UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-K
  x
ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008
  o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  FOR
THE TRANSITION PERIOD FROM ______________ TO ________________
  Commission
File Number: 0-10147
  DIATECT
INTERNATIONAL CORPORATION
 (Name of
small business issuer in its charter)
  California
                  82-0513109(State
      or other jurisdiction of incorporation ororganization)
                  (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
Act.  o
  Indicate
by check mark if the issuer is a well-known seasoned issuer as defined in Rule
405 of the Securities Act.  ̈
 Check whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes o   Nox
 
 Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-K 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-K or any amendment to this Form
10-K. o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filer ̈
                
                Accelerated filer ̈Non-accelerated filer ̈
                
                Smaller
      reporting company x
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  ̈
   No x
 
 For the
fiscal year ended December 31, 2008 the issuer’s revenues were
$1,931,660.
 
 The
aggregate market value of the issuer’s voting stock held by non-affiliates on
June 30, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter was $14,613,944 based on the average of the bid and ask
prices of such stock on that date of $0.075, as reported on the OTC Bulletin
Board.
  On May
18, 2009 there were 215,350,959 shares of Registrant’s common stock, no par
value, issued and outstanding.
 
 Documents
included by reference: None
 
   
 
 TABLE OF
CONTENTS
 
 PageNumberPART
      IItem
      1.
                      Our
      Business
                      
                      1Item
      2.
                      Properties
                      
                      3Item
      3.
                      Legal
      Proceedings
                      
                      4Item
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      
                      5PART
      IIItem
      5.
                      Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities
                      
                      6Item
      6.
                      Management’s
      Discussion and Analysis or Plan of Operation
                      
                      7Item
      7.
                      Financial
      Statements
                      
                      9Item
      8.
                      Changes
      in and Disagreements with the Accountants on Accounting and Financial
      Disclosure
                      
                      9Item
      8A.
                      Controls
      and Procedures
                      
                      9Item
      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
                      
                      10Item
      10.
                      Executive
      Compensation
                      
                      11Item
      11.
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      
                      13Item
      12.
                      Certain
      Relationships and Related Transactions
                      
                      14Item
      13.
                      Exhibits
                      
                      15Item
      14.
                      Principal
      Accountant Fees and Services
                      
                      16Signatures
                      
                      
                      17
  
 
 FORWARD
LOOKING STATEMENTS
  We are
including the following cautionary statement in this Annual Report on Form 10-K
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-K 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.
  
 PART
I
 
 ITEM
1.  Our Business
 
 Diatect
International Corporation (the “Company”) is a developer and marketer of
non-toxic pesticide products, selling its products to wholesale distributors and
retail customers in the United States.  We also sell directly to the
consumer via our website at www.diatect.com.  The
Company was incorporated under the laws of the State of California in 1979 as
San Diego Bancorp., and we changed our name to Diatect International Corporation
in 1998.  During 2002, we consolidated our operations in Utah, moving
our administrative offices from Idaho and our manufacturing facilities from
Kansas.
  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 eight 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.
  1
 
 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 labels
have indefinite lives and should not be amortized further, but are subject to
periodic review for impairment.  During 2008 we performed an impairment
analysis in light of the decrease in sales and our lack of funds for operations
and expansion.  As a result of this analysis, we recognized an
impairment of the remaining value of the EPA labels in 2008 in the amount of
$1,116,322.
 
 Marketing
and Sales
 
 We market
our products under two different product brand names - DiatectTM and
ResultsTM.
 
 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.
  2
 
 Results Garden & Floral is
designed for outdoor use by protecting garden plants from many varieties of
worms, beetles, leafhoppers, stink bugs, squash vine borers, and other
insects.
 
 Results Pet Powder is
specifically designed for use on domestic pets. This product is targeted to
provide homeowners and veterinarians with a powder that is effective in kennels
and other animal boarding facilities to control insects that become lodged in
the skin and fur of animals.
 
 A
substantial part of our advertising and marketing efforts have been directed
toward direct marketing and trade shows. We believe that one-on-one contact with
our wholesale buyers allow us to explain the differences 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, 2008, the Company had 13 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.
 
 On
January 1, 2007, the Company entered into a five year lease with Aspen Capital
Management, LLC, an entity controlled by our major shareholder 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.
 
 We have
insurance for the building and inventory for amounts which we believe are
adequate.
  3
 
 ITEM
3.  LEGAL PROCEEDINGS
  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 former president who was 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.  The Company is seeking to constructively resolve this
issue by settlement with the SEC.
 
 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.
 
 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 2005, the Company paid $9,342 to the vendor, which decreased the
recorded accrued settlement obligation liability to $63,283 at December 31,
2007.  In March, 2008 the Company entered into a settlement agreement
by which all claims of both parties will be settled upon the payment by the
Company of an aggregate of $60,000 to Litho-Flexo.  The Company made
all required payments on a timely basis.
  4
 
 Litigation Claim
-  The Company has been threatened with litigation regarding a
loan agreement on which the statute of limitations was believed by management to
have expired.  Although the Company has not received a complaint
regarding this claim, they have accrued an estimated loss from this threatened
litigation in the amount of $282,367.
 
 Jack Stites-On June 23, 2008 Jack Stites (“Stites”) filed a complaint in the Chancery
Court of Putnam County, Tennessee naming the Company as a
defendant.  Stites contends that the Company failed to make payment on
an unsecured note payable in the amount of $40,000 plus accrued interest and
fees of $110,180.  The Company did not respond to the suit, and a
default judgment was entered against the Company in the amount of $150,180.
Stites has also obtained a judgment in the state of Utah against the Company.
The Company has recorded this amount as loss contingency on the accompanying
statement of operations as of December 31, 2008.
 
 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, 2008.
  5
  PART
II
  ITEM
5.   MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
 
 Our
shares of common stock are presently quoted on the OTC Bulletin Board under the
symbol DTCT. Listed below are the high and low bid prices for the shares of our
common stock during the years ended December 31, 2008 and 2007. These quotations
reflect inter-dealer prices, without mark-up, mark-down or commission and may
not represent actual transactions.
 
 High
                        
                        
                        LowFiscal 2008First
      Quarter (ended March 31, 2008)
                        
                        $
                        0.080
                        
                        
                        
                        0.070Second
      Quarter (ended June 30, 2008)
                        
                        
                        0.080
                        
                        
                        
                        0.070Third
      Quarter (ended September 30, 2008)
                        
                        
                        0.070
                        
                        
                        
                        0.060Fourth
      Quarter (ended December 31, 2008)
                        
                        
                        0.030
                        
                        
                        
                        0.020Fiscal 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
                        
                        
                        
                        0.034
 
 We
presently do not have any stock compensation plans.
 
 As of
December 31, 2008 there were 215,350,959 shares issued and outstanding and
approximately 1,235 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, 2008 which were not registered under the
Securities Act.  All issuances were of the Company’s no par common
stock. The
Company relied upon the exemption from registration of the issuance of the
securities discussed below provided by Section 4(2) of the Securities Act of
1933 (the “Securities Act”), in view of the close relationships that each
of the purchasers acquiring such securities had with the Company and the access
to all material information about the Company provided to all such
purchasers.
  On
January 1, 2008, we issued a three-year warrant to purchase 500,000 shares of
common stock at an exercise price of $0.07 per share as compensation to a vendor
for services rendered.
 
 Between
January 4 and June 30, 2008, we completed 14 separate transactions in which we
issued 9,800,000 shares of common stock and two year warrants to purchase
9,800,000 shares of common stock at an exercise price of $0.05 per share upon
the conversion of the Company’s convertible promissory notes having an aggregate
principal amount of $490,000, which the noteholders had acquired in
2007.
 
