UNITED
        STATES
 SECURITIES
        ANDEXCHANGE COMMISSION
 WASHINGTON,
        D.C.
        20549
  FORM
        10-KSB
  xANNUAL
        REPORT UNDER SECTION 13 OR
        15(d) OF THE SECURITIES EXCHANGE
 ACT
        OF 1934
  FOR
        THE FISCAL YEAR ENDED DECEMBER 31, 2006
  oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934
  FOR
        THE TRANSITION PERIOD FROM ______________ TO ________________
  Commission
        File Number: 0-10147
  DIATECT
        INTERNATIONAL
        CORPORATION
 (Name
        of
        small business issuer in its charter)
  California
              82-0513109(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)
  875
        South Industrial
        Parkway, Heber City, Utah 84032
 (Address
        of principal executive offices)
 
 (435)
        654-4370
 (Issuer’s
        telephone number)
  Securities
        registered under Section 12(g) of the Exchange Act: COMMON STOCK NO PAR
        VALUE.
 
 Check
        whether the issuer is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange. o
  Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the issuer was required to file such reports), and (2) has been subject
        to
        such filing requirements for the past 90 days. YesoNox
 
 Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B not contained in this form, and no disclosure will be contained,
        to the best of the issuer’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB. o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes oNox
 
 For
        the
        fiscal year ended December 31, 2006 the issuer’s revenues were
        $1,031,608.
 
  
  As
        of
        December 11, 2007, the aggregate market value of the voting and non-voting
        common equity held by non-affiliates computed by reference to the average
        of the
        bid and asked price of such stock on that date of $7,893,594, as reported
        on the
        Pink Sheets.
 
 On
        December 11, 2007 there were 175,933,752 shares of Registrant’s common stock, no
        par value, issued and outstanding.
 
 Documents
        included by reference: None
 
 Transitional
        Small Business Disclosure Format: Yes o   No x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  TABLE
        OF
        CONTENTS
 
 
 
 Page
                NumberPART
                  IItem
                  1.
              Our
                  Business
              2Item
                  2.
              Properties
              5Item
                  3.
              Legal
                  Proceedings
              5Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              7PART
                  IIItem
                  5.
              Market
                  for Common Equity, Related Stockholder Matters and Small Business
                  Issuer
                  Purchases of Equity Securities
              8Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation
              9Item
                  7.
              Financial
                  Statements
              11Item
                  8.
              Changes
                  in and Disagreements with the Accountants on Accounting and Financial
                  Disclosure
              11Item
                  8A.
              Controls
                  and Procedures
              11Item
                  8B.
              Other
                  Information
              11PART
                  IIIItem
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons and Corporate
                  Governance; Compliance With Section 16(a) of the Exchange
                  Act
              12Item
                  10.
              Executive
                  Compensation
              13Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              15Item
                  12.
              Certain
                  Relationships and Related Transactions
              15Item
                  13.
              Exhibits
              17Item
                  14.
              Principal
                  Accountant Fees and Services
              17Signatures
              18
 
 
 
 
 
 
 
 
 
 
  
  FORWARD
        LOOKING STATEMENTS
  We
        are
        including the following cautionary statement in this Annual Report on Form
        10-KSB to make applicable and take advantage of the safe harbor provisions
        of
        the Private Securities Litigation Reform Act of 1995 for any forward-looking
        statements. All statements other than statements of historical fact, including
        statements concerning plans, objectives, goals, strategies, future events
        or
        performance and underlying assumptions, future results of operations or
        financial position, made in this Annual Report on Form 10-KSB are forward
        looking. In particular, the words “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “may,” “will,” variations of such words, and similar expressions
        identify forward-looking statements, but are not the exclusive means of
        identifying such statements and their absence does not mean that the statement
        is not forward-looking.
  The
        forward-looking statements contained herein involve risks and uncertainties
        which could cause actual results or outcomes to differ materially from those
        expressed in the forward-looking statements. Our expectations, beliefs and
        projections are expressed in good faith and are believed by management to
        have a
        reasonable basis, including without limitation, management’s examination of
        historical operating trends, data contained in our records and other data
        available from third parties, but there can be no assurance that management’s
        expectation, beliefs or projections will result or be achieved or accomplished.
        In addition to other factors and matters discussed elsewhere herein, the
        following are important factors that, in our view, could cause actual results
        to
        differ materially from those discussed in the forward-looking statements:
        our
        losses from period to period; our current dependence on a limited number
        of key
        suppliers and investors; our ability to successfully market and sell our
        products in view of changing trends, acceptance of products and other factors
        affecting market conditions; technological advances by our competitors; capital
        needs to fund operations and development programs; delays in the manufacture
        of
        new and existing products by us or third party contractors; the loss of any
        key
        employee; the outcome of any litigation; changes in governmental regulations;
        and availability of capital on terms satisfactory to us. We disclaim any
        obligation to update any forward-looking statements to reflect events or
        circumstances after the date hereof.
  For
        a
        discussion of some of the factors that may affect our business, results and
        prospects, see “ITEM 1.– OUR BUSINESS”.  Readers are urged to
        carefully review and consider the various disclosures made by us in this
        Report
        and in our other reports filed with the Securities and Exchange Commission,
        and
        those described from time to time in our press releases and other
        communications, which attempt to advise interested parties of the risks and
        factors that may affect our business, prospects and results of
        operations.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  1
  PART
        I
 
 ITEM
        1.  Our Business
 
 Diatect
        International Corporation (“Company”) was incorporated under the laws of the
        State of California in 1979 as San Diego Bancorp. In 1998 we changed our
        name to
        Diatect International Corporation. During 2002, we moved our administrative
        offices from Idaho and our manufacturing facilities from Kansas and consolidated
        our operations in Utah.   During 2005 three of our creditors filed
        suit in Federal Bankruptcy Court in an attempt to force the Company into
        Involuntary Chapter 7.  In February 2006 the Company filed a
        counter-suit for lost profits and other damages.  In June 2006 the
        company and the creditors entered into a settlement agreement.   See Part
        1, Item 3 for additional information   about this suit   The
        Company was not and did not enter Chapter 7.
 
 The
        Pesticide Market
 
 Our
        relative position in the market place for insecticides is very small. Major
        companies with sales significantly greater than ours represent our major
        competitors. These competitors have extensive resources that allow them to
        conduct research and development efforts that may lead to the introduction
        of
        new products. Any advantage that we may have over our competitors is based
        on
        the non-toxic nature of our products and we believe this gives our products
        retail appeal.
 
 Manufacturing
        Process
 
 We
        have
        nine different insecticide products that utilize so called "natural-killing
        agents" which are non-toxic to the environment as well as humans and other
        warm-blooded animals. The active ingredients used in our products are
        diatomaceous earth (“DE”), pyrethrin (a natural extract chemical) and pypernyl
        butoxide (“PBO” a chemical agent). These raw materials are readily available and
        we do not depend on a single source to obtain them.
 
 In
        our
        manufacturing process we combine the DE, pyrethrin and PBO by using surfactants
        to ensure a proper mix and resulting in an increased effectiveness and
        persistence of their insecticide properties over the natural state of the
        ingredients. In combination, these active ingredients substantially increase
        their effectiveness compared to their use individually. In our manufacturing
        process we blend the active ingredients resulting in a breakdown of the chitin
        from the DE, which allows the pyrethrin to act directly on an insect’s nerve
        cells. Our blended process prevents the pyrethrin from evaporating quickly
        and
        therefore its potency is released for hours rather than minutes. We believe
        the
        use of PBO acts as a synergist and increases effectiveness of the pyrethrin
        by
        as much as ten times over the non-blended state.
 
 The
        ingredients in our products have been used separately for years as adequate
        alternatives to hazardous chemical insecticides and therefore represent an
        alternative to synthetic products that often utilize hazardous chemical
        compounds. Synthetic insecticides were first used in the 1940's and most
        insect
        species have developed a resistance to many of these products. Unlike the
        synthetic insecticides that have resulted in a constant search for new
        formulations, our products have not changed since we first started production
        and commercial marketing in 2001.
 
 
 Our
        Intellectual Property, Patents and Proprietary Rights
 
 We
        rely
        on five registrations (42850-1 through 5) that we obtained from the
        Environmental Protection Agency (EPA) that allowed us to formulate nine labels
        for retail sales. These registrations are required for the production and
        marketing of our insect control products. Pursuant to the Federal Insecticide,
        Fungicide and Rodenticide Act, all insecticides must be "registered" with
        the
        EPA, and specific conditions for their use must be stated on an approved
        label.
        These labels provide an extensive amount of information and indicate that
        the
        insecticide has been tested and evaluated, provide instructions for the proper
        handling, storage and disposal; and state that the EPA regulates the use
        thereof. The process of submitting a pesticide product to the EPA and obtaining
        approval through registration to label one or more products for retail sale
        may
        take a considerable amount of time and require substantial
        expenditures.
 
  2
  Obtaining
        EPA registrations and approval of our labels represents an essential asset
        of
        the Company and is the result of a lengthy and expensive process. During
        2003 we
        reevaluated the estimated useful life of our EPA labels and determined that
        competitive business conditions and the continued introduction of new products
        into the marketplace has resulted in a shortening of their estimated useful
        life. Consequently, in 2003 we elected to amortize the approximate $1.7 million
        carrying value of the EPA labels over a 7-year period using the straight-line
        method.  During 2005 the useful life of the labels was reviewed for
        impairment in light of the growing concern with synthetic insecticides and
        it
        was concluded that the life of the labels would exceed 10
        years.  Further it has been estimated by the American Crop Protection
        Society that replacing EPA labels in today’s environment would cost between $160
        million and $250 million. Based on this analysis we concluded that the label
        should not be amortized further.  No impairment was required from our
        review in 2006.
 
 Marketing
        and Sales
 
 We
        market
        our products under two different product brand names - Diatect and
        Results.
 
 Diatect
 
 Diatect
        II Multi-Purpose Insect
        Control is sold in the agriculture market and is used in a wide variety
        of areas, primarily in conjunction with edible growing crops, animal quarters,
        livestock, and ornamentals.
 
 Diatect
        III Insect Control is
        sold in the commercial, industrial, and government markets and is also used
        in a
        wide variety of areas, primarily in conjunction with schools, parks, rest
        stops,
        roadways, childcare facilities, rest homes, eating establishments, and other
        public places.
 
 Diatect
        V: is a product
        designed and formulated to meet the needs of the organic food industry, which
        requires insecticides with no synthetic ingredients. Our primary market for
        Diatect V is to 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 quickly eliminate the fire ant population.
  Results
        Indoor this product is
        designed for indoor use under sinks, behind furniture, in air vents, under
        tile,
        and in stairwells and basements for the control of roaches, fleas, ants,
        silverfish, crickets, bedbugs, box elder bugs, and other insects.
 
 Results
        Tomato & Garden is
        designed for outdoor use by protecting garden plants from many varieties
        of
        worms, beetles, leafhoppers, stink bugs, squash vine borers, and other
        insects.
 
  3
  Results
        Rose & Floral is
        also an outdoor product designed to protect specific floral such as azaleas,
        begonias, African violets, chrysanthemums, dogwood, elm, roses, tulips, as
        well
        as a variety of plants. This product is designed to destroy such insects
        as
        mealy bugs, fruit flies, white flies, and caterpillars.
 
 Results
        Pet Powder is
        specifically designed for use on domestic pets. This product is targeted
        to
        provide homeowners and veterinarians with a powder that is effective in kennels
        and other animal boarding facilities to control insects that become lodged
        in
        the skin and fur of animals.
 
 A
        substantial part of our advertising and marketing efforts have been directed
        towards trade shows. We believe that one-on-one contact with our wholesale
        buyers allow us to explain the difference’s between our non-toxic products and
        competitive products whose active ingredients may contain toxins or synthetics.
        We have a variety of wholesale customers and we are not dependent on any
        one or
        on a small group of customers for our product sales. Primarily our customers
        are
        comprised of small to medium retail outlets that serve agriculture and gardening
        customers in the United States, where the insect population is prevalent.
        We do
        not have any agreements with our customers for their purchase of our products
        over any period of time. Consequently, we contact our customers periodically
        to
        obtain orders from them or our customers must place orders prior to
        shipments.
 
 At
        the
        start of 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 seventy one 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 believe that
        the
        attempted bankruptcy action restricted our ability to obtain more retail
        outlets
        from this chain.
 
 In
        addition to trade shows, 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 material s at our offices in Utah.
 
 In
        2006
        we made inroads in the organic and sustainable agricultural arena. We
        believe our Diatect product is cost effective when used on specialty crops
        and
        with animal production facilities. This product is in various stages of
        testing with a number of large commercial growers.
 
 At
        the
        end of 2005 the company operated out of its Utah office with contract personnel
        due to the Involuntary Chapter 7 filing. We have also retained from time
        to time
        consultants to help in our marketing efforts and we have two independent
        field
        representatives to help us sell our products.  At the end of 2004 we
        entered into a new agreement with a consultant who assisted in marketing
        our
        products to large retailers.
 
 Employees
 
 As
        of
        December 31, 2006, the Company had 12 employees.
 
