
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 sales of $2,015,484 during the year
ended December 31, 2007 compared to $1,031,608 during the year ended December
31, 2006, resulting in a gross profit of $1,240,724 and $623,364, respectively.
For the years ended December 31, 2007 and 2006, the Company incurred net losses
of $1,163,939 and $1,787,141, respectively, and used $1,173,783 and $657,857,
respectively, of cash in its operating activities. At December 31, 2007, the
Company had a stockholders’ deficit of $1,770,740 and its current liabilities
exceeded current assets by $3,025,079.





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 arranged and are discussed further in Notes 4 and 6.





Cash and Cash
Equivalents - Cash and cash equivalents include all highly liquid
investments 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 has not had any significant credit
losses in the past and maintains allowances for doubtful accounts and such
allowances in the aggregate did not exceed management’s
estimations.





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





Inventory
– The Company’s current inventory consists primarily of raw materials and
finished goods 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 15 years.  Leasehold
improvements are depreciated over the lesser of the remaining term of the lease
or the remaining useful life of the asset.





F-7


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





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 manufactures and sells non-toxic pesticides to
retailers, agricultural concerns and directly to the public through a Company
website. 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 estimated and recognized
as a reduction of revenue at the time of the sale.





Shipping and
Handling Costs – Shipping and handling costs are billed to customers and
are recorded as sales and the associated costs are included in cost of goods
sold.





Marketing and
Selling Expenses – Marketing and selling expenses include the salaries
and wages of its in-house sales force, 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 income tax
purposes because the Company has had no net taxable income since inception. In
accordance with SFAS 109, 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.  The potentially dilutive
common shares in the following table were not included in the computation of
diluted loss per share as their effect would have been
anti-dilutive.


F-8


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





December
      312007
            
            
            2006Outstanding
      warrants
            
            
            74,410,444
            
            
            
            32,150,000Convertible
      promissory notes convertible into:Common
      stock
            
            
            6,500,000
            
            
            
            15,900,000Warrants
            
            
            1,500,000
            
            
            
            15,900,000Total
      potentially dilutive common shares
            
            
            82,410,444
            
            
            
            63,950,000








Share Based
Payments– The Company accounts for stock-based compensation expense in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 123(R), “Share-Based Payment” (SFAS 123R). Under SFAS 123R,
stock-based compensation expense reflects the fair value of stock-based awards
measured at the grant date, is recognized over the relevant service period, and
is adjusted each period for anticipated forfeitures. As of December 31, 2007 and
2006, the Company has no unvested options and did not grant any options to
employees during the years ended December 31, 2007 and 2006. For future stock
awards, the Company intends to estimate the fair value of each stock-based award
on the date of grant using the Black-Scholes option valuation model. The
Black-Scholes option valuation model incorporates assumptions as to stock price
volatility, the expected life of options, a risk-free interest rate and dividend
yield.





Recently Enacted
Accounting Standards – In September 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
extended the effective date for certain nonfinancial assets and nonfinancial
liabilities to fiscal years beginning after November 15, 2008.  The
Company does not expect the adoption of SFAS No. 157 to have a material
impact on our consolidated financial statements.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company does not expect the
adoption of SFAS No. 159 to have a material impact on our consolidated financial
statements.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 141(R) requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. SFAS No. 160 clarifies that a non-controlling interest in
a subsidiary should be reported as equity in the consolidated financial
statements, consolidated net income shall be adjusted to include the net income
attributed to the non-controlling interest and consolidated comprehensive income
shall be adjusted to include the comprehensive income attributed to the
non-controlling interest. The calculation of earnings per share will continue to
be based on income amounts attributable to the parent. SFAS
No. 141(R) and SFAS No. 160 are effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
adoption is prohibited. The Company has not yet determined the effect on our
consolidated financial statements, if any, upon adoption of SFAS
No. 141(R) or SFAS No. 160.