 On
January 11, 2008, we issued 7,000,000 shares of common stock upon the exercise
of warrants for proceeds of $70,000, in accordance with the terms of such
warrants..
 
 On
January 29, 2008, we issued 250,000 shares of common stock upon the exercise of
warrants for proceeds of $2,500, in accordance with the terms of such
warrants.
 
 On June
18, 2008, we issued 1,600,000 shares valued at $115,200 or $0.072 per share and
a three-year warrant to purchase 1,000,000 shares of common stock at an exercise
price of $0.10 per share as compensation to a vendor for services
rendered.  The value represents the market price of our common stock
on the date of issuance.
 
 On July
1, 2008, we issued three-year warrants to purchase 2,000,000 shares of common
stock at an exercise price of $0.075 per share to three vendors for services
rendered.
  6
 
 On July
1, 2008, we issued a three-year warrant to purchase 1,575,000 shares of common
stock at an exercise price of $0.05 per share to five vendors for services
rendered.
 
 On July
7, 2008, we issued 1,000,000 shares of common stock valued at $75,000 or $0.075
per share as compensation to a vendor for services rendered; and on January 4,
2008, we issued an additional 640,000 shares of common stock valued at $48,000
or $0.075 per share to employees.  The value represents the market
price of our common stock on the dates of issuance.
 
 On July
31, 2008, we issued 769,230 shares of common stock and two-year warrants to
purchase 769,230 shares of common stock at an exercise price of $0.13 per share
for gross proceeds of $50,000 in a private placement to a purchaser who was an
“accredited investor” as defined by Regulation D under the Securities
Act.
 
 On August
7, 2008, we issued 2,000,000 shares of common stock upon the exercise of
warrants for proceeds of $100,000, in accordance with the terms of such
warrants.
 
 On August
18, 2008, we issued 384,615 shares of common stock and two-year warrants to
purchase 384,615 shares of common stock at an exercise price of $0.13 per share
for gross proceeds of $25,000 in a private placement to a purchaser who was an
“accredited investor” as defined by Regulation D under the Securities
Act.
 
 On August
31, 2008, we issued 1,194,531 shares of common stock and a two-year warrant to
purchase 1,194,531 shares of common stock at an exercise price of $0.75 per
share, to an investor, upon the conversion of a note payable to him from the
Company in the amount of $50,000 and related interest of $9,728.
 
 On
September 25, 2008, we issued three-year warrants to purchase 12,000,000 shares
of common stock at an exercise price of $0.07 per share as compensation to our
officers and directors.  The exercise price exceeded the market price
on the date of grant.
 
 On
November 14, 2008, we issued 150,000 shares valued at $6,750 or $0.045 per
share, as compensation to a vendor for services rendered.  The value
represents the market price of our common stock on the date of
issuance.
 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.
 
 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, 2008 and 2007
 
 Results of
Operations:
 
 Revenue: We had
revenue of $1,931,660 for the year ended December 31, 2008 compared to
$2,015,484 for the year ended December 31, 2007.   Total revenue decreased
in 2008 by $83,824 primarily due to decreases in web based retail sales and
reduced sales into the commercial agriculture market.
  7
 
 Cost of revenue:
  Our cost of revenue was $550,046 for the year ended December 31,
2008 as compared to $600,424 for the year ended December 31,
2007.  The decrease of $50,378 is due to reductions in labor costs
related to manufacturing.
 
 Marketing and Selling
Expenses:
Marketing and selling expenses were $1,417,392 for the year ended December 31,
2008, as compared to $1,182,066 for the year ended December 31,
2007.  The increase of $235,326 is due primarily to increases in web
based advertising and increases in compensation expenses for marketing
staff.
 
 General and
Administrative Expenses: For the
year ended December 31, 2008 general and administrative expenses were $2,677,987
as compared to $1,767,231 for the year ended December 31, 2007.  The
increase of $910,756 is primarily due to increases in director and officer
compensation, professional fees, investor relations fees and amortization of
loan costs.
 
 Loss from Litigation Claims
and Judgments:Loss from Litigation Claims and Judgments was $432,547 and
is comprised of amounts of judgments obtained against the Company and estimated
amounts for claims anticipated from legal action.  There was no
comparable amount for the year ended December 31, 2007.
 
 Impairment of EPA
Labels:  During the fourth quarter of 2008, the Company
performed an impairment analysis of our EPA labels in view of our reduced sales,
continued losses and our limited financial capabilities and determined that the
value of the EPA labels of $1,116,322 was fully impaired.  There was
no comparable amount for the year ended December 31, 2007.
 
 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, 2008
interest expense was $443,150 as compared to $676,249 for the year ended
December 31, 2006, a decrease of $233,099. The decrease is primarily due to the
lower amortization of loan discount somewhat offset by higher borrowing levels.
Interest expense for the years ended December 31, 2008 and 2007 reflects the
amortization of loan discount in the amount of $135,855 and $313,536,
respectively.
 
 Gain from
termination of debt was $1,046,547 for the year ended December 31, 2007. The
amount 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. There is no
comparable amount for the year ended December 31, 2008.
 
 Liquidity and Capital
Resources
 
 Our cash
and cash equivalents was $587 as of December 31, 2008 and we had a working
capital deficiency of $4,847,568. Accordingly, we are actively seeking
additional financing through debt and/or equity offerings.
 
 From
March 1 to May 7, 2009 we issued short term Notes for proceeds totaling $700,000
at interest rates ranging from 12% to 24%.  The proceeds from these
short term Notes were used for working capital purposes.
 
 The
proceeds from these short term Notes are not considered sufficient to support
our operations, and we must raise working capital to fund our on-going
operations through one or more debt or equity financings. Our efforts to raise
capital may not be successful, and even if we are able to obtain additional
financing, the terms of any such financing may be unfavorable to us and may be
highly dilutive to existing stockholders. Any future debt or equity financings,
when and if made, may not be sufficient to sustain our required levels of
operations. Any inability to obtain additional cash as needed would have a
material adverse effect on our financial position and results of operations and
may result in our having to severely curtail or even cease our
operations.
  8
 
 ITEM
7.  FINANCIAL STATEMENTS
 
 Our
financial statements are set forth immediately following the signature page to
this Form 10-K.
 
 ITEM
8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
 
 NONE
 
 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, 2008.
 
 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 2008 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, 2008, 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,
2008.
  9
 
 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/ Patrick CarrPatrick
      CarrPresident/s/ Robert RudmanRobert
      Rudman
                Chief
      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
 
 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, 2008 the name, age and position of
each of our executive officers and directors and their respective terms of
office.
 
 Name
                  
                  Age
                  
                  Position
                  
                  Director and/orOfficer
      SincePatrick
      Carr
                  
                  61
                  
                  Chief
      Executive Officer Chairman of the Board and Director
                  
                  July
      15, 2008Robert
      Rudman
                  
                  61
                  
                  Chief
      Financial Officer
                  
                  March
      24, 2008David
      Carlile
                  
                  53
                  
                  Director
                  
                  May
      1, 2008Philip
      Ellett
                  
                  55
                  
                  Director
                  
                  April
      15, 2008Timothy
      White
                  
                  60
                  
                  Director
                  
                  May
      8, 2008Frank
      Sanchez*
                  
                  49
                  
                  Director
                  
                  April
      7, 2008
 *
Resigned February 20, 2009
  10
 
 Audit
Committee Financial Expert
 
 Timothy
White serves as the sole member of our Audit Committee.  The Company
is presently seeking an additional member to serve on the 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-K.
 
 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, 2008 and 2007 by
our Principal Executive Officer and Principal Financial Officer (the “Named
Executive Officers”).
 