 
 
 
 
  4
  ITEM
        2.  PROPERTIES
 
 Diatect
        International Corporation is located in an eleven-year-old 20,254 square
        foot
        class B masonry office/warehouse building at 875 South Industrial Parkway,
        Heber
        City, Utah. Heber City is located approximately 45 miles East of Salt Lake
        City,
        Utah, and is easily accessible by connecting freeways and highways. The building
        is located on a 1.928-acre parcel of ground that is part of the Utah  
Industrial Park and adequately serves as our corporate office, manufacturing
        and
        distribution facility. The occupancy capacity of the business office portion
        of
        the building is 23 people. We are the sole occupant of the
        building.
 
 In
        March
        2005, we sold this real estate for $900,000 and entered into a verbal leaseback
        arrangement that was not finalized. Consequently, no lease payments were
        made
        subsequent to the sale. During the fourth quarter of 2006, the land and building
        where the Company maintains its offices and manufacturing facility was sold
        by a
        shareholder to an entity (“Landlord”) that is affiliated with a former director
        of the Company. In conjunction with this sale, $117,060 of unpaid rent was
        forgiven. Commencing on January 1, 2007, the Company entered into a five
        year
        lease with the Landlord, requiring monthly rental payments of $12,000 plus
        taxes
        and maintenance. The lease is renewable for two additional 5 year terms with
        10%
        increases of the rental payments to $13,200 per month and $14,250 per month,
        respectively.
 
 We
        have
        insurance for the building and inventory for amounts which we believe are
        adequate.
 
 The
        Company owns association placer diatomaceous earth mining claims and placer
        diatomaceous earth mining claims, in the State of Oregon. We have not engaged
        in
        any mining operations and we do not anticipate undertaking mining operations
        in
        the near future. The mining claims are carried at no value.  Any
        future activities will be dependent on business and market conditions and
        resources available.
 
 ITEM
        3.  LEGAL PROCEEDINGS
  Administrative
        Proceeding – U.S. Securities and Exchange Commission
 
 One
        September 27, 2007, the Commission entered an order instituting a proceeding
        under Section 12(j) of the Securities Exchange Act of 1934 (“1934 Act”) naming
        us as a respondent.  This administrative proceeding has file no.
        3-12843.
 
 Section
        12(j) empowers the Commission to revoke a company’s registration under the 1934
        Act for not filing the required periodic reports such as Form 10-QSB’s and Form
        10-KSB’s.  The order states that we have not filed periodic reports
        since we filed a report on Form 10-QSB for the period ended March 31,
        2005.  The order also set a hearing date which has since been
        postponed.  We answered the allegations of the Order.  On
        November 1, 2007, Administrative Law Judge Kelly allowed the parties to proceed
        by summary disposition.  Recently, we filed six of the delinquent
        reports and we intend to file the other delinquent reports with
        dispatch.  Our plan is to file the most delinquent reports
        first.
 
 Section
        12(j) provides that the Commission may suspend the trading of our shares
        for a
        period of up to twelve months.
 
  5
  U.S.
        Securities
        and Exchange Commission ,  On October 1, 2007, the Company and
        its acting president and a director through their attorney accepted service
        of a
        Complaint filed on September 24, 2007, by the U.S. Securities and Exchange
        Commission in the U.S. District Court, District of Utah, Central Division
        having
        Case No.: 2:07cv00709.  The caption on the Complaint is Securities and Exchange
        Commission
        v. Diatect International Corporation et al. The four
        defendants are the acting president who is also a director, a former officer
        and
        director, a former director, and the Company.   The allegations
        of the Complaint claim that the Defendants engaged in a transaction in 2003
        involving the sale of mining claims located in the State of Oregon which
        transaction was improperly recorded on the Company’s financial statements
        causing the overstatement of revenues and assets.   The
        allegations of the Complaint also claim that certain revenues were improperly
        recorded in the Company’s 2002 financial statements because the sales were
        consignment sales and not actual sales.   The Complaint alleges
        various violations of the federal securities laws and regulations promulgated
        thereunder including violations of the anti-fraud provisions and violations
        of
        regulations pertaining to periodic reports filed by the Company with the
        SEC in
        2003 and 2004.   On April 14, 2005, the Company issued restated
        financial statement as of December 31, 2004, which restated the sale of the
        mining claims and our revenues.  The Complaint seeks injunctive action
        against the defendants including the Company and seeks fines from the three
        individual defendants, and from two individual defendant’s disgorgement of stock
        sale proceeds and a bar as an officer and director.  We intend to
        vigorously defend the allegations of the Complaint.
  Complete
        Packaging, LLC d.b.a. Compax– On October 17, 2003, Complete Packaging,
        LLC, doing business as Compax, filed a complaint in the Third  
District   Court   of   Salt   Lake   County, State of
        Utah, naming the Company as the defendant. Compax claimed a trade payable,
        with
        interest and costs of $323,892. Compax obtained a judgment against the Company.
        During 2005, we entered into a settlement agreement with Compax that required
        us
        to make three monthly payments of $25,000 through May 2005 and a lump sum
        payment of $145,000 in June 2005. We accrued a $220,000 settlement obligation
        liability at December 31, 2004. The Company made two of the monthly payments
        but
        failed to make the remaining payments due under the terms of the settlement
        agreement. In July 2006, the Company and Compax reached a further agreement
        dated June 6, 2006 under which Compax agreed to accept payment of $150,000
        as
        total satisfaction of our obligation.   We made the payments and
        received a judgment release on September 1, 2007.
  La
        Jolla Cove
        Investors – During December 2002, the Company entered into a
        convertible debenture agreement with La Jolla Cove Investors, Inc. (“La Jolla
        Cove”), who at the time was the named as an underwriter for a planned public
        offering of the Company’s common stock. La Jolla Cove advanced the Company
        $150,000 in 2002 and $100,000 in 2003, which advances were evidenced by a
        convertible debenture agreement that was to be repaid out of a portion of
        the
        proceeds from the public offering. On July 12, 2004, La Jolla Cove filed
        a
        complaint in the Superior Court of California, County of San Diego, naming
        the
        Company as the defendant. La Jolla Cove contended that the Company breached
        its
        contract with La Jolla Cove by failing to honor the convertible debenture
        agreement. La Jolla Cove claimed damages in the amount of $406,990 plus interest
        and penalties, which resulted in part from the $150,000 of advances to the
        Company in 2002 and $100,000 in 2003. The Company withdrew the registration
        statement for the public offering on November 18, 2004 and claimed that La
        Jolla
        Cove made unreasonable demands on the Company with respect to the registration
        statement. During 2005, the Company made principal payments on the convertible
        debenture of $7,763. The adjusted carrying amount of the convertible debenture
        was $200,000 plus $78,500 of accrued interest at December 31,
        2005.  In June 2006, the Company reached a settlement with La Jolla
        Cove under which the Company paid La Jolla Cove $140,000 through July 2006
        in
        full satisfaction of all amounts due under the convertible debenture and
        related
        interest and penalties and recognized a gain from termination of debt in
        the
        amount of $138,500 in the accompanying statement of operations for the year
        ended December 31, 2006.
  David
        J.
        Stecher– During 2002, the Company entered into a demand promissory note
        in the amount of $18,070, bearing interest at 15% per annum. During 2004
        a suit
        was filed to collect the principal amount and accrued interest. At December
        31,
        2005, we accrued a settlement obligation of $28,325. During 2006, we paid
        $36,000 to satisfy this obligation.
  6
  Litho-Flexo
        Graphics, Inc.– On May 23, 2003, we were named as defendant in a
        complaint filed by Litho-Flexo Graphics, Inc. in the Fourth District Court
        in
        and for Wasatch County, State of Utah. Litho-Flexo claimed a trade payable
        of
        $92,478. We contended that the packaging labels we received from Litho-Flexo
        were defective and could not be used in the packaging of our products. We
        filed
        a counterclaim claiming damages in excess of $100,000 caused by the defective
        labels. We accrued a $72,625 settlement obligation liability at December
        31,
        2004. During the year ended December 31, 2005, we paid $9,342 to Litho-Flexo,
        which decreased the accrued settlement obligation liability to $63,283 at
        December 31, 2006 and 2005.   We intend to defend the complaint and
        pursue our counterclaim.
 
 AllegedBankruptcy
        - In June 2005, three note holders, Bruce L. Shannon, Brent Larson
        and
        the Robinson Family LLC, filed suit in Federal Bankruptcy Court to force
        the
        Company into a Chapter 7 receivership. In February 2006, the Company filed
        a
        damage suit against those note holders. In April 2006, a settlement was reach
        whereby the note-holders’ bankruptcy suit was dismissed and the Company was
        awarded damages through the relief of $248,175 of notes payable and $121,681
        of
        related accrued interest due to the note holders, the return of 207,275 shares
        of the Company’s common stock by the note holders, and the payment of $10,000 of
        legal fees for the Company.
 
 The
        Robinson
        Family, L.L.C.–   The Robinson Family LLC filed suit in Fourth
        District Court in Wasatch County, State of Utah, to collect a $106,000
        promissory note bearing interest at 12% per annum that was due on April 1,
        2002.
        At December 31, 2004, we carried the note at $126,686. The Robinson Family
        LLC
        was party to a suit filed in Federal Bankruptcy Court seeking to force us
        into
        involuntary bankruptcy. During the fourth quarter of 2005, we entered into
        a
        settlement agreement with the Robinson Family LLC, where they forgave their
        note
        and interest; in return we released the Robinson Family LLC from any counter
        claims based on the involuntary bankruptcy suit.
 
 
 
 ITEM
        4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
 
 We
        did
        not submit any matters to a vote of our securities holders in the fourth
        quarter
        ended December 31, 2006.
 
 
 
 
 
 
 
 
 
 
 
  7
  PART
        II
 
 ITEM
        5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
        BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
 
 Our
        shares of common stock are presently quoted on the Pink Sheets under the
        symbol
        DTCT. Listed below are the high and low sale prices for the shares of our
        common
        stock during the years ended December 31, 2006 and 2005. These quotations
        reflect inter-dealer prices, without mark-up, mark-down or commission and
        may
        not represent actual transactions.
 
 High
              
              
              LowFiscal
                  2005First
                  Quarter (ended March 31, 2005)
              
              $
              0.043
              
              
              $
              0.090Second
                  Quarter (ended June 30, 2005)
              
              
              0.015
              
              
              
              0.090Third
                  Quarter (ended September 30, 2005)
              
              
              0.009
              
              
              
              0.023Fourth
                  Quarter (ended December 31, 2005)
              
              
              0.006
              
              
              
              0.030Fiscal
                  2006First
                  Quarter (ended March 31, 2006)
              
              $
              0.007
              
              
              $
              0.034Second
                  Quarter (ended June 30, 2006)
              
              
              0.015
              
              
              
              0.028Third
                  Quarter (ended September 30, 2006)
              
              
              0.023
              
              
              
              0.070Fourth
                  Quarter (ended December 31, 2006)
              
              
              0.030
              
              
              
              0.056
  We
        presently do not have any stock compensation plans.
 
 As
        of
        December 31, 2006 there were 151,552,140 shares issued and outstanding and
        approximately 1,247 holders of record of our common stock. We believe that
        a
        significant number of beneficial owners of our common stock hold shares in
        street name. No dividends have ever been paid to holders of our common stock,
        and we do not anticipate paying dividends in the future.
 
 Sales
        of Unregistered Securities
 
 The
        following provides information regarding sales of equity securities by us
        during
        the fiscal year ended December 31, 2006 which were not registered under the
        Securities Act.  All issuances were of the Company’s no par common
        stock.
 
 During
        2006, we issued 15,000,000 shares of its common stock at a conversion price
        of
        $0.01 per share for the conversion of bridge financing of $150,000, 2,500,000
        shares for employee bonuses valued at $70,000 or $0.028 per share, 9,460,350
        shares valued at $189,207 or $0.02 per share and 6,000,000 shares valued
        at
        $156,000 or $0.026 per share as officer bonus, 500,000 shares to a director
        as
        compensation for his guarantee of a line of credit of the Company valued
        at
        $8,500 or $0.017 per share, 2,500,000 shares for professional services valued
        at
        $45,000 or $0.018 per share and 15,154,068 shares for professional fees valued
        at $394,006 or $0.026 per share and 1,780,000 shares valued at $35,948 to
        vendors in settlement of expenses and accrued liabilities.
 
 
  8
  ITEM
        6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION
 
 The
        following discussion and analysis should be read in conjunction with the
        Consolidated Financial Statements and notes thereto appearing elsewhere in
        this
        Report. Except for historical information, the following discussion contains
        forward-looking statements within the meaning of the Private Securities
        Litigation Reform Act of 1995. See “Forward Looking Statements”
 
 Overview:
 
 Diatect
        International Corporation (the “Company”) is a California corporation operating
        in Utah as a developer and marketer of non-toxic pesticide products. We sell
        our
        products to wholesale distributors and retail customers in the United
        States.  As of the date of this filing, we sell directly to the
        consumer via our website at www.diatect.com.  The results from
        operations for the periods presented do not have any costs or results from
        the
        website for any period presented.
 