F-9


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS








NOTE
2 – INVENTORY





Inventory
is comprised of the following:





December
      31,2007
            
            
            2006Raw
      materials
            
            $
            32,836
            
            
            $
            202,291Finished
      goods
            
            
            33,852
            
            
            
            33,598Total
      Inventory
            
            $
            66,688
            
            
            $
            235,889







NOTE
3 – 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, 2007 and 2006 was $63,071 and $53,068,
respectively. The components of property and equipment are as
follows:





EstimatedUseful
      Life
            
            December
      31,in
      Years
            
            2007
            
            
            2006Computer
      equipment
            
            3
      to 5
            
            $
            89,774
            
            
            $
            81,239Office
      furniture and equipment
            
            5
            
            
            48,024
            
            
            
            31,432Manufacturing
      equipment
            
            3
      to 10
            
            
            256,169
            
            
            
            245,610Leasehold
      improvements
            
            15
            
            
            4,935
            
            
            
            -Total
      Property and Equipment
            
            
            
            
            398,902
            
            
            
            358,281Less:
      Accumulated depreciation
            
            
            
            
            (140,673
            )
            
            
            (268,275
            )Net
      Property and Equipment
            
            
            
            $
            258,229
            
            
            $
            90,006











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.














F-10


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS








NOTE
4 – NOTES PAYABLE




Notes
payable are comprised of the following:


December
      31,2007
            
            
            2006Revolving
      line of credit with financial institution
            
            $
            49,807
            
            
            $
            49,436Accounts
      receivable line of credit
            
            
            185,000
            
            
            
            -Cash
      advances from shareholder, unsecured
            
            
            -
            
            
            
            97,000Unsecured
      10% notes payable to investors, in default
            
            
            292,250
            
            
            
            306,980Unsecured
      12% notes payable to investors, in default
            
            
            40,000
            
            
            
            50,000Unsecured
      15% notes payable to investors, in default
            
            
            36,500
            
            
            
            286,500Unsecured
      12% convertible promissory notes payable, netof unamortized
      discount of $135,855 and $191,094, respectively
            
            
            189,145
            
            
            
            603,906Unsecured
      5% notes payable to shareholders, due in 2008
            
            
            1,220,937
            
            
            
            1,220,937Unsecured
      5% notes payable to vendors, due in 2008
            
            
            564,626
            
            
            
            564,626Total
      Notes Payable
            
            
            2,578,265
            
            
            
            3,179,385Less:
      Current portion
            
            
            -
            
            
            
            1,393,822Long-Term
      Notes Payable
            
            $
            2,578,265
            
            
            $
            1,785,563








Revolving Line of
Credit –The Company currently has unsecured, revolving credit notes with
a financial institution totaling $49,807. The line of credit bears interest at
9.0% per annum, is due on demand and requires monthly interest only payments.
The line is unsecured and is personally guaranteed by a former director of the
Company. In July 2006 in conjunction with the issuance of the guarantee, the
Company issued the former director 500,000 shares of common stock valued at
$8,500 or $0.017 per share, representing the closing market price on the date of
issuance.





Accounts
Receivable Line of Credit – On September 20, 2007 the Company
entered into an accounts receivable loan agreement with Aspen Opportunity Fund,
L.P. for advances up to $500,000 in $5,000 increments, subject to maintaining a
borrowing base of 80% of eligible accounts receivable as defined in the
agreement. The Note bears interest at a rate of 12.0%, is secured by eligible
accounts receivable as defined in the agreement, requires monthly interest
payments and is due on September 30, 2009.  Mandatory prepayments of
principal are required in the event that the eligible borrowing base falls below
amounts advanced under the agreement.  In conjunction with the loan
agreement, the Company issued a five-year warrant to purchase 4,000,000 shares
of the Company’s common stock at an exercise price of $0.075 per share. The
warrant was valued at $169,294 and was recorded as prepaid expenses and other
assets and amortized over the life of the loan.  A total of $23,304
and $0 was recorded as amortization expense for the years ended December 31,
2007 and 2006.





The
estimated fair value of the above warrant was calculated using the Black Scholes
method and the following assumptions.