 SUMMARY
COMPENSATION TABLE
  Name and Principal
                                Position
                              
                              Year
                              
                              Salary ($)
                              
                              
                              Bonus
                                ($)
                              
                              
                              Stock
                                Awards ($)
                              
                              
                              Warrant
                                or Option
                                Awards
                                ($)
                              
                              
                              Non-Equity
                                Incentive Plan
                                Compensation
                                ($)
                              
                              
                              Nonqualified
                                Deferred
                                Compensation
                                Earnings
                                ($)
                              
                              
                              All
                                Other
                                Compensation
                                ($)
                              
                              
                              Total ($)Patrick
      Carr
                              
                              2008
                              
                              
                              114,583
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              80,500
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              195,083Chief
      Executive Officer
                              
                              2007
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Robert
      Rudman
                              
                              2008
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              63,250
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              63,250Chief
      Financial Officer
                              
                              2007
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
 11
 
 Narrative
Disclosure to Summary Compensation Table
 
 Employment
Agreements
 
 Patrick
Carr signed an employment agreement effective July 15, 2008 for a term of two
years at an annual salary of $250,000 per year.  The agreement also
provides for the granting of three-year warrants to purchase up to five million
shares of the Company at an exercise price of $0.07 per share. The warrants are
subject to time vesting with one million vested on the grant date of September
24, 2008, two million on the first anniversary and two million on the second
anniversary. A total of $76,920 of Mr. Carr’s salary was unpaid as of December
31, 2008.
 
 Mr.
Rudman does not receive a salary for his services to the Company. His
services are provided to the Company as part of the services provided to the
Company by Aspen Capital Partners, LLC under the 2008 Engagement Letter
described under Item 12 below.
 
 Outstanding
Equity Awards at Fiscal Year-End
 
 Warrant
      Awards
                          
                          Stock
      AwardsName
                          
                          Number of
                            Securities
                            Underlying
                            Unexercised
                            Warrants (#)
                            Exciseable
                          
                          
                          Number of
                            Securities
                            Underlying
                            UnexercisedWarrants (#)
                            Unexerciseable
                          
                          
                          Equity Incentive Plan
                            Awards: Number of
                            Securities Underlying
                            Unexercised Unearned
                            Warrants (#)
                          
                          
                          Warrant
                            Exercise Price
                            ($)
                          
                          Warrant
                            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 ($)Patrick
      Carr
                          
                          
                          1,000,000
                          
                          
                          
                          4,000,000
                          
                          
                          
                          —
                          
                          
                          $
                          0.07
                          
                          9/24/2011
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Robert
      Rudman
                          
                          
                          1,000,000
                          
                          
                          
                          2,000,000
                          
                          
                          
                          —
                          
                          
                          $
                          0.07
                          
                          9/24/2011
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
 
 Compensation
of Directors
 
 The
following table summarizes data concerning the compensation of our directors for
the fiscal year ended December 31, 2008.
 
 
 Name
                      
                      Fees Earned or
                        Paid in Cash
                        ($)
                      
                      
                      Stock Awards
                        ($)
                      
                      
                      Warrant and
                        Option Awards
                        ($)
                      
                      
                      Non-Equity
                        Incentive Plan
                        Compensation
                        ($)
                      
                      
                      Nonqualified
                        Deferred
                        Compensation
                        Earnings ($)
                      
                      
                      All Other
                        Compensation
                        ($)
                      
                      
                      Total ($)Phillip
      Ellett
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      46,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      46,000David
      Carlile
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      46,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      46,000Timothy
      White
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      46,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      46,000Frank
      Sanchez
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      46,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      46,000
  On
September 25, 2008 each director was granted a three-year warrant to purchase
1,000,000 shares of Company common stock at an exercise price of $0.07 per
share.  The warrants were fully vested upon issuance.
  12
 
 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 May 18, 2009, 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 Officers; and
 ·
              all
      of our executive officers and directors, as a
  group.
 
 As of May
18, 2009, there were 215,350,959 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
                    %Patrick
      Carr,Chief Executive Officer,Chairman of the Board
                    
                    
                    5,000,000
                    
                    
                    
                    2.32
                    %Robert
      Rudman,Chief FinancialOfficer
                    
                    
                    3,000,000
                    
                    
                    
                    1.39
                    %Philip
      Ellett
                      Director
                    
                    
                    1,000,000
                    
                    
                    
                    *David
      Carlile
                      Director
                    
                    
                    1,000,000
                    
                    
                    
                    *Timothy
      White
                      Director
                    
                    
                    1,000,000
                    
                    
                    
                    *Total
      officers and directors as a group (5 persons)
                    
                    
                    11,000,000
                    
                    
                    
                    5.11
                    %
 
 * - Less
than 1%
 
 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.
  13
 
 Item
12.  Certain Relationships and Related Transactions
 
 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 controlled by our major
shareholder. 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 $14,520 per month,
respectively.
 
 In
October 2008, we entered into a one year Investment Banking Agreement with
Pointe Atlantic, Inc. an entity that is owned by our major shareholder. The
terms of the Investment Banking Agreement required that we pay a monthly
retainer of $7,500. If a merger or acquisition transaction is consummated during
the term of this agreement, the Company shall pay a cash fee equal to the sum of
5% of the aggregate consideration and 2.5% if the aggregate consideration
exceeds $5 million. In the event that Pointe assists in the arranging of a debt
financing, the Company will pay Pointe a fee of 2.5% of the total debt facility.
As our exclusive placement agent, Pointe shall be paid 8% of the gross proceeds
of a securities transaction plus a 2% non-accountable expense allowance and
warrants equal to 20% of the offering at the offering price.
 
 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 is owned by our major shareholder to provide 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.
  In March
2008, we entered into a second renewable two-year non-exclusive engagement
letter (the “2008 Engagement Letter”) with Aspen Capital Partners, LLC that
specifically supersedes the  earlier Engagement Letter. In addition to
providing consulting services in a variety of areas relating to our financial,
strategic and developmental growth, Aspen agreed to provide one of its employees
to serve in the position of the Company’s Chief Financial Officer. The Company
agreed to pay Aspen a monthly consulting fee of $20,000 for the services
provided by both Aspen and the Chief Financial Officer. On July 15, 2008, Aspen
agreed to reduce its monthly retainer to $15,000 in conjunction with the
appointment of Patrick Carr as the Company’s new President.
 
 On May
22, 2007 the Company entered into a Master Lease Line with Gulf Pointe Capital,
LLC (“Gulf Pointe”).  Our major shareholder is a one-third beneficial
owner of 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 years ended December
31, 2008 and 2007, the Company recognized $36,283 and $22,043, respectively 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 $15,067 and $45,599 of this lease financing facility
during 2008 and 2007, respectively.
  14
 
 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 5,809,984 of the
warrants will vest and have been valued at $212,994. 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. 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 $78,586 and
$72,665 was recorded as amortization expense during the years ended December 31,
2008 and 2007, respectively.
 
 In
August, 2008, the Company executed an amendment to the Master Lease Line in
which Gulf Pointe agreed to exercise 2,000,000 warrants to purchase common stock
at a price of $0.05 per share in exchange for past due payments totaling $51,943
and cash of $48,057.  In addition, the Company agreed to vest the
remaining 4,190,016 of the warrants to purchase common stock at an exercise
price of $0.05 per share issued in conjunction with the Master Lease Line. Upon
vesting, the Company expensed the remaining fair value at issuance of $153,630
as additional loan cost amortization.
 
 On
September 20, 2007 the Company entered into an accounts receivable loan
agreement with Aspen Opportunity Fund, L.P., an entity that is owned one-third
by our major shareholder 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.
 
 In
August, 2008 the Company executed an amendment to increase the currently
available amount of credit under the line to the greater of $185,000 or 80% of
eligible accounts receivable as defined in the agreement until January 1,
2009.  The amendment also reduced the total available amount from
$500,000 to $250,000, subject to eligible accounts receivable
requirements.
 