 In
        June
        2005 three note holders of the Company filed suit in Federal Bankruptcy Court
        to
        force the Company into a Chapter 7 receivership and in February 2006 the
        Company
        filed a damage suit against those note holders.  In April 2006 a
        settlement was reach whereby the creditor suit was dismissed and the Company
        was
        awarded damages through the relief of $248,175 of notes payable and $121,681
        of
        related accrued interest, the return to the Company of 207,275 shares of
        its
        common stock, which were cancelled, and the payment of $10,000. Accordingly,
        the
        Company was never under bankruptcy court supervision and the accompanying
        financial statements do not present any liabilities as subject to
        compromise.
 
 In
        February 2006 the Company entered into a one year non exclusive Financial
        Advisory and Investment Banking Agreement (“Investment Banking Agreement”) with
        Pointe Capital L.L.C. (“Pointe”), and pursuant thereto, received $150,000. In
        addition, in June 2006 the Company, through Pointe, commenced a Convertible
        Promissory Note (“Convertible Note”) offering.  The terms of the
        Investment Banking Agreement, the Convertible Note, and other financial
        arrangements, we have entered into are described in Note 6 to these financial
        statements. Through December 31, 2006, we have received $795,000 pursuant to the
        Convertible Note offering.
 
 Our
        ability to continue operations is dependent upon obtaining additional financing
        and being able to generate net profits in the future. Management believes
        that
        these events are likely to occur, even though no assurance thereof can be
        given.
 
 Results
        of Operations for the Fiscal Years ended December 31, 2006 and 2005
 
 Results
        of
        Operations:
 
 Revenue:
        We had
        revenue of $1,031,608 for the year ended December 31, 2006 compared to $507,573
        for the year ended December 31, 2005.   Total revenue increased in 2006 by
        $524,035 primarily due to increases in web based retail sales and additional
        sales into the commercial agriculture market.
 
 Cost
        ofrevenue:  Our
        cost of revenue was $408,244 for the year ended December 31, 2006 as compared
        to
        $435,346 for the year ended December 31, 2005.  The decrease of
        $27,102 is due in part to a decrease in amortization expense of $124,000
        for the
        year ended December 31, 2006 compared to amortization expense of a year earlier.
        Subsequent to June 30, 2005, we determined that the EPA registrations had
        an
        indefinite life and we ceased amortization of the EPA
        registrations.  This is partially offset by increases in cost of
        revenues due to higher sales volume.
 
  9
  Marketing
        and
        SellingExpenses:
        Marketing
        and selling expenses were $443,204 for the year ended December 31, 2006,
        as
        compared to $328,003 for the year ended December 31, 2005.  The
        increase of $115,201 is primarily due to a non-cash charge representing the
        fair
        value of a warrant to purchase 7,000,000 shares of common stock at an exercise
        price of $0.01 per share with a fair value using the Black Scholes method
        of
        $116,935 issued to a marketing consultant for which there is no expense in
        the
        prior year. There were also increases in marketing based advertising offset
        by
        decreases in salaries during the year ended December 31, 2006.
 
 General
        and
        AdministrativeExpenses:
        For the
        year ended December 31, 2006 general and administrative expenses were $2,360,688
        as compared to $1,010,035 for the year ended December 31, 2005.  The
        increase of $ 1,350,653 is primarily due to the value of common stock issued
        to
        our Chief Executive officer of $189,207, common stock issued for professional
        fees in the aggregate amount of $630,954 and common stock issued for employee
        bonuses in the amount if $70,000 for which no prior year amounts
        exist.  In addition, there were increases in professional fees paid
        during 2006.
 
 Other
        Income and
        Expense:
        Other income
        and expense is comprised of interest expense, gain from the sale of the building
        and gain from termination of debt.   For the year ended December 31,
        2006, interest expense was $340,643 as compared to $356,677 for the year
        ended
        December 31, 2005, a decrease of $16,034.  Included in the interest
        expense for the year ended December 31, 2006 is the value of a non-cash charge
        representing the fair value of a warrant to purchase 4,500,000 shares of
        common
        stock at an exercise price of $0.01 per share with a fair value using the
        Black
        Scholes method of $76,410 issued in conjunction with a bridge loan for which
        no
        comparable prior year expense exists. Also included in interest expense for
        the
        year ended December 31, 2006 is the amortization of loan discount in the
        amount
        of $48,801 for which no comparable prior year expense exists. Included in
        the
        prior year was a non-cash charge totaling $122,398 pursuant to common stock
        issued for interest and finance charges for which no comparable current year
        expense exists.
 
 We
        had a
        gain from the sale of our building of $70,822 for the year ended December
        31,
        2005 for which no current year amount exists.
 
 Gain
        from
        termination of debt was $734,030 for the year ended December 31, 2006 compared
        to $154,013 for the year ended December 31, 2005, an increase of $580,017.
        The
        increase is primarily due to settlements of debt related to the attempted
        Chapter 7 action against us resulting in gains of approximately $395,000
        and
        gains from the settlement of LaJolla Cove of $138,500 and gain from the
        settlement of rent of $117,060 for which no prior year comparable amounts
        exist.
 
 Liquidity
        and Capital
        Resources
 
 Our
        cash
        and cash equivalents of $61,743 as of December 31, 2006 are not considered
        sufficient to support our current levels of operations for the next 12
        months.  According, we intend to seek additional financing through
        debt or equity offerings.
 
 Subsequent
        to December 31, 2006 we continued the Convertible Promissory Note private
        placement offering, and have received gross proceeds in 2007 of an additional
        $533,500.  We have repaid an aggregate of $107,500 of the Convertible
        Promissory Notes issued in 2006 and 2007.  Through November 30, 2007,
        an aggregate of $1,046,000 of the convertible promissory notes plus $118,079
        of
        accrued interest have been converted at the conversion price of $0.05 per
        share
        into an aggregate of 23,281,549 shares of common stock. In addition, the
        Company
        issued an aggregate of 20,920,000 three year warrants to purchase the Company’s
        common stock at an exercise price of $0.075 per share.
 
 In
        May
        2007 we entered into a Master Lease Line with Gulf Pointe Capital,
        LLC.  The terms of the lease line are a credit limit of $500,000 that
        can be used for various new and used tier one production, material handling,
        computer, technology and fixture related equipment.  To date the
        company has drawn $209,000 of the available credit.
 
  10
  In
        July
        2007, we issued a 12% convertible promissory note for $250,000 and a five
        year
        warrant to purchase 5,000,000 shares of its common stock at an exercise price
        of
        $0.075 to Aspen Opportunity Fund LP in exchange for proceeds of
        $250,000.  The note is convertible at a rate of $0.05 per share for
        5,000,000 shares of common stock.
 
 In
        September 2007, we entered into an accounts receivable line of credit agreement
        with Aspen Opportunity Fund LP, with a credit line of $500,000.  The
        company can draw advances against accounts receivable, in $100,000 increments
        as
        needed.
 
 We
        believe that, with the proceeds of the Convertible Promissory Notes, the
        Master
        Lease Line, the accounts receivable credit line and our working capital that
        we
        will have sufficient resources for the next 12 months from the date of this
        report on Form 10-KSB.
   Item
        7.  Financial Statements
 
 Our
        financial statements are set forth immediately following the signature page
        to
        this Form 10-KSB.
 
 
 Item
        8.  Changes In and Disagreements With Accountants on Accounting and
        Financial Disclosures
 
 NONE




Item
        8A.  Controls and Procedures
 
 As
        required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal
        year
        covered by this report, Mr. David Andrus, our Chief Executive Officer and
        Principal Accounting Officer carried out an evaluation of the effectiveness
        of
        the design and operation of our disclosure controls and procedures. Based
        upon
        that evaluation, our chief executive officer and chief financial officer
        concluded that our disclosure controls and procedures are effective at December
        31, 2006. There have been no changes in our internal controls over financial
        reporting in connection with this evaluation that occurred during the fourth
        quarter of fiscal 2006 that has materially affected, or is reasonably likely
        to
        materially affect, our internal control over financial reporting.
  Disclosure
        controls and procedures are controls and other procedures that are designed
        to
        ensure that information required to be disclosed in our reports filed or
        submitted under the Exchange Act is (1) recorded, processed, summarized and
        reported, within the time periods specified in the Securities and Exchange
        Commission’s rules and forms and (2) accumulated and communicated to
        management, including our chief executive officer and chief financial officer,
        as appropriate, to allow timely decisions regarding required
        disclosure.
   Item
        8B.  Other Information
 
 None
 
 
  11
  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, 2006 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
                  SinceDave
                  H Andrus
              
              41
              
              Director
              
              December
                  1997President
              
              December
                  2004Chairman
                  of the Board
              
              December
                  2004Michael
                  O’Keefe
              
              66
              
              Director
              
              April,
                  2006Javvis
                  O Jacobson
              
              34
              
              Director
              
              March
                   2004
  Our
        directors serve for a term of one year or until his or her successor is elected
        at the next shareholders meeting. All officers serve at the pleasure of the
        Board of Directors or until his or her successor is elected at the annual
        meeting of the Board of Directors. We have no arrangements or understandings
        written among any of our officers or directors.
 
 The
        principal occupations and brief summary of the background of each of our
        directors and executive officers during the past five years is as
        follows:
 
 David
        H. Andrus, CEO/President
        and CFO began an affiliation with Diatect International in 1992.  Dave
        served in the U.S. Marine Corps for 10 years in the logistics and intelligence
        field, and was medically retired in 1991.  He formed Venture
        Creations, which performed contract research and development for EnviroGuard
        (now Diatect).  As R&D Project Manager, Dave supervised extensive
        field trials of the Diatect Insect Control within the Poultry industry and
        for
        fire ant concerns in that region.  In 1998 Dave was appointed
        technical manager for Diatect.  Since then, Dave has been VP
        Operations and was elected president in December of 2004 to
        current.
 
 Javvis
        O. Jacobson, director,
        audit committee chairman, is a certified public accountant and is the CFO
        of
        Beehive Credit Union in Salt Lake City, Utah.  He has held this
        position for the last two years.  Formerly he was with Deloitte and
        Touche, as audit manager for six years.  Javvis graduated from Weber
        State University with a Masters of Professional Accountancy.
 
 Michael
        O’Keefe is an
        executive with over 30 years of experience leading companies in the
        telecommunications, technology, optical, heavy equipment, and packaged goods
        sectors. He managed private companies as a COO and served as VP/CFO at
        major corporations, ranging in revenues from $1 million to over $13 billion.
        He
        held positions with foreign owned firms, served on boards, has manufacturing
        experience as well as turn around skill and worked with developmental and
        startup organizations. Mr. O’Keefe was a director from April 2006 to April
        2007.
 
 Frank
        Priestly and John L. Runft resigned from the board in April 2006.
 
 
  12
  Audit
        Committee Financial Expert
 
 The
        entire Board of Directors serves as our Audit Committee.
 
 Section
        16(a) Beneficial Ownership Reporting Compliance
 
 Section
        16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
        and directors and persons who own more than 10% of a registered class of
        our
        equity securities to file reports of ownership on Form 3 and changes in
        ownership on Form 4 or 5 with the Securities and Exchange Commission (the
        “SEC”). Such officers, directors, and 10% stockholders are also required by SEC
        rules to furnish us with copies of all Section 16(a) reports they
        file.  The Company believes all necessary reports were made on a
        timely basis for the period of this report on Form 10-KSB.
   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, 2006 and 2005
        by
        our principal executive officer (the “Named Executive Officer”).
 
 SUMMARY
        COMPENSATION TABLE
 
 Name
                  and
                Principal
                Position
              
              Year
              
              Salary
                ($)
              
              Bonus
                ($)
              
              Stock
                Awards
                ($)
              
              Option
                Awards
                  ($)
              
              Non-Equity
                Incentive
                  Plan
                  Compensation
                ($)
              
              Nonqualified
                  Deferred Compensation
                  Earnings
                ($)
              
              All
                  Other
                Compensation
                ($)
              
              Total
                ($)David
                  Andrus
                Chief
                  Executive Officer, Principal
                  Executive Officer, Chief Financial Officer
              
              2006
                2005
              
              $75,000
                $75,000
              
              -
                -
              
              $189,207
                -
              
              -
                -
              
              -
                -
              
              -
                -
              
              -
                -
              
              $264,207
                75,000
  Narrative
        Disclosure to Summary Compensation Table
 
 Employment
        Agreements
 
 David
        Andrus signed an employment agreement effective December 1, 2004 for a term
        of
        two years at an annual salary of $150,000 per year, with a signing bonus
        of
        3,000,000 shares of our restricted common stock.  The agreement includes
        provisions for reasonable allowances and a bonus based on 1% of gross sales
        receipts as determined on a quarterly basis.   Mr. Andrus received 50% of
        the salary and no bonus due to the Chapter 7 proceedings during 2006 and
        2005.
        The employment agreement is presently expired and Mr. Andrus is being paid
        a
        salary of $90,000 per year. In 2006, Mr. Andrus was issued 9,460,350 shares
        of
        our common stock valued at $189,207 or $0.02 per share representing the closing
        price on the date of issuance.
 