F-11


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





Closing
      price for the Company's common stock
            
            $
            0.05Estimated
      volatility
            
            
            135%Risk
      free interest rate
            
            
            4.35%Expected
      dividend rate
            
            
            0%Expected
      life, in years
            
            
            5.0




The
shares underlying the warrants have certain registration rights and the Company
is required to file a registration statement no later than March 31,
2008.  Should the Company fail to file the registration statement by
the required date, the registration rights agreement stipulates penalties of 1%
of the purchase price per month as liquidated damages.  Should the
Company be unable to have the registration statement declared effective within
120 days, a penalty of 1% per month of the total warrant exercise price of
$300,000 will be assessed.





Cash Advances
from Shareholder – A shareholder advanced $97,000 of cash to the Company.
The cash advances are unsecured and have no stated maturity
date.  During 2007, the Company was able to settle these advances with
no payment from the Company. As a result, the Company recognized a gain from
settlement of debt of $97,000 in the accompanying statement of operations for
the year ended December 31, 2007.





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 15% payable
at different times.  During the year ended December 31, 2007, a total
of $261,000 of these notes plus the related accrued interest of $415,492 were
settled with no cash payments by the Company. As a result, the Company
recognized a gain from settlement of debt of $676,492 related to these notes and
the related accrued interest for the year ended December 31, 2007.





Convertible
Promissory Notes Payable–In
June 2006, the Company commenced a private placement offering of convertible
promissory notes and warrants through Pointe Capital, LLC (“Pointe”). From June
through December 31, 2006, the Company issued $795,000 of convertible promissory
notes that bear interest at 12% per annum, are unsecured and are due one year
from the date of issuance. The effective interest rates of the notes including
computed discounts issued in 2006 range from 12% to 39%. The notes are
convertible into units at $0.05 per unit, each unit consisting of one share of
common stock and one warrant to purchase one share of common stock at $0.075 per
share for a period of three years from the date of issuance. Thus, the notes are
convertible into an aggregate of 15,900,000 shares of common stock and warrants
to purchase an additional 15,900,000 shares of common stock. The Company has the
option to redeem the notes at their face value plus accrued interest if the
average market price of the Company’s common stock is $0.10 per share for a
period of twenty consecutive days. In conjunction with this offering, the
Company paid Pointe loan fees of $63,600 that were capitalized and included in
prepaid expenses and other assets. The loan costs are being amortized over the
terms of the respective notes.  A total of $46,486 and $17,114 of
amortization was recorded for the year ended December 31, 2007 and 2006,
respectively.





In 2007,
the Company issued an additional $533,500 of convertible promissory notes on the
same terms. The notes are convertible into an aggregate of 10,670,000 shares of
common stock and warrants to purchase an additional 10,670,000 shares of common
stock. Based upon the fair value of the Company’s common stock on the dates the
notes were issued, the investors received a beneficial conversion option of
$239,895 during 2006 and $64,421 during 2007. The beneficial conversion option
was computed as the difference between the fair value of the common stock
issuable upon conversion of the promissory notes and the proceeds allocated to
the common stock portion of the conversion option. The recognition of the
beneficial conversion option resulted in a discount to the notes payable that is
being amortized over the term of the convertible notes using the effective
interest method, or through the date of conversion, and resulted in the
recognition of $251,993 and $48,801 of interest expense during the years ended
December 31, 2007 and 2006, respectively.





F-12


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





During
the second quarter of 2007, $107,500 of principal on the convertible notes was
repaid in cash. During the fourth quarter of 2007, $1,146,000 of principal on
the convertible notes was converted into 22,920,000 shares of common stock and
22,920,000 three-year warrants with an exercise price of $0.075. In addition,
the holders of the notes converted $124,522 in accrued interest into 2,490,444
shares of common stock, with a fair value of $99,618 based on the closing market
price of $0.04 as of the date of conversion, and 2,490,444 three-year warrants
to purchase common stock at an exercise price of $0.075 per share with an
aggregate fair value of $61,454. The estimated fair value of the warrants issued
in conjunction with the conversion of accrued interest was calculated using the
Black-Scholes option pricing model and the following weighted-average
assumptions: market price of common stock – $0.04 per share; estimated
volatility – 120%; risk-free interest rate – 3.35%, expected dividend rate – 0%
and expected life – 3.0 years. The excess of the fair value of the common stock
and the warrants over the accrued interest was recognized as additional interest
expense in the amount of $36,550.