 Item
13.  Exhibits
 
 Index to
Exhibits:
 
 31.1
              Rule
      13a-14(a)/15d-14(a) Certification of Patrick Carr, Principal Executive
      Officer and Robert Rudman, Principal Financial
  Officer
 
 32.1
              Certification
      of Patrick Carr, Principal Executive Officer and Robert Rudman, Principal
      Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of
2002
  15
 
 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, 2008 and
2007:
 
 Fiscal
      2008
                    
                    
                    Fiscal
      2007Audit
      Fees
                    
                    $
                    94,966
                    
                    
                    $
                    103,882Audit
      Related Fees
                    
                    
                    —
                    
                    
                    
                    —Tax
      Fees
                    
                    
                    —
                    
                    
                    
                    —All
      Other Fees
                    
                    
                    —
                    
                    
                    
                    —TOTAL
      Fees
                    
                    $
                    94,966
                    
                    
                    $
                    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.
  16
 
 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:
      May 18, 2009By:
                /s/ Patrick CarrPatrick
      CarrPrincipal
      Executive Officer
 
 In
accordance with the Securities Exchange Act of 1934, this Report on Form 10-K
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 Carlile
              Director
              May
      18, 2009David
      Carlile/s/
      Philip Ellett
              Director
              May
      18, 2009Philip
      Ellett/s/
      Robert Rudman
              Chief
      Financial Officer
              May
      18, 2009Robert
      Rudman/s/
      Timothy White
              Director
              May
      18, 2009Timothy
      White
  17




DIATECT
INTERNATIONAL CORPORATION


INDEX
TO FINANCIAL STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm
                F-1Balance
      Sheets as of December 31, 2008 and  2007
                F-2Statements
      of Operations for the Years Ended December 31, 2008 and
    2007
                F-3Statements
      of Stockholders’ Deficit for the Years Ended December 31, 2007 and
      2008
                F-4Statements
      of Cash Flows for the Years Ended December 31, 2008 and
    2007
                F-5Notes
      to Financial Statements
                F-7










HANSEN,BARNETT& MAXWELL,
      P.C.A
      Professional Corporation
              Registered
      with the Public CompanyCERTIFIED
      PUBLIC ACCOUNTANTS
              Accounting
      Oversight Board5
      Triad Center, Suite 750Salt
      Lake City, UT 84180-1128Phone:
      (801) 532-2200Fax:
      (801) 532-7944
              A
      Member of the Forum of Firmswww.hbmcpas.com





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and the Stockholders


Diatect
International Corporation





We have
audited the accompanying balance sheets of Diatect International Corporation as
of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ deficit, and cash flows for each of the two years in
the period ended December 31, 2008. 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 audits 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
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Diatect International Corporation
as of December 31, 2008 and 2007, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has incurred significant operating losses and
negative cash flows from operating activities during each of the two years in
the period ended December 31, 2008. As of December 31, 2008, the Company had an
accumulated deficit of $32,625,287, and negative working capital of $4,847,568.
These matters raise substantial doubt about the Company’s ability to continue as
a going concern. Management’s plans with respect to these matters are also
described in Note 1. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




HANSEN,
      BARNETT & MAXWELL. P.C.




Salt Lake
City, Utah


May 16,
2009


F-1




DIATECT
      INTERNATIONAL CORPORATIONBALANCE
      SHEETSDecember 31,2008
                                                      
                                                      
                                                      2007ASSETSCurrent
      AssetsCash
                                                      
                                                      $
                                                      587
                                                      
                                                      
                                                      $
                                                      9,864Trade
      accounts receivable, net of allowance for doubtfulaccounts
      of $16,000 and $16,000, respectively
                                                      
                                                      
                                                      51,814
                                                      
                                                      
                                                      
                                                      242,406Inventory
                                                      
                                                      
                                                      38,416
                                                      
                                                      
                                                      
                                                      66,688Deferred loan costs and other current
      assets
                                                      
                                                      
                                                      135,719
                                                      
                                                      
                                                      
                                                      306,206Total
      Current Assets
                                                      
                                                      
                                                      226,536
                                                      
                                                      
                                                      
                                                      625,164Property and Equipment,
      net of accumulated depreciation of$189,894
      and $140,673, respectively
                                                      
                                                      
                                                      182,286
                                                      
                                                      
                                                      
                                                      258,229Intangible Assets - EPA
    Labels
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,116,322Total Assets
                                                      
                                                      $
                                                      408,822
                                                      
                                                      
                                                      $
                                                      1,999,715LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesTrade
      accounts payable
                                                      
                                                      $
                                                      1,009,133
                                                      
                                                      
                                                      $
                                                      224,213Accrued
      liabilities
                                                      
                                                      
                                                      75,833
                                                      
                                                      
                                                      
                                                      155,125Accrued
      interest payable
                                                      
                                                      
                                                      606,556
                                                      
                                                      
                                                      
                                                      456,626Accrued
      settlement obligations
                                                      
                                                      
                                                      502,251
                                                      
                                                      
                                                      
                                                      89,187Deferred
      gain on sale and leaseback of assets
                                                      
                                                      
                                                      50,523
                                                      
                                                      
                                                      
                                                      86,806Notes
      payable, net of unamortized discount of $0 and $135,855,
      respectively
                                                      
                                                      
                                                      2,749,996
                                                      
                                                      
                                                      
                                                      2,578,265Current portion of capital lease
      obligations
                                                      
                                                      
                                                      79,812
                                                      
                                                      
                                                      
                                                      60,021Total Current Liabilities
                                                      
                                                      
                                                      5,074,104
                                                      
                                                      
                                                      
                                                      3,650,243Long-Term
      LiabilitiesCapital lease obligations, net of current
      portion
                                                      
                                                      
                                                      52,041
                                                      
                                                      
                                                      
                                                      120,212Total Long-Term Liabilities
                                                      
                                                      
                                                      52,041
                                                      
                                                      
                                                      
                                                      120,212Stockholders'
      DeficitCommon
      stock, no par value; 500,000,000 shares authorized;215,350,959
      shares and 190,562,583 shares outstanding, respectively
                                                      
                                                      
                                                      25,589,213
                                                      
                                                      
                                                      
                                                      24,587,396Warrants
      outstanding
                                                      
                                                      
                                                      2,318,751
                                                      
                                                      
                                                      
                                                      1,561,367Accumulated deficit
                                                      
                                                      
                                                      (32,625,287
                                                      )
                                                      
                                                      
                                                      (27,919,503
                                                      )Total Stockholders' Deficit
                                                      
                                                      
                                                      (4,717,323
                                                      )
                                                      
                                                      
                                                      (1,770,740
                                                      )Total Liabilities and Stockholders'
      Deficit
                                                      
                                                      $
                                                      408,822
                                                      
                                                      
                                                      $
                                                      1,999,715




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


F-2




DIATECT
      INTERNATIONAL CORPORATIONSTATEMENTS
      OF OPERATIONSFor
      the Years EndedDecember 31,2008
                                          
                                          
                                          2007Sales
                                          
                                          $
                                          1,931,660
                                          
                                          
                                          $
                                          2,015,484Cost of Goods Sold
                                          
                                          
                                          550,046
                                          
                                          
                                          
                                          600,424Gross Profit
                                          
                                          
                                          1,381,614
                                          
                                          
                                          
                                          1,415,060ExpensesMarketing
      and selling
                                          
                                          
                                          1,417,392
                                          
                                          
                                          
                                          1,182,066General
      and administrative
                                          
                                          
                                          2,677,987
                                          
                                          
                                          
                                          1,767,231Loss
      from litigation claims and judgements
                                          
                                          
                                          432,547
                                          
                                          
                                          