 
 
 
  13
  Outstanding
        Equity Awards at Fiscal Year-End
 
 Option
                  Awards
              
              Stock
                  AwardsName
              
              Number
                  of Securities Underlying Unexercised Options
                (#)
                Exercisable
              
              Number
                  of Securities Underlying Unexercised Options
                (#)
                Unexercisable
              
              Equity
                  Incentive Plan Awards:  Number of Securities Underlying
                  Unexercised Unearned Options
                (#)
              
              Option
                  Exercise Price
                ($)
              
              Option
                  Expiration Date
              
              Number
                  of Shares or Units of Stock That Have Not Vested
                (#)
              
              Market
                  Value of Shares or Units of Stock That Have Not Vested
                ($)
              
              Equity
                  Incentive Plan Awards:  Number of Unearned Shares, Units or
                  Other Rights That Have Not Vested
                (#)
              
              Equity
                  Incentive Plan Awards:  Market or Payout Value of Unearned
                  Shares, Units or Other Rights That Have Not Vested
                ($)David
                  AndrusChief
                  Executive Officer, Principal Executive Officer, Chief Financial
                  Officer
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --
              
              --
 
 
 Compensation
        of Directors
 
 The
        following table summarizes data concerning the compensation of our directors
        for
        the fiscal year ended December 31, 2006.
 
 Name
              
              Fees
                  Earned or Paid in
                  Cash
                ($)
              
              Stock
                  Awards
                ($)
              
              Option
                Awards
                ($)
              
              Non-Equity
                  Incentive Plan
                  Compensation
                ($)
              
              Nonqualified
                  Deferred Compensation
                  Earnings
                ($)
              
              All
                  Other
                  Compensation
                ($)
              
              Total
                ($)David
                  Andrus
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Javvis
                  O.
                  Jacobson
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Michael
                  O’Keefe
              
              -
              
              $8,500
              
              -
              
              -
              
              -
              
              -
              
              -
 
 Mr.
        O’Keefe was issued 500,000 shares of common stock valued at $8,500 or $0.017
        per
        share as compensation for providing his guarantee for our line of credit
        with a
        bank.  The price was based on the closing market price as of the date
        of issuance.
 
 
 
 
  14
  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 December 11, 2007, based on information available to us
        by
        the following persons or groups:
 
 ·
              each
                  person who is known by us to own more than 5% of the outstanding
                  common
                  stock;
 ·
              each
                  of our directors;
 ·
              the
                  Named Executive Officer; and
 ·
              all
                  of our executive officers and directors, as a group.
 
 As
        of
        December 11, 2007, there were 175,413,205 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
              
              8.55%David
                  H Andrus, Director/President, Chairman of the Board
              
              9,466,350
              
              5.40%Javvis
                  Jacobson, Director
              
              169,000
              
              0.00%
 
 
 Beneficial
        ownership is determined in accordance with the rules of the SEC and generally
        includes voting or investment power with respect to the shares. A person
        is also
        deemed to be a beneficial owner of any securities of which the person has
        the
        right to acquire beneficial ownership within 60 days. Unless otherwise indicated
        in the footnotes to this table and subject to community property laws where
        applicable, we believe that the each of the stockholders named in this table
        has
        sole voting and investment power with respect to the shares shown as
        beneficially owned by him. To our knowledge, there are no voting arrangements
        among our stockholders.
 
 Securities
        Authorized for Issuance Under Equity Compensations Plans
 
 The
        Company does not have any Equity Compensation Plans.
   Item
        12.  Certain Relationships and Related Transactions
 
 In
        February 2006, we entered into a one year Investment Banking Agreement with
        Pointe. The terms of the Investment Banking Agreement required that we pay
        $25,000 upon completion of $150,000 in bridge financing. The Company
        subsequently received $150,000 under the terms of a convertible promissory
        note
        that was arranged by Pointe and we made the $25,000 payment to Pointe.
        Additionally, we issued Pointe 8,000,000 warrants to purchase common stock
        at
        $0.01 per share for a period of 3 years. The warrants issued pursuant to
        this
        agreement were valued at $125,892. This amount was recorded as a prepaid
        expense
        and is being amortized over the one-year term of the agreement. We further
        agreed to pay Pointe a 7% commission and a 1% unaccountable expense allowance
        upon receipt of financing brought to us by Pointe, agreed to pay Pointe a
        fee
        equal to 5% of the value of the transaction as defined in the agreement in
        the
        event of a merger or acquisition of the Company.
 
  15
  In
        February 2006, we entered into a renewable two-year non-exclusive engagement
        letter ( the “Engagement Letter”) with Aspen Capital Partners, LLC, an entity
        that employs a person that was on our board of directors at that time for
        consulting services in a variety of areas relating to our financial, strategic
        and developmental growth. The financial terms of the Engagement Letter required
        a non-refundable retainer fee of $25,000, the issuance of 2,500,000 shares
        of
        common stock and payments of $15,000 per month for a two-year period. Additional
        provisions of the Engagement Letter provide that we issue 8,000,000 warrants
        to
        purchase common stock at $0.01 per share for a period of five years and,
        upon
        the completion of the $150,000 bridge financing, we issued 4,500,000 warrants
        to
        purchase common stock at $.01 per share for a period of five years. The
        8,000,000 warrants issued pursuant to the Engagement Letter were valued at
        $125,892. This amount was recorded as a prepaid expense and will be amortized
        over the two year term of the agreement. The 4,500,000 warrants were valued
        at
        $76,410 and were recorded as interest expense. The agreement also provides
        for
        the issuance of 5,000,000 warrants to purchase common stock at $0.05 per
        share
        for a period of five years upon the completion of one million dollars of
        funding. These warrants were issued in May, 2007.
 
 During
        2006, we issued 500,000 shares of our common stock valued at $8,500 to one
        of
        our directors as compensation for the guarantee provided to us of our line
        of
        credit with a bank.
 
 During
        2006, we issued 9,460,350 shares of common stock valued at $189,207 to our
        Chief
        Executive Officer as compensation pursuant to his employment
        agreement.
 
 During
        the fourth quarter of 2006, the land and building where we maintain our offices
        and manufacturing facility was sold by a shareholder to Aspen Capital
        Management, LLC (“Landlord”) an entity that is affiliated with a one of our
        directors. In conjunction with this sale, $117,060 of unpaid rent was forgiven.
        Commencing on January 1, 2007, we entered into a five year lease with the
        Landlord, requiring monthly rental payments of $12,000 plus taxes and
        maintenance. The lease is renewable for two additional 5 year terms with
        10%
        increases of the rental payments to $13,200 per month and $14,250 per month,
        respectively.
 
 One
        of
        our Directors performed legal services for us during the fiscal year 2005
        and
        charged us at his usual and customary rate. During 2005, 250,000 shares of
        common stock valued at market ($3,250) were issued in payment for these
        services.   During 2006 the Director resigned from the board, and
        because of a potential conflict his services have not been engaged.
 
 At
        December 31, 2006 and 2005 we had total notes payable in the amounts of $
        3,370,479 and $3,053,526, respectively. Some of these notes are payable to
        our
        stockholders.
 
 On
        March
        9, 2005 we entered into a memorandum of understanding with Paul Morrell,
        Inc.,
        d.b.a. The Event Source (“TES”). Under the terms of the memorandum of
        understanding, as subsequently modified, we agreed to purchase the business
        operations and the intangible assets of TES;
        however, TES withdrew from the
        transaction on June 6, 2005, with no further obligations or commitments to
        us.
 
 On
        March
        9, 2005, we sold our real property located in Heber City, Utah for $900,000
        to
        Morrell & Associates, LLC, an entity in which Mr. Morrell is also a
        principal stockholder and the Chief Executive Officer. Furthermore, we issued
        1,400,000 shares of our common stock as prepaid interest on the $402,000
        Note.
  At the time of the sale, we entered into a verbal lease agreement with
        the purchaser of the land and building to lease the land and building on
        a
        month-to-month basis for $10,000 per month.
 
  16
  During
        March 2005, we entered into a stock subscription agreement with Mr. Morrell
        (“Subscriber”) and issued 3,500,000 shares of common stock to the Subscriber for
        $700,000 receivable from the Subscriber. During March 2005, we also sold
        its
        real property, consisting of its manufacturing facilities located in Heber
        City,
        Utah to the Subscriber and in conjunction therewith entered into a note payable
        in the amount of $402,000 bearing interest at 10% per annum. Upon the sale
        of
        this real estate, we entered into a verbal rental agreement with the Subscriber
        whereby the Company would pay $10,000 per month rent for the real estate
        that
        was sold. In addition to the foregoing, the Company issued 1,500,000 shares
        of
        its common stock to the Subscriber in February 2005 for $150,000 and issued
        1,577,034 shares to the Subscriber in March 2005 as financing fees, valued
        at
        $80,523, the market value of the Company’s common stock on the date of
        issuance.
 
 During
        2005, the Company collected $265,258 of the receivable from the Subscriber
        and
        in June 2005, the Comp any was informed by the Subscriber that the balance
        of
        the receivable would not be paid. The subscription agreement provided us
        with
        the right to offset any and all obligations that the Company may have to
        the
        Subscriber against the amount due from the Sub scriber. Upon notification
        that
        the balance of the subscription agreement would not be paid, the Company
        offset
        the $402,000 note payable to the Subscriber and related accrued interest
        of
        $9,802 against the unpaid balance of $434,742 receivable from the Subscriber.
        The remaining $22,940 was offset against the $10,000 per month rental payments.
        The Company has not made any payments since the inception of the verbal rental
        agreement expect for the amount offset.
 
 Item
        13.  Exhibits
 
 Index
        to
        Exhibits:
  31.1
              Rule
                  13a-14(a)/15d-14(a) Certification of David Andrus, Principal Executive
                  Officer and Principal Financial Officer
 
 32.1
              Certification
                  of David Andrus, Principal Executive Officer and Principal Financial
                  Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                  to
                  Section 906 of the Sarbanes-Oxley Act of 2002
   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, 2006 and
        2005:
 
 Fiscal
                  2006
              
              
              Fiscal
                  2005Audit
                  Fees
              
              $
              —
              
              
              $
              72,394Audit
                  Related Fees
              
              
              —
              
              
              
              1,550Tax
                  Fees
              
              
              —
              
              
              
              10,196All
                  Other Fees
              
              
              —
              
              
              
              —TOTAL
                  Fees
              
              $
              —
              
              
              $
              84,900
 
 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.
 
  17
  SIGNATURES
 
 In
        accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant
        caused this report to be signed on its behalf by the undersigned, thereunto
        duly
        authorized.
 
 
 Diatect
                  International Corporation(Registrant)Dated:
                  December 19, 2007By:
              /s/
                  David S.
                  AndrusDavid
                  S. AndrusPrincipal
                  Executive OfficerPrincipal
                  Financial Officer
 
 In
        accordance with the Securities Exchange Act of 1934, this Report on Form
        10-KSB
        has been signed below by the following persons on behalf of the Registrant
        in
        the capacities and on the dates indicated.
 
 
 Signature
              Capacity
              Date/s/
                  David S. Andrus
              Director
              December
                  19, 2007David
                  S. Andrus/s/
                  Javvis O. Jacobsen
              Director
              December
                  19, 2007Javvis
                  O. Jacobsen
 
  
  
  
  
  
  
  18
  DIATECT
        INTERNATIONAL CORPORATION
 INDEX
        TO FINANCIAL STATEMENTS
 
 
 PageReport
                  of Independent Registered Public Accounting Firm
              F-1Balance
                  Sheets as of December 31, 2006 and  2005
              F-2Statements
                  of Operations for the Years Ended December 31, 2006 and
                  2005
              F-3Statements
                  of Stockholders’ Deficit for the Years Ended December 31, 2005 and
                  2006
              F-4Statements
                  of Cash Flows for the Years Ended December 31, 2006 and
                  2005
              F-5Notes
                  to Financial Statements
              F-7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  19
  
 HANSEN,BARNETT& MAXWELL,
                  P.C.A
                  Professional CorporationCERTIFIED
                  PUBLIC ACCOUNTANTS
              
              Registered
                  with the Public CompanyAccounting
                  Oversight Board5
                  Triad Center, Suite 750Salt
                  Lake City, UT 84180-1128Phone:
                  (801) 532-2200
                Fax:
                  (801) 532-7944www.hbmcpas.com
 
 
 REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
        the
        Board of Directors and the Stockholders
 Diatect
        International Corporation
 
 We
        have
        audited the balance sheets of Diatect International Corporation as of December
        31, 2006 and 2005, and the related statements of operations, stockholders’
deficit, and cash flows for the years then ended. These financial statements
        are
        the responsibility of the Company’s management. Our responsibility is to express
        an opinion on these financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (U.S). Those standards require that we plan and
        perform the audits to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements.  An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation.  We believe
        that our audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion the financial statements referred to above present fairly, in all
        material respects, the financial position of Diatect International Corporation
        as of December 31, 2006 and 2005, and the results of its operations and its
        cash
        flows for the years then ended, in conformity with accounting principles
        generally accepted in the United States of America.
 