In July
2007, the Company issued 12% convertible promissory notes for $250,000 and
warrants to purchase 5,000,000 shares of common stock at an exercise price of
$0.075 for a period of three years to Aspen Opportunity Fund LP in exchange for
proceeds of $250,000. The notes are convertible at $0.05 per share into
5,000,000 shares of common stock. The estimated fair value of the warrants
issued with the promissory notes of $138,291 was calculated using the
Black-Scholes option pricing model and the following assumptions: market price
of common stock – $0.04 per share; estimated volatility – 135%; risk-free
interest rate – 4.56%, expected dividend rate – 0% and expected life – 3.0
years. The beneficial conversion option was computed as the difference between
the fair value of the common stock issuable upon conversion of the promissory
notes and the proceeds allocated to the common stock portion of the conversion
option.





The
proceeds were allocated between the promissory note and the warrants based upon
their relative fair values and resulted in allocating $56,124 to the promissory
notes, $89,038 to the warrants and $104,838 to the beneficial conversion option.
The resulting $193,876 discount to the note payable is being amortized over the
term of the convertible notes using the effective interest method and resulted
in the recognition of $61,544 of interest expense during the year ended December
31, 2007.





La Jolla Cove
Investors – During December 2002, the Company entered into a
convertible debenture agreement with La Jolla Cove Investors, Inc. (“La Jolla
Cove”), who at the time was the named as an underwriter for a planned public
offering of the Company’s common stock. La Jolla Cove 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, La Jolla Cove filed a
complaint in the Superior Court of California, County of San 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 the convertible debenture
agreement. La Jolla Cove claimed damages in the amount of $406,990 plus interest
and penalties, which resulted in part from the $150,000 of advances to the
Company in 2002 and $100,000 in 2003. 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. During 2005, the Company made principal payments on the convertible
debenture of $7,763. The adjusted carrying amount of the convertible debenture
was $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
$140,000 through July 2006 in full satisfaction of all amounts due under the
convertible debenture and related interest and penalties and recognized a gain
from termination of debt in the amount of $138,500 in the accompanying statement
of operations for the year ended December 31, 2006.





Bruce L.
Shannon Attempted
Bankruptcy Action – 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 $248,175 of notes payable
and $121,681 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. In conjunction with the
settlement, the Company recognized a gain from termination of debt in the amount
of $384,623 in the accompanying statement of operations in the second quarter of
2006.





F-13


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





Bridge Financing–In
February 2006 the Company entered into a one year non-exclusive Financial
Advisory and Investment Banking Agreement (“Investment Banking Agreement”) with
Pointe as more fully described in Note 6. Pursuant to the Investment Banking
Agreement, the Company received gross proceeds of $150,000 in the form of
unsecured convertible notes.  These notes were convertible into the
Company’s common stock at a price of $0.01 per share, representing the market
price on the date of issuance. No beneficial conversion option was recognized on
upon the issuance of these notes. In March and April, 2006, the $150,000 notes
were converted into an aggregate of 15,000,000 shares of the Company’s common
stock.








NOTE
5 – SETTLEMENT OBLIGATIONS AND LITIGATION CLAIMS





The
Company has obligations due to creditors that arose from cash loans and the
receipt of goods or services. 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
      31,2007
            
            
            2006Complete
      Packaging, LLC d.b.a. Compax
            
            $
            -
            
            
            $
            69,622Litho-Flexo
      Graphics, Inc.
            
            
            63,283
            
            
            
            63,283Williams
      & Webster
            
            
            -
            
            
            
            54,564Xerox
            
            
            -
            
            
            
            17,590National
      Bulk
            
            
            -
            
            
            
            20,418Downs
      and Parkinson
            
            
            25,904
            
            
            
            33,904Total
            
            $
            89,187
            
            
            $
            259,381








Complete
Packaging, LLC d.b.a. Compax – On October 17, 2003, Complete Packaging,
LLC, doing business as Compax, filed a complaint in the Third District
Court of Salt Lake County, State of Utah, 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, which amount 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
monthly payments 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. The Company paid $75,000 of this
obligation during 2006.  The remaining 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.