                                          -Impairment of EPA Labels
                                          
                                          
                                          1,116,322
                                          
                                          
                                          
                                          -Total Expenses
                                          
                                          
                                          5,644,248
                                          
                                          
                                          
                                          2,949,297Loss
      from Operations
                                          
                                          
                                          (4,262,634
                                          )
                                          
                                          
                                          (1,534,237
                                          )Other
      Income (Expense)Interest
      expense
                                          
                                          
                                          (443,150
                                          )
                                          
                                          
                                          (676,249
                                          )Gain from termination of
    debt
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,046,547Net Other Income (Expense)
                                          
                                          
                                          (443,150
                                          )
                                          
                                          
                                          370,298Net Loss
                                          
                                          $
                                          (4,705,784
                                          )
                                          
                                          $
                                          (1,163,939
                                          )Basic and Diluted Loss Per
      Share
                                          
                                          $
                                          (0.02
                                          )
                                          
                                          $
                                          (0.01
                                          )Weighted-Average Basic and Diluted Common Shares
      Outstanding
                                          
                                          
                                          209,750,881
                                          
                                          
                                          
                                          160,887,061




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


F-3




DIATECT
      INTERNATIONAL CORPORATIONSTATEMENTS
      OF STOCKHOLDERS' DEFICITFor
      the Years Ended December 31, 2007 and 2008TotalCommon
      Stock
                                      
                                      
                                      Warrants
                                      
                                      
                                      Accumulated
                                      
                                      
                                      Stockholders'Shares
                                      
                                      
                                      Amount
                                      
                                      
                                      Outstanding
                                      
                                      
                                      Deficit
                                      
                                      
                                      DeficitBalance,
      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 convertiblenotes
      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 intocommon
      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
                                      )Issuance
      of stock and warrants for cash - $.05
                                      
                                      
                                      9,800,000
                                      
                                      
                                      
                                      299,718
                                      
                                      
                                      
                                      190,282
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      490,000Issuance
      of stock and warrants for cash - $.065
                                      
                                      
                                      1,153,845
                                      
                                      
                                      
                                      52,410
                                      
                                      
                                      
                                      22,590
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      75,000Issuance
      of warrants for services
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      711,577
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      711,577Issuance
      of stock for services
                                      
                                      
                                      3,390,000
                                      
                                      
                                      
                                      244,950
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      244,950Issuance
      upon exercise of warrants
                                      
                                      
                                      9,250,000
                                      
                                      
                                      
                                      366,830
                                      
                                      
                                      
                                      (194,330
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      172,500Issuance
      of stock and warrants on conversion of note
                                      
                                      
                                      1,194,531
                                      
                                      
                                      
                                      28,181
                                      
                                      
                                      
                                      21,819
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      50,000Issuance
      of stock and warrants for interest
                                      
                                      
                                      -
                                      
                                      
                                      
                                      9,728
                                      
                                      
                                      
                                      5,446
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      15,174Net
      loss for the year
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (4,705,784
                                      )
                                      
                                      
                                      (4,705,784
                                      )Balance
      December 31, 2008
                                      
                                      
                                      215,350,959
                                      
                                      
                                      
                                      25,589,213
                                      
                                      
                                      
                                      2,318,751
                                      
                                      
                                      
                                      (32,625,287
                                      )
                                      
                                      
                                      (4,717,323
                                      )





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


F-4




DIATECT
      INTERNATIONAL CORPORATIONSTATEMENTS
      OF CASH FLOWSFor
      the Years EndedDecember 31,2008
                                        
                                        
                                        2007Cash
      Flows from Operating ActivitiesNet
      loss
                                        
                                        $
                                        (4,705,784
                                        )
                                        
                                        $
                                        (1,163,939
                                        )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
                                        
                                        
                                        92,904
                                        
                                        
                                        
                                        63,106Amortization
      of discount on notes payable
                                        
                                        
                                        135,855
                                        
                                        
                                        
                                        313,536Amortization
      of loan costs
                                        
                                        
                                        162,203
                                        
                                        
                                        
                                        142,455Impairment
      of EPA Labels
                                        
                                        
                                        1,116,322
                                        
                                        
                                        
                                        -Gain
      from debt termination
                                        
                                        
                                        (4,283
                                        )
                                        
                                        
                                        (1,046,547
                                        )Net
      gain on disposal of property and equipment
                                        
                                        
                                        (36,283
                                        )
                                        
                                        
                                        (21,554
                                        )Issuance
      of stock for services
                                        
                                        
                                        244,950
                                        
                                        
                                        
                                        43,250Issuance
      of warrants for services
                                        
                                        
                                        703,305
                                        
                                        
                                        
                                        208,409Issuance
      of stock and warrants for interest
                                        
                                        
                                        5,446
                                        
                                        
                                        
                                        36,550Changes
      in operating assets and liabilities:Accounts
      receivable
                                        
                                        
                                        190,592
                                        
                                        
                                        
                                        (215,905
                                        )Inventory
                                        
                                        
                                        28,272
                                        
                                        
                                        
                                        169,201Deferred
      loan costs and other current assets
                                        
                                        
                                        16,556
                                        
                                        
                                        
                                        (8,478
                                        )Accounts
      payable
                                        
                                        
                                        784,919
                                        
                                        
                                        
                                        65,724Accrued
      liabilities
                                        
                                        
                                        (79,290
                                        )
                                        
                                        
                                        (32,687
                                        )Accrued interest payable
                                        
                                        
                                        159,656
                                        
                                        
                                        
                                        273,096Net Cash Used in Operating
      Activities
                                        
                                        
                                        (1,184,660
                                        )
                                        
                                        
                                        (1,173,783
                                        )Cash
      Flows from Investing ActivitiesPayments
      for purchases of property and equipment
                                        
                                        
                                        (1,894
                                        )
                                        
                                        
                                        (77,372
                                        )Proceeds from sale of property and
      equipment
                                        
                                        
                                        -
                                        
                                        
                                        
                                        160,000Net Cash Provided by (Used in) Investing
      Activities
                                        
                                        
                                        (1,894
                                        )
                                        
                                        
                                        82,628Cash
      Flow from Financing ActivitiesProceeds
      from borrowings under notes payable
                                        
                                        
                                        100,000
                                        
                                        
                                        
                                        958,871Proceeds
      from exercise of warrants
                                        
                                        
                                        172,500
                                        
                                        
                                        
                                        75,000Proceeds
      from issuance of stock and warrants
                                        
                                        
                                        565,001
                                        
                                        
                                        
                                        250,000Principal
      payments on notes payable
                                        
                                        
                                        (14,124
                                        )
                                        
                                        
                                        (111,230
                                        )Principal
      payments on lease obligation
                                        
                                        
                                        (63,447
                                        )
                                        
                                        
                                        (25,365
                                        )Accrued settlement obligation
      changes
                                        
                                        
                                        417,347
                                        
                                        
                                        
                                        (108,000
                                        )Net Cash Provided by Financing
      Activities
                                        
                                        
                                        1,177,277
                                        
                                        
                                        
                                        1,039,276Net
      Increase (Decrease) in Cash
                                        
                                        
                                        (9,277
                                        )
                                        
                                        
                                        (51,879
                                        )Cash at Beginning of Period
                                        
                                        
                                        9,864
                                        
                                        
                                        
                                        61,743Cash at End of Period
                                        
                                        $
                                        587
                                        
                                        
                                        $
                                        9,864




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


F-5




DIATECT
      INTERNATIONAL CORPORATIONSTATEMENTS
      OF CASH FLOWS (continued)For
      the Years EndedDecember 31,2008
                          
                          
                          2007Supplemental
      Disclosure of Cash Flow InformationCash paid for interest
                          
                          $
                          22,127
                          
                          
                          $
                          54,328Supplemental
      Schedule of Noncash Investing andFinancing
      ActivitiesConversion
      of notes payable and interest into common stock and
    warrants
                          
                          $
                          65,174
                          
                          
                          $
                          1,307,072Purchase of equipment under capital lease
      obligations
                          
                          
                          15,067
                          
                          
                          
                          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 $1,931,660 during the year
ended December 31, 2008 compared to $2,015,484 during the year ended December
31, 2007, resulting in a gross profit of $1,381,614 and $1,415,060,
respectively. For the years ended December 31, 2008 and 2007, the Company
incurred net losses of $4,705,784 and $1,163,939, respectively, and used
$1,184,660 and $1,173,783, respectively, of cash in its operating activities. At
December 31, 2008, the Company had a stockholders’ deficit of $4,717,323 and its
current liabilities exceeded current assets by $4,847,568.