 
 HANSEN,
                  BARNETT & MAXWELL, P.C.
 Salt
        Lake
        City, Utah
 December
        18, 2007
 
 
   F-1
  DIATECT
        INTERNATIONAL CORPORATION
 BALANCE
        SHEETS
 
 
 December
                  31,
              
              2006
              
              
              2005ASSETSCurrent
                  AssetsCash
              
              $
              61,743
              
              
              $
              6,382Trade
                  accounts receivable, net of allowance for doubtful accounts of
                  $25,397 and
                  $24,300, respectively
              
              
              26,502
              
              
              
              17,031Inventory
              
              
              235,889
              
              
              
              365,188Prepaid
                  expenses and other current assets
              
              
              147,219
              
              
              
              4,618Total
                  Current Assets
              
              
              471,353
              
              
              
              393,219Property
                  and Equipment,
                  net of accumulated depreciation of $268,275 and $237,839,
                  respectively
              
              
              90,006
              
              
              
              144,631Intangible
                  Assets - EPA
                  Labels, net of accumulated amortization of $620,000 and $620,000,
                  respectively
              
              
              1,116,322
              
              
              
              1,116,322Total
                  Assets
              
              $
              1,677,681
              
              
              $
              1,654,172LIABILITIES
                  AND STOCKHOLDERS' DEFICITCurrent
                  LiabilitiesTrade
                  accounts payable
              
              $
              267,840
              
              
              $
              59,090Accrued
                  liabilities
              
              
              289,322
              
              
              
              508,039Checks
                  drawn in excess of cash in bank
              
              
              -
              
              
              
              10,481Accrued
                  interest payable
              
              
              723,545
              
              
              
              646,064Accrued
                  settlement obligations
              
              
              259,381
              
              
              
              360,540Current
                  portion of notes payable, net of unamortized discount of $191,094
                  and $0,
                  respectively
              
              
              1,393,822
              
              
              
              1,267,963Total
                  Current Liabilities
              
              
              2,933,910
              
              
              
              2,852,177Long-Term
                  Notes Payable,net of current portion
              
              
              1,785,563
              
              
              
              1,785,563Stockholders'
                  DeficitCommon
                  stock, no par value; 300,000,000 shares authorized; 151,552,140
                  shares and
                  99,264,997 shares outstanding, respectively
              
              
              23,120,610
              
              
              
              21,836,822Warrants
                  outstanding
              
              
              593,162
              
              
              
              148,033Accumulated
                  deficit
              
              
              (26,755,564
              )
              
              
              (24,968,423
              )Total
                  Stockholders' Deficit
              
              
              (3,041,792
              )
              
              
              (2,983,568
              )Total
                  Liabilities and Stockholders' Deficit
              
              $
              1,677,681
              
              
              $
              1,654,172
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
 
  F-2
  DIATECT
        INTERNATIONAL CORPORATION
 STATEMENTS
        OF OPERATIONS
   For
                  the Years Ended December 31,
              
              2006
              
              
              2005Sales
              
              $
              1,031,608
              
              
              $
              507,573Cost
                  of Goods Sold
              
              
              408,244
              
              
              
              435,346Gross
                  Profit
              
              
              623,364
              
              
              
              72,227ExpensesMarketing
                  and selling
              
              
              443,204
              
              
              
              328,003General
                  and administrative
              
              
              2,360,688
              
              
              
              1,010,035Total
                  Expenses
              
              
              2,803,892
              
              
              
              1,338,038Loss
                  from Operations
              
              
              (2,180,528
              )
              
              
              (1,265,811
              )Other
                  Income (Expense)Interest
                  expense
              
              
              (340,643
              )
              
              
              (356,677
              )Gain
                  from sale of building
              
              
              -
              
              
              
              70,822Gain
                  from termination of debt
              
              
              734,030
              
              
              
              154,013Net
                  Other Income (Expense)
              
              
              393,387
              
              
              
              (131,842
              )Net
                  Loss
              
              
              (1,787,141
              )
              
              
              (1,397,653
              )Basic
                  and Diluted Loss Per Share
              
              $
              (0.01
              )
              
              $
              (0.01
              )Weighted-Average
                  Common Shares Outstanding
              
              
              129,784,100
              
              
              
              95,643,362
 
 
 
 
 
 
 
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
 
  F-3
  DIATECT
        INTERNATIONAL CORPORATION
 STATEMENTS
        OF STOCKHOLDERS' DEFICIT
 
 Common
                  Stock
              
              
              Warrants
              
              
              Accumulated
              
              
              Total
                  Stockholders'Shares
              
              
              Amount
              
              
              Outstanding
              
              
              Deficit
              
              
              DeficitBalance,
                  December 31, 2004
              
              
              88,817,518
              
              
              $
              20,784,858
              
              
              $
              148,033
              
              
              $
              (23,570,770
              )
              
              $
              (2,637,879
              )Issuance
                  for cash
              
              
              1,900,000
              
              
              
              170,000
              
              
              
              -
              
              
              
              -
              
              
              
              170,000Issuance
                  for services
              
              
              4,147,222
              
              
              
              79,111
              
              
              
              -
              
              
              
              -
              
              
              
              79,111Issuance
                  for a receivable from shareholder
              
              
              3,500,000
              
              
              
              700,000
              
              
              
              -
              
              
              
              -
              
              
              
              700,000Issuance
                  for financing costs
              
              
              2,677,034
              
              
              
              122,398
              
              
              
              -
              
              
              
              -
              
              
              
              122,398Settlement
                  of accrued liabilities and conversion of notes payable
              
              
              1,223,223
              
              
              
              92,955
              
              
              
              -
              
              
              
              -
              
              
              
              92,955Forfeiture
                  of unvested common shares upon cancellation of consulting
                  agreement
              
              
              (3,000,000
              )
              
              
              (112,500
              )
              
              
              -
              
              
              
              -
              
              
              
              (112,500
              )Net
                  loss for the year
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              (1,397,653
              )
              
              
              (1,397,653
              )Balance,
                  December 31, 2005
              
              
              99,264,997
              
              
              
              21,836,822
              
              
              
              148,033
              
              
              
              (24,968,423
              )
              
              
              (2,983,568
              )Issuance
                  for services
              
              
              37,894,418
              
              
              
              898,660
              
              
              
              -
              
              
              
              -
              
              
              
              898,660Issuance
                  upon conversion of loan
              
              
              15,000,000
              
              
              
              150,000
              
              
              
              -
              
              
              
              -
              
              
              
              150,000Beneficial
                  debt conversion feature
              
              
              -
              
              
              
              239,895
              
              
              
              -
              
              
              
              -
              
              
              
              239,895Warrants
                  issued for services
              
              
              -
              
              
              
              -
              
              
              
              445,129
              
              
              
              -
              
              
              
              445,129Cancellation
                  of stock
              
              
              (607,275
              )
              
              
              (4,767
              )
              
              
              -
              
              
              
              -
              
              
              
              (4,767
              )Net
                  loss for the year
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,787,141
              )
              
              
              (1,787,141
              )Balance,
                  December 31, 2006
              
              
              151,552,140
              
              
              $
              23,120,610
              
              
              $
              593,162
              
              
              $
              (26,755,564
              )
              
              $
              (3,041,792
              )
 
 
 
 
 
 
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
 
  F-4
  DIATECT
        INTERNATIONAL CORPORATION
 STATEMENTS
        OF CASH FLOWS
 
 For
                  the Years Ended December 31,
              
              2006
              
              
              2005Cash
                  Flows from Operating ActivitiesNet
                  loss
              
              $
              (1,787,141
              )
              
              $
              (1,397,653
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              53,068
              
              
              
              59,035Amortization
                  of discount on notes payable
              
              
              48,801
              
              
              
              -Amortization
                  of loan costs and license
              
              
              17,114
              
              
              
              124,000Gain
                  from debt termination
              
              
              (734,030
              )
              
              
              (154,013
              )Net
                  loss (gain) on disposal of property and equipment
              
              
              6,728
              
              
              
              (68,212
              )Issuance
                  of stock for services
              
              
              898,660
              
              
              
              79,111Issuance
                  of warrants for services
              
              
              354,762Issuance
                  of stock for finance charges and interest
              
              
              -
              
              
              
              122,398Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (9,471
              )
              
              
              37,888Inventory
              
              
              129,299
              
              
              
              96,723Prepaid
                  expenses and other current assets
              
              
              (5,748
              )
              
              
              32,882Accounts
                  payable
              
              
              336,267
              
              
              
              51,953Accrued
                  liabilities
              
              
              (166,555
              )
              
              
              (46,762
              )Accrued
                  interest payable
              
              
              200,389
              
              
              
              238,225Net
                  Cash Used in Operating Activities
              
              
              (657,857
              )
              
              
              (824,425
              )Cash
                  Flows from Investing ActivitiesProceeds
                  from disposal of property and equipment
              
              
              -
              
              
              
              (26,130
              )Payments
                  to purchase property and equipment
              
              
              (5,170
              )
              
              
              -Net
                  Cash Used in Investing Activities
              
              
              (5,170
              )
              
              
              (26,130
              )Cash
                  Flow from Financing ActivitiesProceeds
                  from borrowings under notes payable
              
              
              1,055,628
              
              
              
              434,500Cash
                  paid for loan costs
              
              
              (63,600
              )
              
              
              -Principal
                  payments on notes payable
              
              
              (162,000
              )
              
              
              (50,560
              )Payments
                  for accrued settlement obligations
              
              
              (101,159
              )
              
              
              (58,002
              )Proceeds
                  from issuance of common stock and warrants
              
              
              -
              
              
              
              170,000Collection
                  of receivable from shareholder
              
              
              -
              
              
              
              265,258(Payments)
                  proceeds from checks drawn in excess of cash in bank
              
              
              (10,481
              )
              
              
              10,481Net
                  Cash Provided by Financing Activities
              
              
              718,388
              
              
              
              771,677Net
                  Increase (Decrease) in Cash
              
              
              55,361
              
              
              
              (78,878
              )Cash
                  at Beginning of Year
              
              
              6,382
              
              
              
              85,260Cash
                  at End of Year
              
              $
              61,743
              
              
              $
              6,382
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
 
  F-5
  DIATECT
        INTERNATIONAL CORPORATION
 STATEMENTS
        OF CASH FLOWS (continued)
 
 For
                  the Years Ended December 31,
              
              2006
              
              
              2005Supplemental
                  Disclosure of Cash Flow InformationCash
                  paid during the year for interest
              
              $
              9,113
              
              
              $
              1,000Supplemental
                  Schedule of Noncash Investing and Financing ActivitiesConversion
                  of notes payable into common stock
              
              
              150,000
              
              
              
              92,955Mortgage
                  note payable and accrued liabilities paid directly from the proceeds
                  from
                  the sale of land and building
              
              
              -
              
              
              
              900,000Common
                  stock issued for a receivable from shareholder
              
              
              -
              
              
              
              700,000Receivable
                  from shareholder offset against note payable, accrued interest
                  and accrued
                  liabilities
              
              
              -
              
              
              
              434,742Forfeiture
                  of unvested common shares upon cancellation of consulting
                  agreement
              
              
              -
              
              
              
              112,500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 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 $1,031,608 during the year
        ended December 31, 2006 compared to $507,573 during the year ended December
        31,
        2005, resulting in a gross profit of $623,364 and $72,227, respectively.
        For the
        years ended December 31, 2006 and 2005, the Company incurred net losses of
        $1,787,141 and $1,397,653, respectively, and used $657,857 and $824,425,
        respectively, of cash in its operating activities. At December 31, 2006,
        the
        Company had a stockholders’ deficit of $3,041,792 and its current liabilities
        exceeded current assets by $2,462,557.
 
 In
        June
        2005 three note holders of the Company filed suit in Federal Bankruptcy Court
        to
        force the Company into a Chapter 7 receivership and in February 2006 the
        Company
        filed a damage suit against those creditors. In April 2006, a settlement
        was
        reach whereby the note-holders’ bankruptcy suit was dismissed and the Company
        was awarded damages through the relief of $248,175 of notes payable and $121,681
        of related accrued interest due to the note holders, the return of 207,275
        shares of the Company’s common stock by the note holders, and the payment of
        $10,000 of legal fees for the Company. Accordingly, the Company was never
        under
        bankruptcy supervision of the court and the accompanying financial statements
        do
        not present any liabilities as subject to compromise.
 
 The
        ability of the Company to continue operations is dependent upon obtaining
        additional financing and being able to generate net profits in the future.
        Management believes that these events are likely to occur in the near future,
        even though no assurance thereof can be given. Additional financing arrangements
        have been arranged and are discussed further in Notes 4 and 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 exceeded management’s
        estimations.
 
 Trade
        Accounts
        Receivable and Allowance for Doubtful Accounts - Trade accounts
        receivables 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.
 
  F-7
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 Property
        and
        Equipment – Property and equipment are stated at cost. Expenditures for
        normal repairs and maintenance are charged to operations as incurred. The
        cost
        of an asset and related accumulated depreciation are also charged to operations
        when retired or otherwise disposed. Depreciation is computed based on the
        estimated useful life of the assets using straight-line and accelerated methods.
        Useful lives for equipment range from 3 to 10 years.
 