F-14


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS








Litho-Flexo
Graphics, Inc. – On May 23, 2003, Litho-Flexo Graphics, Inc. filed a
complaint in the Fourth District Court in and for Wasatch County, State of Utah,
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, 2007 and 2006. No resolution has been reached under the claims,
which continue to be in litigation.





Williams and
Webster– The Company reached a settlement on May 24, 2007 resulting in
no amount being due from the Company and recognized a gain from termination of
debt of $54,564 in the accompanying statement of operations.





Xerox– In
December 2007, the Company negotiated a settlement for all amounts due, paid
$10,000 and recognized a gain from termination of debt of $7,590 in the
accompanying statement of operations.





National Bulk– On May 4, 2007 the Company negotiated a settlement for all amounts due,
paid $15,000 and recognized a gain from termination of debt of $5,418 in the
accompanying statement of operations.





NOTE
6 – COMMITMENTS AND CONTINGENCIES





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
the Company as a respondent.  This administrative proceeding has file
no. 3-12843.The administrative
proceeding sought to revoke the Company’s registration under the Securities
Exchange Act of 1934 (“Exchange Act”) under which the Company files quarterly
and annual financial reports.  The Company had not filed nine
quarterly and annual financial reports.  All of these reports have
been filed as of January 2, 2008.





On
January 30, 2008, Administrative Law Judge James Kelly issued an Initial
Decision. This decision denied the Division of Enforcement’s Motion for
revocation and granted the Company’s motion for summary disposition. The
Judge found that the Company violated rules promulgated under the Exchange Act
which required the filing of annual and quarterly reports.  In the
decision the Judge expressly stated that the sanctions of revocation or trading
suspension would not be imposed as such sanctions were not appropriate or
necessary and denied the Division’s motion for revocation.  The
initial decision dismissed the administrative proceeding. The parties had 21
days to appeal which has expired.  Neither party appealed and on March
6, 2008 the Commission issued a notice making the Initial Decision the Final
Decision.





F-15


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS








U.S. Securities
and Exchange Commission ,  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 May 17, 2004 the Company issued restated
financial statements as of December 31, 2003.  On April 14, 2005, the
Company issued restated financial statements as of December 31,
2004.  These filings restated the sale of the mining claims and
revenues for those years. The Complaint seeks injunctive action against the
defendants including the Company and seeks fines from the three individual
defendants, and from two individual defendant’s disgorgement of stock sale
proceeds and bars as an officer and director. In February, 2008 a
scheduling conference was held and a tentative trial date has been set for
January, 2010. The Company intends to vigorously defend the allegations of
the Complaint.





The
Company had a verbal lease agreement for its current office and production
facilities based in Heber, Utah with annual rent payments due of $120,000. The
Company has not made any payments related to this agreement in fiscal 2006.
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
Aspen Capital Management, LLC (“Landlord”) an entity that is affiliated with a
former director of the Company. In conjunction with this sale, $117,060 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
$14,520 per month, respectively.





Future
minimum lease payments over the next five years ending December 31 are as
follows:








2008
            
            $
            144,0002009
            
            
            144,0002010
            
            
            144,0002011
            
            
            144,0002012
            
            
            158,400











In
February 2006, the Company entered into a one year 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. The Company
subsequently received $150,000 under the terms of a convertible promissory note
that was arranged by Pointe and the Company made the $25,000 payment to Pointe.
Additionally, the Company issued Pointe 8,000,000 warrants to purchase common
stock at $0.01 per share for a period of 3 years. The warrants issued pursuant
to this agreement were valued at $125,892. This amount was recorded as a prepaid
expense and is being amortized over the one-year term of the agreement. The
Company further agreed to pay Pointe a 7% commission and a 1% unaccountable
expense allowance upon receipt of financing brought to the Company by Pointe,
agreed to pay Pointe a fee equal to 5% of the value of the transaction as
defined in the agreement in the event of a merger or acquisition of the
Company.