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 Note 11.





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. During the fourth quarter of 2008, the Company performed an
impairment analysis and determined that the value of the EPA labels was impaired
and recognized the remaining value of the EPA Labels of $1,116,322 as an
impairment loss.





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.


F-8


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS




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.




December 312008
                    
                    
                    2007Outstanding
      warrants
                    
                    
                    94,383,820
                    
                    
                    
                    74,410,444Convertible
      promissory notes convertible into:Common
      stock
                    
                    
                    5,500,000
                    
                    
                    
                    6,500,000Warrants
                    
                    
                    500,000
                    
                    
                    
                    1,500,000Total
      potentially dilutive common shares
                    
                    
                    100,383,820
                    
                    
                    
                    82,410,444





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, 2008 and
2007, the Company has no unvested options and did not grant any options to
employees during the years ended December 31, 2008 and 2007. 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
adoption of the portions of SFAS No. 157 that were not postponed did not have a
material impact on our financial statements. The Company does not expect the
adoption of the postponed portions of SFAS No. 157 to have a material
impact on our 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. SFAS No. 141(R) and SFAS No. 160 are not expected to
have a material impact on our results of operations or financial
position.


F-9


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS




In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets(FSB FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under FAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(R) and other generally accepted accounting principles. FSP FAS
142-3 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2008. The Company does not expect the
adoption of FSP FAS 142-3 to have a material impact on our consolidated
financial statements.





In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles.  SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP.  The current GAAP hierarchy has been criticized
because it is directed to the auditor rather than the entity, it is complex, and
it ranks FASB Statements of Financial Accounting Concepts, which are subject to
the same level of due process as FASB Statements of Financial Accounting
Standards, below industry practices that are widely recognized as generally
accepted but that are not subject to due process.  The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP.  The
adoption of FASB 162 is not expected to have a material impact on the Company’s
financial statements.





In
October 2008, the FASB issued FSP FAS 157-3 Determining Fair Value of a
Financial Asset in a Market That Is Not Active (FSP FAS 157-3). FSP FAS
157-3 clarified the application of SFAS No. 157 in an inactive market. It
demonstrated how the fair value of a financial asset is determined when the
market for that financial asset is inactive. FSP FAS 157-3 was effective upon
issuance, including prior periods for which financial statements had not been
issued. The adoption of FSP FAS 157-3 is not expected to have a material impact
on the Company’s financial statements.





In
December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities ("FSP FAS 140-4 and FIN 46(R)-8"). FSP FAS 140-4 and
FIN 46(R)-8 amends SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and FIN
46(R), FASB Interpretation No.
46 (R), Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51, to require public entities to
provide additional disclosures about transfers of financial assets and their
involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is
effective for the first interim or annual reporting period ending after December
15, 2008. The adoption of FSP FAS 140-4 and FIN 46(R)-8 is not expected to have
a material impact on the Company’s financial statements.


F-10


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS




NOTE
2 – INVENTORY





Inventory
is comprised of the following:





December 31,2008
                            
                            
                            2007Raw
      materials
                            
                            $
                            18,351
                            
                            
                            $
                            32,836Finished goods
                            
                            
                            20,064
                            
                            
                            
                            33,852Total Inventory
                            
                            $
                            38,416
                            
                            
                            $
                            66,688




NOTE
3 – PROPERTY AND EQUIPMENT





Property
and equipment are stated at cost. Expenditures for normal repairs and
maintenance are charged to operations as incurred. Gains or losses on the sale
or disposal of equipment are recognized in the statement of operations.
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, 2008 and 2007 was $92,904 and $63,071, respectively. The components
of property and equipment are as follows:





EstimatedUseful
      Life
                                          
                                          
                                          December 31,in Years
                                          
                                          
                                          2008
                                          
                                          
                                          2007Computer
      equipment
                                          
                                          3
      to 5
                                          
                                          
                                          $
                                          80,613
                                          
                                          
                                          $
                                          89,774Office
      furniture and equipment
                                          
                                          5
                                          
                                          
                                          
                                          45,724
                                          
                                          
                                          
                                          48,024Manufacturing
      equipment
                                          
                                          3
      to 10
                                          
                                          
                                          
                                          240,908
                                          
                                          
                                          
                                          256,169Leasehold improvements
                                          
                                          15
                                          
                                          
                                          
                                          4,935
                                          
                                          
                                          
                                          4,935Total
      Property and Equipment
                                          
                                          
                                          
                                          
                                          
                                          
                                          372,180
                                          
                                          
                                          
                                          398,902Less: Accumulated
    depreciation
                                          
                                          
                                          
                                          
                                          
                                          
                                          (189,894
                                          )
                                          
                                          
                                          (140,673
                                          )Net Property and Equipment
                                          
                                          
                                          
                                          
                                          
                                          $
                                          182,286
                                          
                                          
                                          $
                                          258,229





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-11


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS




NOTE
4 – NOTES PAYABLE




Notes
payable are comprised of the following:




December 31,2008
                              
                              
                              2007Revolving
      line of credit with financial institution
                              
                              $
                              49,683
                              
                              
                              $
                              49,807Accounts
      receivable line of credit
                              
                              
                              185,000
                              
                              
                              
                              185,000Unsecured
      10% notes payable to investors, in default
                              
                              
                              292,250
                              
                              
                              
                              292,250Unsecured
      12% notes payable to investors, in default
                              
                              
                              40,000
                              
                              
                              
                              40,000Unsecured
      12% notes payable due February 28, 2009
                              
                              
                              55,000
                              
                              
                              
                              -Promissory
      Note, 12%, secured by EPA Labels, due February 28, 2009
                              
                              
                              45,000
                              
                              
                              
                              -Unsecured
      15% notes payable to investors, in default
                              
                              
                              32,500
                              
                              
                              
                              36,500Unsecured
      12% convertible promissory notes payable, netof
      unamortized discount of $0 and $135,855, respectively in
      default
                              
                              
                              275,000
                              
                              
                              
                              189,145Unsecured
      5% notes payable to shareholders, in default
                              
                              
                              1,210,937
                              
                              
                              
                              1,220,937Unsecured 5% notes payable to vendors, in
      default
                              
                              
                              564,626
                              
                              
                              
                              564,626Total Notes Payable
                              
                              $
                              2,749,996
                              
                              
                              $
                              2,578,265





Revolving Line of
Credit –The Company currently has unsecured, revolving credit notes with
a financial institution totaling $49,683. 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.





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 $83,617 and $23,304
was recorded as amortization expense for the years ended December 31, 2008 and
2007.





In
August, 2008 the Company executed an amendment to increase the currently
available amount of credit under the line to the greater of $185,000 or 80% of
eligible accounts receivable as defined in the agreement until January 1,
2009.  The amendment also reduced the total available amount from
$500,000 to $250,000, subject to eligible accounts receivable
requirements.