 Intangible
        Assets–
        The Company’s intangible assets consist of the labels that are placed on its
        products and that have been registered as non-toxic insecticide products
        with
        the United States Environmental Protection Agency pursuant to the Federal
        Insecticide, Fungicide and Rodenticide Act. The Company recorded these labels
        at
        cost; however, it impaired the value thereof by $2,869,570 in 2003. During
        2004
        and for the first 6 months of 2005, the Company amortized the unimpaired
        value
        over an estimated useful life of 7 years using the straight-line method.
        In July
        2005, the Company concluded that the estimated useful life of the labels
        was
        indefinite and will henceforth subject the labels to impairment if and when
        appropriate. The Company has not impaired the value of the labels since making
        this determination.
 
 Long
        Lived
        Assets– Long-lived assets are reviewed for impairment when events or
        changes in circumstances indicate that the carrying amount may not be
        recoverable. Recoverability of assets to be held and used is measured by
        comparison of the carrying amount of an asset to future net cash flows expected
        to be generated by the asset. If such assets are considered to be impaired,
        the
        impairment to be recognized is measured by the amount that the carrying amount
        of the assets exceeds the fair value of the assets. Assets to be disposed
        of are
        reported at the lower of the carrying amount or fair value less costs to
        sell.
 
 Fair
        Value of
        Financial Instruments– Due to the short maturity of trade receivables and
        current liabilities, including trade payables, the carrying amount approximates
        fair value. The carrying amount reported for notes payable approximates fair
        value and interest rates on these notes approximate current interest rates
        given
        the current business condition of the Company.
 
 Revenue
        Recognition– The Company manufactures and sells non-toxic pesticides to
        retailers, agricultural concerns and directly to the public through a Company
        website. Revenue from the sale of its products when (a) persuasive evidence
        of
        an arrangement exists, (b) delivery has occurred and no significant obligations
        remain, (c) the sales price is fixed and determinable and (d) collection
        is
        determined to be probable. Sales credits and price concessions are treated
        as a
        reduction of revenue. Product returns are permitted, but historically have
        occurred within a short period after the sale and are estimated and recognized
        as a reduction of revenue at the time of the sale.
 
 Shipping
        and
        Handling Costs– Shipping and handling costs are billed to customers and
        are recorded as sales and the associated costs are included in cost of goods
        sold.
 
 Marketing
        and
        Selling Expenses– Marketing and selling expenses include the salaries and
        wages of its in-house sales force, advertising, product samples and promotional
        expenses. The Company designs and prints literature and marketing materials
        for
        its products, as well as promotional materials used in trade shows.
  Income
        Taxes
– No income taxes have been paid or accrued for Federal 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.  At December 31, 2006 there
        were potentially dilutive common shares outstanding related to convertible
        promissory notes payable which are convertible into 15,900,000 shares of
        common
        stock and warrants to purchase 15,900,000 shares of common stock. At December
        31, 2006 and 2005, there were potentially dilutive common shares outstanding
        relating to outstanding warrants to purchase 32,150,000 and 4,650,000 shares
        of
        common stock, respectively. The potential common shares were not included
        in the
        computation of diluted loss per share as their effect would have been
        anti-dilutive.
 
 Stock-Based
        Compensation Plans - Effective January 1, 2006, the Company adopted SFAS
        No. 123R "Share Based Payment." This statement is a revision of SFAS Statement
        No. 123, and supersedes APB Opinion No. 25, and its related implementation
        guidance. SFAS 123R addresses all forms of share based payment ("SBP") awards
        including shares issued under employee stock purchase plans, stock options,
        restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards
        will
        result in a charge to operations that will be measured at fair value on the
        awards grant date, based on the estimated number of awards expected to vest
        over
        the service period. Compensation cost for awards that vest will not be reversed
        if the awards expire without being exercised. The Company estimates the fair
        value of each stock option grant by using the Black-Scholes option pricing
        model.
 
 Prior
        to
        the Company's adoption to SFAS No. 123R, SFAS No. 123 required that the Company
        provide pro-forma information regarding net earnings and net earnings per
        share
        as if the Company's stock based awards had been determined in accordance
        with
        the fair value method described therein. The Company had previously adopted
        the
        disclosure portion of SFAS No. 148 "Accounting for Stock-Based Compensation
        -
        Transition and Disclosure," requiring quarterly SFAS No. 123 pro-forma
        disclosure. The pro-forma change for compensation cost related to stock-based
        awards granted was recognized over the service period. For stock options,
        the
        service period represents the period of time between the date of grant and
        the
        date each option becomes exercisable without consideration of acceleration
        provisions such as retirement or change of control.
 
 As
        of
        December 31, 2006 and 2005, the Company has no unvested options and did not
        grant any options to employees during the years ended December 31, 2006 and
        2005. The adoption of SFAS 123R did not effect the Company's financial position,
        results of operations or cash flows for those years, but may have a material
        impact if options are granted in the future.
 
 Recently
        Enacted
        Accounting Standards– On January 1, 2006, the Company adopted SFAS
        No. 151, Inventory Costs
– An Amendment of ARB No. 43, Chapter 4 (“SFAS 151”).
        SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory
        Pricing, to clarify the accounting for abnormal amounts of idle facility
        expense, freight, handling costs, and wasted material (spoilage). Among other
        provisions, the new rule requires that items such as idle facility expense,
        excessive spoilage, double freight, and re-handling costs be recognized as
        current-period charges. Additionally, SFAS 151 requires that the allocation
        of fixed production overhead to the costs of conversion be based on the normal
        capacity of the production facilities. The effects of adoption of SFAS 151
        were
        not material.
 
 In
        February 2006, the FASB issued SFAS No. 155, Accounting for Certain
        Hybrid
        Financial Instruments — an amendment of FASB Statements No. 133 and
        140 (“SFAS 155”). SFAS 155 amends SFAS No. 133, Accounting for
        Derivative
        Instruments and Hedging Activities and SFAS No. 140, Accounting for
        Transfers and
        Servicing of Financial Assets and Extinguishments of Liabilities, and
        related interpretations. SFAS 155 permits fair value remeasurement for any
        hybrid financial instrument that contains an embedded derivative that otherwise
        would require bifurcation and clarifies which interest-only strips and
        principal-only strips are not subject to recognition as liabilities. SFAS
        155
        eliminates the prohibition on a qualifying special-purpose entity from holding
        a
        derivative financial instrument that pertains to a beneficial interest other
        than another derivative financial instrument. SFAS 155 is effective for the
        Company for all financial instruments acquired or issued beginning
        January 1, 2007. The impact of adoption of this statement on the Company’s
        consolidated financial statements is not expected to be material.
 
  F-9
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 In
        June
        2006, the FASB issued Interpretation No. 48, Accounting for Uncertainties
        in
        Income Taxes, (FIN 48).  FIN 48 clarifies the accounting for
        uncertainty in income taxes and prescribes a recognition threshold and
        measurement attribute for the financial statement recognition and measurement
        of
        a tax position taken or expected to be taken in a tax return.  FIN 48
        is effective for fiscal years beginning after December 15,
        2006.  Management believes that adoption of this standard will not
        have a material impact on the Company's financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
        157), to eliminate the diversity in practice that exists due to the different
        definitions of fair value and the limited guidance for applying those
        definitions in GAAP that are dispersed among the many accounting pronouncements
        that require fair value measurements. SFAS No. 157 retains the exchange price
        notion in earlier definitions of fair value, but clarifies that the exchange
        price is the price in an orderly transaction between market participants
        to sell
        an asset or liability in the principal or most advantageous market for the
        asset
        or liability. Moreover, the SFAS states that the transaction is hypothetical
        at
        the measurement date, considered from the perspective of the market participant
        who holds the asset or liability. Consequently, fair value is defined as
        the
        price that would be received to sell an asset or paid to transfer a liability
        in
        an orderly transaction between market participants at the measurement date
        (an
        exit price), as opposed to the price that would be paid to acquire the asset
        or
        received to assume the liability at the measurement date (an entry
        price).
  SFAS
        No.
        157 also stipulates that, as a market-based measurement, fair value measurement
        should be determined based on the assumptions that market participants would
        use
        in pricing the asset or liability, and establishes a fair value hierarchy
        that
        distinguishes between (a) market participant assumptions developed based
        on
        market data obtained from sources independent of the reporting entity
        (observable inputs) and (b) the reporting entity’s own assumptions about market
        participant assumptions developed based on the best information available
        in the
        circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
        about the use of fair value to measure assets and liabilities in interim
        and
        annual periods subsequent to initial recognition. Entities are encouraged
        to
        combine the fair value information disclosed under SFAS No. 157 with the
        fair
        value information disclosed under other accounting pronouncements, including
        SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where
        practicable. The guidance in this Statement applies for derivatives and other
        financial instruments measured at fair value under SFAS No.133, “Accounting for
        Derivative Instruments and Hedging Activities,” at initial recognition and in
        all subsequent periods. The impact of adoption of this statement on the
        Company’s consolidated financial statements, if any, has not yet been
        determined.
  In
        September 2006, the FASB issued “Statement of Financial Accounting Standards No.
        158, Employers’ Accounting for
        Defined Benefit Pension and Other Postretirement Plans (an amendment of
        FASB Statements No. 87, 88, 106, and 132R)” (SFAS 158), which will require
        employers to fully recognize the obligations associated with single-employer
        defined benefit pension, retiree healthcare and other postretirement plans
        in
        their financial statements. Under past accounting standards, the funded status
        of an employer’s postretirement benefit plan (i.e., the difference between the
        plan assets and obligations) was not always completely reported in the balance
        sheet. Past standards only required an employer to disclose the complete
        funded
        status of its plans in the notes to the financial statements. SFAS No. 158
        applies to plan sponsors that are public and private companies and
        nongovernmental not-for-profit organizations. The requirement to recognize
        the
        funded status of a benefit plan and the disclosure requirements are effective
        as
        of the end of the fiscal year ending after December 15, 2006, for entities
        with
        publicly traded equity securities, and at the end of the fiscal year ending
        after June 15, 2007, for all other entities. The requirement to measure plan
        assets and benefit obligations as of the date of the employer’s fiscal year-end
        statement of financial position is effective for fiscal years ending after
        December 15, 2008. The Company does not expect that the adoption of SFAS
        No. 158
        will have a significant impact on the consolidated results of operations
        or
        financial position of the Company.
 
  F-10
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin 108 (SAB 108), Considering the Effects
        of Prior
        year Misstatements When Quantifying Misstatements in Current Year Financial
        Statement. SAB 108 clarifies the staff’s view regarding the process of
        quantifying financial statement misstatements. More specifically, the staff
        noted that certain registrants do not consider the effects of prior year
        errors
        on current year financial statements, thereby allowing improper assets or
        liabilities to remain unadjusted. The staff believes this approach is not
        in the
        best interests of the users of the financial statements. SAB 108 is effective
        for fiscal years ending on or after November 15, 2006 with earlier adoption
        encouraged. Adoption of SAB 108 on December 31, 2006 did not have any effect
        on
        the Company’s financial statements.
 
 
 NOTE
        2 – INVENTORY
 
 Inventory
        is comprised of the following:
 
 December
                  31,2006
              
              
              2005Raw
                  materials
              
              $
              202,291
              
              
              $
              365,188Finished
                  goods
              
              
              33,598
              
              
              
              -Total
                  Inventory
              
              $
              235,889
              
              
              $
              365,188
 
 
 NOTE
        3 – PROPERTY AND EQUIPMENT
 
 Property
        and equipment are stated at cost. Expenditures for normal repairs and
        maintenance are charged to operations as incurred. The cost of an asset and
        related accumulated depreciation are also charged to operations when retired
        or
        otherwise disposed. Depreciation is computed based on the estimated useful
        life
        of the assets using straight-line and accelerated methods. Depreciation expense
        for the years ended December 31, 2006 and 2005 was $53,068 and $59,035,
        respectively. The components of property and equipment are as
        follows:
 
 Estimated
                  Useful Life in
              
              December
                  31,Years
              
              2006
              
              
              2005Computer
                  equipment
              3
                  to 5
              
              $
              81,239
              
              
              $
              103,585Office
                  furniture and equipment
              5
              
              
              31,432
              
              
              
              33,275Manufacturing
                  equipment
              5
                  to 10
              
              
              245,610
              
              
              
              245,610Total
                  Property and Equipment
              
              
              
              358,281
              
              
              
              382,470Less:
                  Accumulated depreciation
              
              
              
              (268,275
              )
              
              
              (237,839
              )Net
                  Property and Equipment
              
              
              $
              90,006
              
              
              $
              144,631
 
 On
        March
        9, 2005, the Company sold its land and building in Heber City, Utah to a
        shareholder of the Company. The land and building were sold for $900,000
        and the
        proceeds from the sale were paid directly by the purchaser to satisfy the
        balance due under the related mortgage note payable. The sale of the land
        and
        building resulted in the recognition of a gain of $70,822. At the time of
        the
        sale, the Company entered into a verbal lease agreement with the purchaser
        of
        the land and building to lease the land and building on a month-to-month
        basis
        for $10,000 per month. The terms of the lease and changes thereto are further
        described in Note 6. The Company uses the building as its manufacturing and
        office facilities.
 
  F-11
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 The
        Company owns association placer diatomaceous earth mining claims and placer
        diatomaceous earth mining claims, in the State of Oregon. The Company has
        not
        engaged in any mining operations and does not anticipate undertaking mining
        operations in the near future. The mining claims are carried at no
        cost.
 