F-16


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





In
February 2006, the Company entered into a renewable two-year non-exclusive
engagement letter ( the “Engagement Letter”) with Aspen Capital Partners, LLC,
an entity that employs a person that was on the board of directors of the
Company at that time 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 required a non-refundable retainer fee of
$25,000, the issuance of 2,500,000 shares of common stock and payments of
$15,000 per month for a 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 8,000,000
warrants issued pursuant to the Engagement Letter were valued at $125,892. This
amount was recorded as a prepaid expense and will be amortized over the two year
term of the agreement. The 4,500,000 warrants were valued at $76,410 and were
recorded as interest expense. 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. These warrants
were issued in May 2007.  It is the intent of the Company to renew
this agreement.





On May
22, 2007 the Company entered into a Master Lease Line with Gulf Pointe Capital,
LLC (“Gulf Pointe”).  The terms of the lease line provide 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. Upon
entering into the lease agreement, the Company sold certain manufacturing,
computer and office furniture and equipment to Gulf Pointe for $160,000 and
leased the assets back from Gulf Pointe under the terms of a three-year lease
agreement. The assets sold had a net book value of $51,152.  The
resultant gain on sale of $108,848 was deferred and is being recognized over the
three-year term of the capital lease obligation. During the year ended December
31, 2007, the Company recognized $22,043 of this gain. In connection with
entering into the lease for the equipment, the Company recognized a $160,000
capital lease obligation.  The Company has utilized an additional
$45,599 of this lease financing facility during 2007.





The
capital lease obligations bear interest at a rates ranging from 21.5% to 26.5%
and require payments of principal and interest over the 36-month term of the
leases. The assets acquired under the capital lease obligation are being
depreciated over the three-year term of the lease. The following is a schedule
by years of future minimum lease payments under the capital leases together with
the present value of the net minimum lease payments as of December 31,
2007:





Years
      Ending December 31:2008
            
            $
            95,0022009
            
            
            95,0022010
            
            
            48,824Total
      minimum lease payments
            
            
            238,828Less:  Amount
      representing interest
            
            
            (58,595
            )Present
      value of minimum lease payments
            
            
            180,233Less:
      Current portion
            
            
            (60,021
            )Capital
      lease obligations, long-term
            
            $
            120,212











In
conjunction with the Master Lease Line, the Company issued a five-year warrant
to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per
share.  A total of 2,500,000 of these warrants vested upon the
execution of the Master Lease Line.  The remaining 7,500,000 warrants
vest pro-rata upon the funding of the credit limit of $500,000.  Based
upon the estimated total funding that will take place under the Master Lease
Line, the Company has estimated that it is probable that 5,583,979 of the
warrants will vest and have been valued at $204,722. That amount has been
recorded as deferred loan costs and is being amortized to interest expense over
the term of the respective capital lease obligations. A total of $72,665 was
recorded as amortization expense during the year ended December 31,
2007.





The
Company has agreements with three vendors to issue three year warrants to
purchase of an aggregate of 4,500,000 shares of common stock at a price of $0.05
per share upon the achievement of certain performance milestones as defined in
the respective agreements.  None of the contractually defined
milestones has been achieved and no warrants have been issued pursuant to these
agreements.





F-17


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS








The
Company is party to certain litigation from time to time regarding trade
accounts payable and certain notes payable.  The amount surrounding
the litigation has in each case been properly recorded in the financial
statements.





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 significant pending environmentally related litigation or of
any specific past or prospective matters involving environmental concerns, which
could impair the marketing of its products.