The
estimated fair value of the above warrant was calculated using the Black Scholes
method and the following assumptions: market price of common stock – $0.05 per
share; estimated volatility – 135%; risk-free interest rate – 4.35%, expected
dividend rate – 0% and expected life – 5.0 years.





Secured
Promissory Note –On December 30, 2008 the Company issued a secured 12%
promissory note in the amount of $45,000 for cash payable February 28,
2009.  The promissory note is secured by all tangible and intangible
property related to the Company’s EPA labels.


F-12


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS




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.





In
September, 2008 the Company issued an unsecured 12% note in the amount of
$55,000 for cash payable February 28, 2009.





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 of amortization was
recorded for the year ended December 31, 2007.





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 $3,523 and $251,993 of interest expense during the years ended
December 31, 2008 and 2007, respectively.





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.


F-13


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS




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 $132,333 and $61,544 of interest expense during the year
ended December 31, 2008 and 2007, respectively.





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 31,2008
                          
                          
                          2007Litigation
      Claim
                          
                          $
                          282,367
                          
                          
                          $
                          -Jack
      Stites
                          
                          
                          150,180Litho-Flexo
      Graphics, Inc.
                          
                          
                          -
                          
                          
                          
                          63,283Other
                          
                          
                          69,704
                          
                          
                          
                          25,904Total
                          
                          $
                          502,251
                          
                          
                          $
                          89,187





Litigation Claim
- The Company has been threatened with litigation regarding a loan
agreement on which the statute of limitations was believed by management to have
expired.  Although the Company has not received a formal complaint
regarding this claim, the Company has accrued an estimated loss from this
threatened litigation in the amount of $282,367.


F-14





DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





Jack Stites-On June 23, 2008 Jack Stites (“Stites”) filed a complaint in the Chancery
Court of Putnam County, Tennessee naming the Company as a
defendant.  Stites contends that the Company failed to make payment on
an unsecured note payable in the amount of $40,000 plus accrued interest and
fees of $110,180.  The Company did not respond to the suit, and a
default judgment was entered against the Company in the amount of $150,180.
Stites has also obtained a judgment in the state of Utah against the Company.
The Company has recorded this amount as loss contingency on the accompanying
statement of operations as of December 31, 2008.





Litho-Flexo
Grafics, Inc.– On May 23, 2003, Litho-Flexo Grafics, Inc.
(“Litho-Flexo”) 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 2005, the Company paid $9,342 to the vendor, which
decreased the recorded accrued settlement obligation liability to $63,283 at
December 31, 2007.  In March, 2008 the Company entered into a
settlement agreement by which all claims of both parties will be settled upon
the payment by the Company of an aggregate of $60,000 to
Litho-Flexo.  The Company made all required payments on a timely
basis.





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.





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.


F-15


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





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.





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 is seeking to constructively resolve this issue
by settlement with the SEC.





On
January 1, 2007, the Company entered into a five year lease with Aspen Capital
Management, LLC, 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.


F-16





DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





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





2009
                  
                  $
                  144,0002010
                  
                  
                  144,0002011
                  
                  
                  144,0002012
                  
                  
                  158,4002013
                  
                  
                  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.




In
October 2008, the Company entered into a one year Investment Banking Agreement
with Pointe Atlantic, Inc. The terms of the Investment Banking Agreement
required that the Company pay a monthly retainer of $7,500. If a merger or
acquisition transaction is consummated during the term of this agreement, the
Company shall pay a cash fee equal to the sum of 5% of the aggregate
consideration and 2.5% if the aggregate consideration exceeds $5 million. In the
event that Pointe assists in the arranging of a debt financing, the Company will
pay Pointe a fee of 2.5% of the total debt facility. As the exclusive placement
agent, Pointe shall be paid 8% of the gross proceeds of a securities transaction
plus a 2% non-accountable expense allowance and warrants equal to 20% of the
offering at the offering price.




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.




In March
2008, the Company entered into a second renewable two-year non-exclusive
engagement letter (the “2008 Engagement Letter”) with Aspen Capital Partners,
LLC. that specifically supersedes the  earlier Engagement Letter. In
addition to providing consulting services in a variety of areas relating to the
financial, strategic and developmental growth, Aspen agreed to provide one of
its employees to serve in the position of the Company’s Chief Financial Officer.
The Company agreed to pay Aspen a monthly consulting fee of $20,000 for the
services provided by both Aspen and the Chief Financial Officer. On July 15,
2008, Aspen agreed to reduce its monthly retainer to $15,000 in conjunction with
the appointment of Patrick Carr as the Company’s new President.


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 years ended December
31, 2008 and 2007, the Company recognized $36,283 and $22,043, respectively 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 $15,067 and $45,599 of this lease financing facility
during 2008 and 2007, respectively.





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,
2008:


F-17


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





Years
      Ending December 31:2009
                          
                          $
                          102,3302010
                          
                          
                          56,1522011
                          
                          
                          611Total
      minimum lease payments
                          
                          
                          159,092Less:  Amount representing
      interest
                          
                          
                          (27,239
                          )Present
      value of minimum lease payments
                          
                          
                          131,853Less: Current portion
                          
                          
                          (79,812
                          )Capital lease obligations,
      long-term
                          
                          $
                          52,041





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 5,809,984 of the
warrants will vest and have been valued at $212,994. 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. 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 $78,586 and
$72,665 was recorded as amortization expense during the years ended December 31,
2008 and 2007, respectively.  In August, 2008 the Company executed an
amendment to the Master Lease Line who agreed to exercise 2,000,000 warrants to
purchase common stock at an exercise price of $0.05 per share in exchange for
past due payments totaling $51,943 and cash of $48,057.  In addition,
the Company agreed to vest the remaining 4,190,016 of the warrants to purchase
common stock at an exercise price of $0.05 per share issued in conjunction with
the Master Lease Line. Upon vesting, the Company expensed the remaining fair
value at issuance of $153,630 as additional loan cost amortization.





The
Company had 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.  During the second quarter of 2008, the
Company terminated an agreement with a vendor which included the potential
issuance of three year warrants to purchase 750,000 shares of common stock at an
exercise price of $0.05 per share. None of the contractually defined milestones
has been achieved and no warrants have been issued pursuant to these
agreements.





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.


F-18


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





NOTE
7 - COMMON STOCK





In May
2008, the shareholders approved an increase of the authorized common stock of
the Company from 300,000,000 shares to 500,000,000 shares.





During
2008, the Company issued 1,600,000 shares valued at $115,200 or $0.072 per share
as compensation to a vendor, 1,640,000 shares valued at $123,000 or $0.075 per
share, as compensation to employees and two vendors and 150,000 shares valued at
$6,750 or $0.45 per share as compensation to a vendor. The values represent the
market price of the Company’s common stock on the dates of
issuance.





The
Company issued 9,250,000 shares of common stock upon the exercise of warrants
for proceeds of $172,500.





The
Company issued 9,800,000 shares of common stock and two year warrants to
purchase 2,000,000 shares of common stock at an exercise price of $0.075 per
share for gross proceeds of $490,000.  The proceeds were allocated
based on the relative fair values of the common stock and the warrants on the
dates of issuance.  The allocated fair value of the warrants was
$190,282 and the balance of the proceeds of $299,718 was allocated to the common
stock. The fair value of the warrants, determined using the Black-Scholes Option
Pricing Model, was calculated using the following weighted average assumptions:
risk free interest rate of 1.80% - 2.48%, expected dividend yield of 0%,
expected volatility of 117% - 131% and an expected life of 2 years.