 NOTE
        4 – NOTES PAYABLE
 
 Notes
        payable are comprised of the following:
 
 December
                  31,
              
              2006
              
              
              2005Revolving
                  lines of credit with financial institution
              
              $
              49,436
              
              
              $
              2,808Cash
                  advances from shareholder, unsecured
              
              
              97,000
              
              
              
              97,000Convertible
                  debenture payable to La Jolla Investment, LLC
              
              
              -
              
              
              
              278,500Unsecured
                  10% notes payable to investors, in default
              
              
              306,980
              
              
              
              323,155Unsecured
                  12% notes payable to investors, in default
              
              
              50,000
              
              
              
              240,000Unsecured
                  15% notes payable to investors, in default
              
              
              286,500
              
              
              
              286,500Unsecured
                  24% notes payable to investors
              
              
              -
              
              
              
              40,000Unsecured
                  12% convertible promissory notes payable, net of unamortized discount
                  of
                  $191,094 and $0, respectively
              
              
              603,906
              
              
              
              -Unsecured
                  5% notes payable to shareholders, due in 2008
              
              
              1,220,937
              
              
              
              1,220,937Unsecured
                  5% notes payable to vendors, due in 2008
              
              
              564,626
              
              
              
              564,626Total
                  Notes Payable
              
              
              3,179,385
              
              
              
              3,053,526Less:
                  Current portion
              
              
              1,393,822
              
              
              
              1,267,963Long-Term
                  Notes Payable
              
              $
              1,785,563
              
              
              $
              1,785,563
 
 Revolving
        Lines
        of Credit– As of December 31, 2005 the Company has unsecured, revolving
        credit notes with a financial institution totaling $2,808. Officers and
        shareholders of the Company guaranteed the credit notes payable. In July,
        2006
        the Company entered into a $50,000 line of credit with a bank.  The
        line of credit bears interest at 9.75% per annum, is due on demand and requires
        monthly interest only payments. The line is unsecured and is personally
        guaranteed by a director of the Company.  In July 2006 in conjunction
        with the issuance of the guarantee, the Company issued the director 500,000
        shares of common stock valued at $8,500 or $0.017 per share, representing
        the
        closing market price on the date of issuance.
 
 Cash
        Advances
        from Shareholder– Prior to 2004, a shareholder advanced $97,000 of cash
        to the Company. The Company was obligated to issue 250,000 shares of common
        stock to the shareholder every six months as payment of interest on the cash
        advances. During 2005, the Company issued 750,000 shares of common stock
        to this
        shareholder in payment of the $37,500 of accrued interest on the advances
        through that date and the shareholder agreed to not require any further interest
        payments in common stock or otherwise. The cash advances are unsecured and
        have
        no stated maturity date.
 
  F-12
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 La
        Jolla Cove
        Investors – During December 2002, the Company entered into a
        convertible debenture agreement with La Jolla Cove Investors, Inc. (“La Jolla
        Cove”), who at the time was the named as an underwriter for a planned public
        offering of the Company’s common stock. La Jolla Cove advanced the Company
        $150,000 in 2002 and $100,000 in 2003, which advances were evidenced by a
        convertible debenture agreement that was to be repaid out of a portion of
        the
        proceeds from the public offering. On July 12, 2004, La Jolla Cove filed
        a
        complaint in the Superior Court of California, County of San Diego, naming
        the
        Company as the defendant. La Jolla Cove contended that the Company breached
        its
        contract with La Jolla Cove by failing to honor the convertible debenture
        agreement. La Jolla Cove claimed damages in the amount of $406,990 plus interest
        and penalties, which resulted in part from the $150,000 of advances to the
        Company in 2002 and $100,000 in 2003. The Company withdrew the registration
        statement for the public offering on November 18, 2004 and claimed that La
        Jolla
        Cove made unreasonable demands on the Company with respect to the registration
        statement. During 2005, the Company made principal payments on the convertible
        debenture of $7,763. The adjusted carrying amount of the convertible debenture
        was $278,500 at December 31, 2005.  In June 2006, the Company reached
        a settlement with La Jolla Cove under which the Company paid La Jolla Cove
        $140,000 through July 2006 in full satisfaction of all amounts due under
        the
        convertible debenture and related interest and penalties and recognized a
        gain
        from termination of debt in the amount of $138,500 in the accompanying statement
        of operations for the year ended December 31, 2006.
 
 Bruce
        L.
        ShannonAttempted
        Bankruptcy Action– On February 28, 2005, Bruce L. Shannon, an individual
        doing business as K-Net, filed a complaint in the Fourth District Court in
        and
        for Wasatch County, State of Utah, naming the Company as the defendant. Mr.
        Shannon contended that a $200,000 note dated August 1, 2001 and bearing interest
        at 12% per annum was due on August 1, 2002. The Company contended that Mr.
        Shannon entered into a note extension with the Company and thereby delayed
        the
        payment due date of this note until May 1, 2005. The Company accrued a $200,000
        12% note payable and $80,500 of accrued interest at December 31,
        2005.
 
 In
        June
        2005, three note holders, Bruce L. Shannon, Brent Larson and the Robinson
        Family
        LLC, filed suit in Federal Bankruptcy Court to force the Company into a Chapter
        7 receivership. In February 2006, the Company filed a damage suit against
        those
        note holders. In April 2006, a settlement was reach whereby the note-holders’
bankruptcy suit was dismissed and the Company was awarded damages through
        the
        relief of $248,175 of notes payable and $121,681 of related accrued interest
        due
        to the note holders, the return of 207,275 shares of the Company’s common stock
        by the note holders, and the payment of $10,000 of legal fees for the Company.
        In conjunction with the settlement, the Company recognized a gain from
        termination of debt in the amount of $384,623 in the accompanying statement
        of
        operations in the second quarter of 2006.
 
 Unsecured
        12%
        Notes Payable to Investors– The Robinson Family LLC filed suit in Fourth
        District Court in Wasatch County, State of Utah, to collect a $106,000
        promissory note bearing interest at 12% per annum that was due on April 1,
        2002.
        At December 31, 2004, the note was carried at $126,686. Subsequently, the
        Robinson Family LLC became a party to a suit filed in Federal Bankruptcy
        Court
        to force the Company into involuntary bankruptcy. During the fourth quarter
        of
        2005, the Company entered into a settlement agreement with the Robinson Family
        LLC and a shareholder of the company, whereby the shareholder made a settlement
        payment to the Robinson Family LLC and the Company was released from any
        obligations.  The Company released the Robinson Family LLC from any
        damages resulting from the involuntary bankruptcy suit. The settlement resulted
        in the Company recognizing a $126,686 gain from termination of debt in the
        accompanying statement of operations for the year ended December 31,
        2005.
 
 Unsecured
        Notes
        Payable– The Company has borrowed money from several entities, including
        shareholders of the Company, with various terms including demand promissory
        notes. The notes are unsecured and bear interest at rates from 5% to 24%
        payable
        at different times. As additional consideration for certain loans, the Company
        issued common stock to the lenders. The shares of common stock issued to
        the
        lenders were valued at the market value of the common stock on the date issued
        and were recognized as interest expense on that date. During the year ended
        December 31, 2005 the Company issued 1,100,000 shares of common stock at
        prices
        ranging from $0.013 to $0.06 per share having a total market value of $ 41,875
        that were recognized as interest expense upon issuance.
 
  F-13
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 Bridge
        Financing–In
        February 2006 the Company entered into a one year non-exclusive Financial
        Advisory and Investment Banking Agreement (“Investment Banking Agreement”) with
        Pointe Capital L.L.C. (“Pointe”) as more fully described in Note 6. Pursuant to
        the Investment Banking Agreement, the Company received gross proceeds of
        $150,000 in the form of unsecured convertible notes.  These notes were
        convertible into the Company’s common stock at a price of $0.01 per share,
        representing the market price on the date of issuance. No beneficial conversion
        option was recognized on upon the issuance of these notes. In March and April,
        2006, the $150,000 notes were converted into an aggregate of 15,000,000 shares
        of the Company’s common stock.
 
 Convertible
        Promissory Notes Payable–In
        June 2006, the Company commenced a private placement offering of convertible
        promissory notes and warrants through 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 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 $17,114 of amortization was recorded for the year ended December 31,
        2006.
 
 Based
        upon the market price of the Company’s common stock on the dates the notes were
        issued, the investors received a beneficial conversion option of $239,895.
        The
        beneficial conversion option was computed as the difference between the fair
        value and the allocated proceeds of the common stock issuable upon conversion
        of
        the promissory notes. 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 and resulted
        in the recognition of $48,801 of interest expense during the year ended December
        31, 2006.
 
 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. The related beneficial conversion option was valued at $64,421. During
        the second quarter of 2007, a total of $107,500 of the above notes was repaid
        in
        cash.
 
 
 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:
 
 
  F-14
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 December
                  31,2006
              
              
              2005Complete
                  Packaging, LLC d.b.a. Compax
              
              $
              69,622
              
              
              $
              144,622David
                  J. Stecher
              
              
              -
              
              
              
              28,325Litho-Flexo
                  Graphics, Inc.
              
              
              63,283
              
              
              
              63,283Williams
                  & Webster
              
              
              54,564
              
              
              
              54,564Xerox
              
              
              17,590
              
              
              
              17,590National
                  Bulk
              
              
              20,418
              
              
              
              20,418Downs
                  and Parkinson
              
              
              33,904
              
              
              
              31,738Total
              
              $
              259,381
              
              
              $
              360,540
 
 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.
 
 David
        J.
        Stecher– During 2002, the Company entered into a promissory note in the
        amount of $18,070, bearing interest at 15% per annum and due on demand. During
        2004 a suit was filed to collect the principal amount due including accrued
        interest. At December 31, 2005, the accrued settlement obligation was $28,325
        including accrued interest. During 2006, the Company paid $36,000 in full
        satisfaction of this obligation.
 
 Litho-Flexo
        Graphics, Inc.– On May 23, 2003, Litho-Flexo Graphics, Inc. filed a
        complaint in the Fourth District Court in and for Wasatch County, State of
        Utah,
        naming the Company as the defendant. Litho-Flexo contended that the Company
        failed to make payment of a trade payable that, with interest and costs amounted
        to $92,478. The Company contended that the packaging labels purchased from
        Litho-Flexo were defective and could not be used in the packaging of the
        Company’s products. The Company filed a counterclaim claiming in excess of
        $100,000 for damages resulting from the use of the defective labels. The
        Company
        accrued a $72,625 accrued settlement obligation liability at December 31,
        2004.
        During the year ended December 31, 2005, the Company paid $9,342 to the vendor,
        which decreased the recorded accrued settlement obligation liability to $63,283
        at December 31, 2006 and 2005. No resolution has been reached under the claims,
        which continue to be in litigation.
 
 
 NOTE
        6 – COMMITMENTS AND CONTINGENCIES
 
 The
        Company had a verbal lease agreement for its current office and production
        facilities based in Heber, Utah with annual rent payments due of $120,000.
        The
        Company has not made any payments related to this agreement in fiscal 2006.
        During the fourth quarter of 2006, the land and building where the Company
        maintains its offices and manufacturing facility was sold by a shareholder
        to
        Aspen Capital Management, LLC (“Landlord”) an entity that is affiliated with a
        director of the Company. In conjunction with this sale, $117,060 of unpaid
        rent
        was forgiven. Commencing on January 1, 2007, the Company entered into a five
        year lease with the Landlord, requiring monthly rental payments of $12,000
        plus
        taxes and maintenance. The lease is renewable for two additional 5 year terms
        with 10% increases of the rental payments to $13,200 per month and $14,250
        per
        month, respectively.
 
  F-15
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 Future
        minimum lease payments over the next five years are as follows:
 
 2007
              
              $
              144,0002008
              
              
              144,0002009
              
              
              144,0002010
              
              
              144,0002011
              
              
              144,000
 
 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
        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
        November 2005, the Company started marketing its products under an Internet
        marketing program and entered into a verbal agreement with Saber Management
        for
        its Internet marketing services. The Company agreed to set aside 12 million
        shares of common stock to be issued to Saber Management as compensation for
        its
        services, of which four million shares were delivered to Saber Management
        through May 2006 for a down payment on the project. The Company issued 3,000,000
        shares in December, 2005 valued at $24,000 or $0.008 per share and 1,000,000
        shares in May, 2006 valued at $24,000 or $0.024 per share representing the
        closing market prices on the dates of issuance.
 
 Diatect
        was unable to reach a written agreement with Saber Management and during
        the
        third quarter of 2006, the verbal agreement with Saber Management was cancelled,
        with the four million shares of common stock remaining issued to Saber
        Management. The Company’s ongoing efforts under its Internet marketing program
        were thereafter brought in-house and managed by contract personal.
 
  F-16
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 The
        production of pesticides is subject to complex environmental regulations.
        As of
        the date of these financial statements and the date of this report, the Company
        is unaware of any significant pending environmentally related litigation
        or of
        any specific past or prospective matters involving environmental concerns,
        which
        could impair the marketing of its products.
 