NOTE
7 - COMMON STOCK





During
2007, the Company issued 500,000 shares valued at $20,000 or $0.04 per share,
250,000 shares of common stock valued at $7,500 or $0.03 per share as
compensation to employees, 100,000 shares of common stock as compensation to an
employee valued at $4,500 or $0.045 per share and 250,000 shares to a vendor for
services valued at $11,250 or $0.045 per share. The value represents the market
price of the Company’s common stock on the dates of issuance.  An
aggregate of 22,920,000 shares of common stock were issued upon the conversion
of $1,146,000 of 12% convertible notes and 2,490,443 shares of common stock
valued at $99,618 or $0.04 per share based on the closing market price on the
date of issuance.  In addition, 7,500,000 shares of common stock were
issued upon the exercise of warrants for cash of $75,000 or $0.01 per
share.





The
Company also issued 5,000,000 shares of common stock and three-year warrants to
purchase 5,000,000 shares of common stock for proceeds of
$250,000.  The proceeds were allocated to the warrants based upon
their fair value of $123,383, and the balance of the proceeds of $126,617 was
allocated to the shares of common stock. The fair value of the warrants,
determined using the Black-Scholes Option Pricing Model, was calculated using
the following assumptions: risk free interest rate of 3.35%, expected dividend
yield of 0%, expected volatility of 120% and an expected life of 3
years.





During
2006, the Company issued 15,000,000 shares of its common stock at a conversion
price of $0.01 per share for the conversion of the bridge financing of $150,000,
2,500,000 shares for employee bonuses valued at $70,000 or $0.028 per share,
9,460,350 shares issued as compensation to our chief executive officer valued at
$189,207 or $0.02 per share and 6,000,000 shares valued at $156,000 or $0.026
per share as officer bonus, 500,000 shares to a director as compensation for his
guarantee of a line of credit of the Company valued at $8,500 or $0.017 per
share, 2,500,000 shares for professional services valued at $45,000 or $0.018
per share and 15,154,068 shares for professional fees valued at $394,006 or
$0.026 per share and 1,780,000 shares valued at $35,948 to vendors in settlement
of expenses and accrued liabilities.  All prices were the market price
as of the date of issuance.








NOTE
8 - STOCK WARRANTS





In May
2007, the Company issued five-year warrants to purchase 5,000,000 shares of
common stock at $0.05 per share upon the completion of one million dollars of
funding pursuant to the Engagement Letter with Aspen Capital Partners,
LLC.  The warrants were valued at $127,357.





In May
2007, and as further described in Note 6, the Company issued five-year warrants
to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per
share to Gulf Pointe in connection with a lease line of credit.  The
value of the 5,583,979 warrants that are expected to vest was
$204,722.  A total of 4,416,021 warrants remain unvested as of
December 31, 2007. Under the terms of the warrants, Gulf Pointe has the option
to pay the exercise price to the Company indirectly repurchasing shares from
Gulf Pointe at the market price of the Company’s common stock on the day prior
to the exercise date.





F-18


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS








In July
2007 and as further described in Note 4, the Company issued three-year warrants
to purchase 5,000,000 shares of common stock at an exercise price of $0.075 per
share to Aspen Opportunity Fund, L.P. in connection with a 12% convertible note
payable.





In
September 2007, the Company issued five-year warrants to purchase 4,000,000
shares of the Company’s common stock at an exercise price of $0.075 per share
pursuant to the accounts receivable loan agreement with Aspen Opportunity Fund,
L.P. as discussed in Note 4. The warrants were valued at $169,294. Under the
terms of the warrants, the holder of the warrants has the option to pay the
exercise price to the Company indirectly repurchasing shares from the holder at
the market price of the Company’s common stock on the day prior to the exercise
date.





During
2007, the Company issued  three-year warrants to purchase 22,920,000
shares of common stock with an exercise price of $0.075 on the conversion of
$1,146,000 of 12% notes payable and issued 2,490,444 three-year warrants with an
exercise price of $0.075 per share on the conversion of $124,522 of accrued
interest as discussed in Note 4.  The warrants were recorded at their
fair value of $61,454.





In
November 2007, the Company issued three-year warrants to purchase 5,000,000
shares of common stock at an exercise price of $0.075 in conjunction with an
issuance of 5,000,000 shares of common stock for cash as discussed in Note
7.