The
Company also issued 1,153,845 shares of common stock and two year warrants to
purchase 1,153,845 shares of common stock at an exercise price of $0.13 per
share for gross proceeds of $75,000.  The proceeds were allocated
based on the relative fair values of the common stock and the warrants on the
dates of issuance.  The allocated fair value of the warrants was
$22,590 and the balance of the proceeds of $52,410 was allocated to the common
stock. The fair value of the warrants, determined using the Black-Scholes Option
Pricing Model, was calculated using the following weighted average assumptions:
risk free interest rate of 2.35% - 2.52%, expected dividend yield of 0%,
expected volatility of 113% - 117% and an expected life of 2 years.





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.


F-19


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





NOTE
8 - STOCK WARRANTS





In May,
2008 the Company issued a warrant to purchase 1,000,000 shares of common stock
at an exercise price of $0.10 per share to a vendor for services which expires
November 30, 2011.  The value of the warrant of $61,000 was charged to
General and Administrative expenses on the issuance date. 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 2.7%,
expected dividend yield of 0%, expected volatility of 117% and an expected life
of 3.55 years.





In
September, 2008 the Company issued three-year warrants to purchase 1,741,667
shares of common stock at an exercise price of $0.05 per share to five
consultants for services provided.  In addition, the Company issued
three-year warrants to purchase 1,500,000 shares of common stock at an exercise
price of $0.75 per share to two vendors for services provided.  The
fair value of the warrants of $134,925 was charged to General and Administrative
expenses on the issuance date.  The fair value was determined using
the Black Scholes Option Pricing Model using the following assumptions: risk
free interest rate of 2.0%, expected dividend yield of 0%, expected volatility
of 115% and an expected life of 3 years.





On
September 25, 2008 the Company issued 12,000,000 three-year warrants to purchase
common stock at an exercise price of $0.07 per share its officers and
directors.  The Chief Executive Officer received 5,000,000 warrants,
the Chief Financial Officer received 3,000,000 warrants, and four directors each
received 1,000,000 warrants. The director warrants vested on the date of
issuance.  The warrant issued to the Chief Executive Officer vests
1,000,000 shares on the date of issuance, with 2,000,000 warrants vesting on
September 25, 2009 and 2010, respectively.  The warrant issued to the
Chief Financial Officer vests 1,000,000 shares on issuance, with 1,000,000
shares vesting on September 25, 2009 and 2010, respectively.  The
warrants were valued at $552,000, of which $327,750 was recognized as General
and Administrative expenses during fiscal 2008, representing the vested portion
of the fair value of the warrants. The unvested value of 224,250 will be
recognized over the remaining vesting period of 1.75 years. The fair value was
determined using the Black Scholes Option Pricing Model using the following
assumptions: risk free interest rate of 2.4%, expected dividend yield of 0%,
expected volatility of 112% and an expected life of 3 years.  The
exercise price exceeded the closing market price on the date of
issuance.





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. 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.





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.


F-20


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





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.





The
following summarizes the outstanding warrants as of December 31,
2008:





Weighted-AverageExercise
                  
                  Warrants
                  
                  
                  Remaining Contractual
                  
                  
                  NumberPrice
                  
                  Outstanding
                  
                  
                  Life (Years)
                  
                  
                  Exercisable$0.01
                  
                  
                  12,750,000
                  
                  
                  
                  0.9
                  
                  
                  
                  12,750,000$0.05
                  
                  
                  15,075,000
                  
                  
                  
                  3.3
                  
                  
                  
                  15,075,000$0.07
                  
                  
                  12,500,000
                  
                  
                  
                  2.7
                  
                  
                  
                  6,500,000$0.075
                  
                  
                  51,904,975
                  
                  
                  
                  1.8
                  
                  
                  
                  51,904,975$0.10
                  
                  
                  1,000,000
                  
                  
                  
                  2.9
                  
                  
                  
                  1,000,000$0.13
                  
                  
                  1,153,845
                  
                  
                  
                  1.6
                  
                  
                  
                  1,153,84594,383,820
                  
                  
                  
                  1.7
                  
                  
                  
                  88,383,820





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, 2008 and 2007 are as follows:


F-21


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





December 31,
                        
                        2008
                        
                        
                        2007Net
      Operating Loss Carryforwards:Federal
                        
                        $
                        10,087,271
                        
                        
                        $
                        8,852,470State
                        
                        
                        1,456,230
                        
                        
                        
                        1,347,277Allowance
      for doubtful accounts
                        
                        
                        5,968
                        
                        
                        
                        6,198Deferred gain on capital
    lease
                        
                        
                        18,845
                        
                        
                        
                        32,379Total
      deferred income tax assets
                        
                        
                        11,568,314
                        
                        
                        
                        10,238,324Valuation
      allowance
                        
                        
                        (11,568,314
                        )
                        
                        
                        (9,902,544
                        )Deferred income tax liability - intangible
      assets
                        
                        
                        -
                        
                        
                        
                        (335,780
                        )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,
                        
                        2008
                        
                        
                        2007Federal
      tax benefit at statutory rate (34%)
                        
                        $
                        (1,599,967
                        )
                        
                        $
                        (395,739
                        )State
      tax benefit, net of federal effect
                        
                        
                        (155,291
                        )
                        
                        
                        (38,410
                        )Non-deductible
      and other items
                        
                        
                        89,487
                        
                        
                        
                        133,443Change in valuation
    allowance
                        
                        
                        1,665,771
                        
                        
                        
                        300,706Provision for Income Taxes
                        
                        $
                        -
                        
                        
                        $
                        -





NOTE
11 – SUBSEQUENT EVENTS





On March
1, 2009, the Company entered into a promissory note agreement in the amount of
$100,000.   The note bears interest at the rate of 15% per annum
and is due and payable on August 1, 2009. Pursuant to this note, the
Company entered into a common stock purchase warrant agreement granting the
noteholder the right to purchase a total of 1,000,000 shares of the
Company’s common stock at a price of $0.025 per share for two years from the
date of the agreement.





On March
30, 2009, the Company entered into a promissory note agreement in the
amount of $100,000.   The note bears interest at the rate of 20%
per annum and was due and payable on April 30, 2009.  Pursuant to this
note, the Company entered into a common stock purchase warrant agreement
granting the noteholder the right to purchase a total of 833,333 shares of
the Company’s common stock at a price of $0.030 per share for two years from the
date of the agreement.





On April
30, 2009, the Company entered into a promissory note agreement in the
amount of $100,000 that satisfied and replaced the March 30 2008
note.  This second note bears interest at the rate of 20% per annum
and is due and payable on May 31, 2009.  Pursuant to this note,
the Company entered into a common stock purchase warrant agreement granting the
noteholder the right to purchase a total of 1,250,000 shares of the
Company’s common stock at a price of $0.02 per share for two years from the date
of the agreement.





On May 7,
2009, the Company entered into a promissory note agreement in the amount of
$500,000.  The note bears interest at the rate of 18% per annum and
is due and payable on July 31, 2009.  Pursuant to this note, the
Company entered into a common stock purchase warrant agreement granting the
noteholder the right to purchase a total of 3,000,000 shares of the
Company’s common stock at a price of $0.025 per share for two years from the
date of the agreement.


F-22


DIATECT
INTERNATIONAL CORPORATION


NOTES
TO FINANCIAL STATEMENTS





On May 7, 2009, the Company entered
into a common stock purchase warrant agreement with the co-guarantor of the
$500,000 note and granted the right to purchase a total of 3,000,000 shares of
the Company’s common stock at a price of $0.025 per share for two years from the
date of the agreement.  Also on May 7, 2009, the Company entered into
a common stock purchase warrant agreement with the guarantor of the April 30,
2009 note and the co-guarantor of the $500,000 note and granted the right to
purchase a total of 4,000,000 shares of the Company’s common stock at a price of
$0.025 per share for two years from the date of the
agreement.


F-23