 
 NOTE
        7 - COMMON STOCK
 
 In
        February 2006, the shareholders approved an increase of the authorized common
        stock of the Company from 100,000,000 shares to 300,000,000 shares.
 
 During
        2006, the Company issued 15,000,000 shares of its common stock at a conversion
        price of $0.01 per share for the conversion of the bridge financing of $150,000,
        2,500,000 shares for employee bonuses valued at $70,000 or $0.028 per share,
        9,460,350 shares issued as compensation to our chief executive officer valued
        at
        $189,207 or $0.02 per share and 6,000,000 shares valued at $156,000 or $0.026
        per share as officer bonus, 500,000 shares to a director as compensation
        for his
        guarantee of a line of credit of the Company valued at $8,500 or $0.017 per
        share, 2,500,000 shares for professional services valued at $45,000 or $0.018
        per share and 15,154,068 shares for professional fees valued at $394,006
        or
        $0.026 per share and 1,780,000 shares valued at $35,948 to vendors in settlement
        of expenses and accrued liabilities.  All prices were the market price
        as of the date of issuance.
 
 During
        March 2005, the Company entered into a stock subscription agreement with
        a
        shareholder of the Company (“Subscriber”) and issued 3,500,000 shares of common
        stock to the Subscriber for $700,000 receivable from the Subscriber. During
        March 2005, the Company also sold its real property, consisting of its
        manufacturing facilities located in Heber City, Utah, to the Subscriber.
        The
        Subscriber paid $402,000 of liens on the property in excess of the $900,000
        sales price, which resulted in the Company issuing the Subscriber a promissory
        note payable in the amount of $402,000 bearing interest at 10% per annum.
        Upon
        the sale of this real estate, the Company entered into a verbal rental agreement
        with the Subscriber whereby the Company would pay $10,000 per month rent
        for the
        real estate that was sold. In addition to the foregoing, the Company issued
        1,500,000 shares of its common stock to the Subscriber in February 2005 for
        $150,000 and issued 1,577,034 shares to the Subscriber in March 2005 as
        financing fees, valued at $80,523, the market value of the Company’s common
        stock on the date of issuance.
 
 During
        March, April and May of 2005, the Company collected $265,258 of the receivable
        from the Subscriber and in June 2005, the Company was informed by the Subscriber
        that the balance of the receivable would not be paid. The subscription agreement
        provided the Company with the right to offset any and all obligations that
        the
        Company may have to the Subscriber against the amount due from the Subscriber.
        Upon notification that the balance of the subscription agreement would not
        be
        paid, the Company offset the $402,000 note payable to the Subscriber and
        related
        accrued interest of $9,802 against the unpaid balance of $434,742 receivable
        from the Subscriber. The remaining $22,940 was offset against the $10,000
        per
        month rental payments. The Company has not made any payments since the inception
        of the verbal rental agreement expect for the amount offset. During 2007,
        the
        Subscriber forgave the amounts due pursuant to the verbal rental agreement,
        in
        conjunction with the Subscriber’s sale of the real estate described
        herein.
 
 During
        2005, the Company issued 1,478,571 shares of its common stock to related
        parties
        consisting of 550,000 shares for director fees valued at $33,000, or $0.06
        per
        share, 250,000 shares as an officer’s bonus valued at $12,500, or $0.05 per
        share, 428,571 shares for the settlement of $12,500 of accrued liabilities
        and
        $12,500 of notes payable, at $0.06 per share, and 250,000 shares for services
        valued at $3,250, or $0.01 per share. In addition, the Company issued 400,000
        shares for $20,000 of cash, or $0.05 per share, 3,097,222 shares for $30,361
        of
        consulting fees and employee bonuses valued at $0.01 per share, and 794,652
        shares in settlement of $67,955 of accrued liabilities. The shares were valued
        at their market value on the date of issuance. As further discussed in Note
        4,
        the Company issued 1,100,000 shares of common stock for $41,875 of financing
        costs.
 
  F-17
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 In
        connection with the termination of a consulting agreement, a consultant returned
        3,000,000 unvested shares of common stock to the Company on June 1, 2005.
        The
        3,000,000 shares were issued in 2004 and were valued at $150,000, or $0.05
        per
        share. The cancellation of the shares resulted in the reversal of the related
        $112,500 of prepaid consulting expense during 2005.
 
 
 NOTE
        8 - STOCK WARRANTS
 
 Prior
        to
        December 31, 2005, the Company issued warrants to purchase 4,650,000 shares
        of
        common stock at prices ranging from $0.20 to $0.50 per share.
 
 During
        February, 2006, the Company issued five year warrants to purchase an aggregate
        of 8,000,000 shares of its common stock at an exercise price of $0.01 per
        share
        pursuant to the Engagement Letter as discussed in Note 6.  In
        addition, the Company issued three year warrants to purchase an aggregate
        of
        8,000,000 shares of its common stock to Pointe pursuant to the investment
        banking agreement as discussed in Note 6. These warrants were each valued
        at
        $125,892 and were recorded as prepaid expenses in the accompanying balance
        sheet
        of December 31, 2006.  The values are being amortized to general and
        administrative expenses in the accompanying statement of operations for the
        year
        ended December 31, 2006 over the lives of the respective agreements of 2
        years
        and one year, respectively. Also, the Company, pursuant to the Engagement
        Letter
        issued five year warrants to purchase an aggregate of 4,500,000 shares of
        its
        common stock at an exercise price of $0.01 per share valued at
        $76,410.
 
 In
        March,
        2006 the Company issued three year warrants purchase 7,000,000 shares of
        its
        common stock at an exercise price of $0.01 per share a to a consultant to
        the
        Company for marketing services.  The warrant was valued at $116,935
        and was charged to marketing and selling expense in the accompanying statement

        of operations for the year ended December 31, 2006.
 
 The
        estimated fair values of the above warrants were calculated using the Black
        Scholes method and the following assumptions.
 
 Closing
                  price for the Company's common stock
              
              $0.018  to
                  $0.02Estimated
                  volatility
              
              130%
                  to 153%Risk
                  free interest rate
              
              4.77%Expected
                  dividend rate
              
              0%
 
 The
        following summarizes the outstanding warrants as of December 31,
        2006:
 
 Exercise
                  Price
              
              Warrants
                  Outstanding
              
              Weighted-Average
                  Remaining Contractual Life (Years)
              
              Number
                  Exercisable$0.01
              
              27,500,000
              
              3.1
              
              27,500,000$0.20
              
              2,912,500
              
              0.5
              
              2,912,500$0.50
              
              281,250
              
              0.5
              
              281,250$0.35
              
              1,456,250
              
              0.5
              
              1,456,25032,150,000
              
              
              
              32,150,000
 
  F-18
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 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, 2006 and 2005 are as follows:
 
 December
                  31,
              
              2006
              
              
              2005Net
                  Operating Loss Carryforwards:Federal
              
              $
              8,505,817
              
              
              $
              7,854,968State
              
              
              1,316,690
              
              
              
              1,215,939Allowance
                  for doubtful accounts
              
              
              9,473
              
              
              
              9,064Total
                  deferred income tax assets
              
              
              9,831,980
              
              
              
              9,079,971Valuation
                  allowance
              
              
              (9,601,838
              )
              
              
              (8,955,467
              )Deferred
                  income tax liability - intangible assets
              
              
              (230,142
              )
              
              
              (124,504
              )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,
              
              2006
              
              
              2005Federal
                  tax benefit at statutory rate (34%)
              
              $
              (607,628
              )
              
              $
              (475,202
              )State
                  tax benefit, net of federal effect
              
              
              (58,976
              )
              
              
              (46,123
              )Non-deductible
                  and other items
              
              
              20,233
              
              
              
              (4,012
              )Change
                  in valuation allowance
              
              
              646,371
              
              
              
              525,337Provision
                  for Income Taxes
              
              $
              -
              
              
              $
              -
 
 
 NOTE
        11 – SUBSEQUENT EVENTS
 
 In
        May
        2007 the Company entered into a Master Lease Line with Gulf Pointe Capital,
        LLC.  The terms of the lease line are a credit limit of $500,000 that
        can be used for various new and used tier one production, material handling,
        computer, technology and fixture related equipment.  To date the
        Company has drawn $205,600 of the available credit.  The amounts
        advanced bear interest at a rate of 21.5% and are payable in 36 equal
        installments of principal and interest.
 
 In
        July
        2007, the Company issued a 12% convertible promissory note for $250,000 and
        a
        five year warrant to purchase 5,000,000 shares of its common stock at an
        exercise price of $0.075 to Aspen Opportunity Fund LP in exchange for proceeds
        of $250,000.  The note is convertible at a rate of $0.05 per share for
        5,000,000 shares of common stock.  The shares issuable upon conversion
        and the shares underlying the warrants have certain registration rights and
        are
        required to file a registration statement no later than March 31,
        2008.  Should the Company fail to file the registration statement by
        the required date, the registration rights agreement stipulates penalties
        of 1%
        of the purchase price per month as liquidated damages.  Should the
        Company be unable to have the registration statement declared effective within
        120 days, the same penalty of 1% per month will be assessed.  The
        penalty is payable in either cash or stock at the option of the note
        holder.
 
  F-19
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 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
        $100,000 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 shares underlying the warrants
        have certain registration rights and the Company is required to file a
        registration statement no later than March 31, 2008.  Should the
        Company fail to file the registration statement by the required date, the
        registration rights agreement stipulates penalties of 1% of the purchase
        price
        per month as liquidated damages.  Should the Company be unable to have
        the registration statement declared effective within 120 days, a penalty
        of 1%
        per month of the total warrant exercise price of $300,000 will be
        assessed.
 
 In
        October, 2007 the Company issued three year warrants to purchase 1,000,000
        shares of its common stock to a vendor at an exercise price of $0.05 for
        services.
 
 Through
        November 30, 2007, an aggregate of $1,046,000 of the convertible promissory
        notes plus $118,079 of accrued interest have been converted at the conversion
        price of $0.05 per share into an aggregate of 23,281,549 shares of common
        stock.
        In addition, the Company issued an aggregate of 20,920,000 three year warrants
        to purchase the Company’s common stock at an exercise price of $0.075 per
        share.
 
 The
        Company has agreements with three vendors to issue three year warrants to
        purchase of an aggregate of 4,500,000 shares of common stock at a price of
        $0.05
        per share upon the achievement of certain performance milestones as defined
        in
        the respective agreements.  None of the contractually defined
        milestones have been achieved and no warrants have been issued pursuant to
        these
        agreements.
 
 Administrative
        Proceeding – U.S. Securities and Exchange Commission
 
 One
        September 27, 2007, the Commission entered an order instituting a proceeding
        under Section 12(j) of the Securities Exchange Act of 1934 (“1934 Act”) naming
        us as a respondent.  This administrative proceeding has file no.
        3-12843.
 
 Section
        12(j) empowers the Commission to revoke a company’s registration under the 1934
        Act for not filing the required periodic reports such as Form 10-QSB’s and Form
        10-KSB’s. The order states that we have not filed periodic reports since we
        filed a report on Form 10-QSB for the period ended March 31,
        2005.  The order also set a hearing date which has since been
        postponed.  We answered the allegations of the Order.  On
        November 1, 2007, Administrative Law Judge Kelly allowed the parties to proceed
        by summary disposition.  Recently we filed two of the delinquent
        reports and we intend to file the other delinquent reports with
        dispatch.  Our plan is to file the most delinquent reports
        first.
 
 Section
        12(j) provides that the Commission may suspend the trading of our shares
        for a
        period of up to twelve months.
  F-20
  DIATECT
        INTERNATIONAL CORPORATION
 NOTES
        TO FINANCIAL STATEMENTS
 
 
 U.S.
        Securities
        and Exchange Commission ,  On October 1, 2007, the Company and
        its acting president and a director through their attorney accepted service
        of a
        Complaint filed on September 24, 2007, by the U.S. Securities and Exchange
        Commission in the U.S. District Court, District of Utah, Central Division
        having
        Case No.: 2:07cv00709.  The caption on the Complaint is Securities and Exchange
        Commission
        v. Diatect International Corporation et al. The four
        defendants are the acting president who is also a director, a former officer
        and
        director, a former director, and the Company.   The allegations
        of the Complaint claim that the Defendants engaged in a transaction in 2003
        involving the sale of mining claims located in the State of Oregon which
        transaction was improperly recorded on the Company’s financial statements
        causing the overstatement of revenues and assets.   The
        allegations of the Complaint also claim that certain revenues were improperly
        recorded in the Company’s 2002 financial statements because the sales were
        consignment sales and not actual sales.   The Complaint alleges
        various violations of the federal securities laws and regulations promulgated
        thereunder including violations of the anti-fraud provisions and violations
        of
        regulations pertaining to periodic reports filed by the Company with the
        SEC in
        2003 and 2004.   On April 14, 2005, the Company issued restated
        financial statement as of December 31, 2004, which restated the sale of the
        mining claims and our revenues.  The Complaint seeks injunctive action
        against the defendants including the Company and seeks fines from the three
        individual defendants, and from two individual defendant’s disgorgement of stock
        sale proceeds and a bar as an officer and director.  We intend to
        vigorously defend the allegations of the Complaint.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 F-21