During
February, 2006, the Company issued five-year warrants to purchase 8,000,000
shares of its common stock at an exercise price of $0.01 per share pursuant to
the Engagement Letter as discussed in Note 6. During the second quarter of 2007,
Aspen Capital Management, LLC exercised warrants to purchase 7,500,000 shares of
common stock with an exercise price of $0.01 per share resulting in proceeds of
$75,000 to the Company pursuant to these warrants.





In
addition, the Company issued three-year warrants to purchase 8,000,000 shares of
its common stock to Pointe pursuant to the investment banking agreement as
discussed in Note 6. These warrants were each valued at $125,892 and were
recorded as prepaid expenses.  The values are being amortized to
general and administrative expenses over the terms of the respective agreements
of 2 years and one year, respectively. Also, the Company pursuant to the
Engagement Letter issued five year warrants to purchase an aggregate of
4,500,000 shares of its common stock at an exercise price of $0.01 per share
valued at $76,410.





In March,
2006 the Company issued three-year warrants purchase 7,000,000 shares of its
common stock at an exercise price of $0.01 per share a to a consultant to the
Company for marketing services.  The warrant was valued at $116,935
and was charged to marketing and selling expense in the accompanying statement
of operations for the year ended December 31, 2006.





The
estimated fair values of the warrants issued under the Engagement Letter, the
investment banking agreement and for marketing services as discussed above were
calculated using the Black Scholes method and the following
assumptions:








Closing
      price for the Company's common stock
            $0.018  to
      $0.02Estimated
      volatility
            130%
      to 153%Risk
      free interest rate
            4.77%Expected
      dividend rate
            0%Estimated
      life
            3
      to 5 years








F-19


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS








Prior to
December 31, 2005, the Company issued warrants to purchase 4,650,000 shares of
common stock at prices ranging from $0.20 to $0.50 per share.  These
warrants expired unexercised in May, 2007.





The
following summarizes the outstanding warrants as of December 31,
2007:





Exercise
      Price
            
            Warrants
      Outstanding
            
            Weighted-Average
      Remaining Contractual Life (Years)
            
            Number
      Exercisable$0.01
            
            20,000,000
            
            1.7
            
            20,000,000$0.05
            
            15,000,000
            
            4.4
            
            10,583,979$0.075
            
            39,410,444
            
            3.0
            
            39,410,44474,410,444
            
            
            
            69,994,423







NOTE
9 – 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, 2007 and 2006 are as follows:





December
      31,
            
            2007
            
            
            2006Net
      Operating Loss Carryforwards:Federal
            
            $
            8,852,470
            
            
            $
            8,505,817State
            
            
            1,347,277
            
            
            
            1,316,690Allowance
      for doubtful accounts
            
            
            6,198
            
            
            
            9,473Deferred
      gain on capital lease
            
            
            32,379
            
            
            
            -Total
      deferred income tax assets
            
            
            10,238,324
            
            
            
            9,831,980Valuation
      allowance
            
            
            (9,902,544
            )
            
            
            (9,601,838
            )Deferred
      income tax liability - intangible assets
            
            
            (335,780
            )
            
            
            (230,142
            )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,
            
            2007
            
            
            2006Federal
      tax benefit at statutory rate (34%)
            
            $
            (395,739
            )
            
            $
            (607,628
            )State
      tax benefit, net of federal effect
            
            
            (38,410
            )
            
            
            (58,976
            )Non-deductible
      and other items
            
            
            133,443
            
            
            
            20,233Change
      in valuation allowance
            
            
            300,706
            
            
            
            646,371Provision
      for Income Taxes
            
            $
            -
            
            
            $
            -








F-20


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS








NOTE
11 – SUBSEQUENT EVENTS





On
January 4, 2008, the Company issued 500,000 shares of common stock valued at
$37,500 or $0.075 per share to certain employees as compensation.  In
addition, the Company issued 140,000 shares of common stock valued at $10,500 or
$0.075 per share to a former director for reimbursement of certain
expenses.  The price was based on the closing market price as of that
date.





In
January 2008, the Company issued 250,000 shares of common stock upon the
exercise of warrants.  The Company received cash proceeds of $2,500 or
$0.01 per share.


































F-21