UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q








[ X ]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934





For the
quarterly period ended June 30, 2009





[    ]
Transition Report Under Section 13 or 15(d) of the Exchange Act





For the
transition period from_____ to _____





Commission
File Number: 0-10147





DIATECT INTERNATIONAL
CORPORATION


(Exact
name of registrant as specified 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)








Check
whether the registrant (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 registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No
[  ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer 
              
              Accelerated
      filer Non-accelerated
      filer 
              
              Smaller
      reporting company x




Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act) YES  NO x





As of
August 19, 2009 the issuer had 215,350,959 shares of common stock, no par value,
outstanding.














Page
      NumberPART
      I  Financial InformationITEM
      1. Condensed Financial Statements (Unaudited)Balance
      Sheets as of June 30, 2009 and December 31, 2008
                                        1Statements of Operations for the
      Three and Six Months Ended June 30, 2009 and 2008
                                        2Statements of Cash Flows for the
      Six Months Ended June 30, 2009 and 2008
                                        3Notes to Unaudited Condensed
      Financial Statements
                                        5ITEM
      2. Management’s Discussion and Analysis or Plan of
    Operation.
                                        15ITEM
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                                        17ITEM
      4T. Controls and Procedures.
                                        17PART
      II Other InformationITEM
      1. Legal Proceedings
                                        18ITEM
      1A. Risk Factors
                                        18ITEM
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
                                        18ITEM
      6. Exhibits.
                                        19Signatures
                                        20












DIATECT INTERNATIONAL
      CORPORATIONCONDENSED BALANCE
      SHEETS(Unaudited)June 30,
                                                                                                        
                                                                                                        
                                                                                                        December
31,2009
                                                                                                        
                                                                                                        
                                                                                                        2008ASSETSCurrent
      AssetsCash
                                                                                                        
                                                                                                        $
                                                                                                        27,902
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        587Trade
      accounts receivable, net of allowance for doubtfulaccounts of $16,000 and $16,000,
      respectively
                                                                                                        
                                                                                                        
                                                                                                        151,986
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        51,814Inventory
                                                                                                        
                                                                                                        
                                                                                                        52,726
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        38,416Deferred
      loan costs and other current assets
                                                                                                        
                                                                                                        
                                                                                                        161,739
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        135,719Total
      Current Assets
                                                                                                        
                                                                                                        
                                                                                                        394,353
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        226,536Property
      and Equipment,
      net of accumulated depreciation of$226,166 and $189,894,
      respectively
                                                                                                        
                                                                                                        
                                                                                                        134,980
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        182,286Total
      Assets
                                                                                                        
                                                                                                        $
                                                                                                        529,333
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        408,822LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesTrade
      accounts payable
                                                                                                        
                                                                                                        $
                                                                                                        901,451
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        929,327Accrued
      liabilities
                                                                                                        
                                                                                                        
                                                                                                        327,871
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        155,639Accrued
      interest payable
                                                                                                        
                                                                                                        
                                                                                                        689,081
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        606,556Accrued
      settlement obligations
                                                                                                        
                                                                                                        
                                                                                                        515,925
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        502,251Deferred
      gain on sale and leaseback of assets
                                                                                                        
                                                                                                        
                                                                                                        32,382
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        50,523Notes
      Payable, net of discount of $12,430 and $0,
      respectively
                                                                                                        
                                                                                                        
                                                                                                        3,459,599
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        2,749,996Current
      portion of capital lease obligations
                                                                                                        
                                                                                                        
                                                                                                        94,194
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        79,812Total
      Current Liabilities
                                                                                                        
                                                                                                        
                                                                                                        6,020,503
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        5,074,104Long-Term
      LiabilitiesCapital
      lease obligations, net of current portion
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        52,041Total
      Long-Term Liabilities
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        52,041Stockholders'
      DeficitCommon
      stock, no par value; 500,000,000 shares authorized;215,350,959 shares and 215,350,959 shares
      outstanding, respectively
                                                                                                        
                                                                                                        
                                                                                                        25,589,213
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        25,589,213Warrants
      outstanding
                                                                                                        
                                                                                                        
                                                                                                        2,568,643
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        2,318,751Accumulated
      deficit
                                                                                                        
                                                                                                        
                                                                                                        (33,649,026
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (32,625,287
                                                                                                        )Total
      Stockholders' Deficit
                                                                                                        
                                                                                                        
                                                                                                        (5,491,170
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (4,717,323
                                                                                                        )Total
      Liabilities and Stockholders' Deficit
                                                                                                        
                                                                                                        $
                                                                                                        529,333
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        408,822







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





1





DIATECT INTERNATIONAL
      CORPORATIONCONDENSED STATEMENTS OF
      OPERATIONS(Unaudited)Three Months Ended June
      30,
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              Six Months Ended June
      30,2009
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              2008
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              2009
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              2008Sales
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              366,947
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              633,934
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              555,374
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              1,006,898Cost of Goods
      Sold
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              155,788
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              129,560
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              274,195
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              243,383Gross
Profit
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              211,159
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              504,374
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              281,179
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              763,515ExpensesMarketing and
      selling
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              138,825
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              482,436
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              259,512
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              782,837General and
      administrative
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              489,520
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              588,101
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              843,782
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,184,289Total
    Expenses
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              628,345
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,070,537
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,103,294
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              1,967,126Loss from
      Operations
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (417,186
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (566,163
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (822,115
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (1,203,611
                                                                                                                                                                                                              )Other Income
      (Expense)Interest
      expense
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (128,842
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (138,459
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (201,624
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (255,573
                                                                                                                                                                                                              )Gain from termination of
      debt
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              -
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              4,283Net Other Income
      (Expense)
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (128,842
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (138,459
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (201,624
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              (251,290
                                                                                                                                                                                                              )Net Income
      (Loss)
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (546,028
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (704,622
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (1,023,739
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (1,454,901
                                                                                                                                                                                                              )Basic and Diluted Loss Per
      Share
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (0.00
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (0.00
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (0.00
                                                                                                                                                                                                              )
                                                                                                                                                                                                              
                                                                                                                                                                                                              $
                                                                                                                                                                                                              (0.01
                                                                                                                                                                                                              )Weighted-Average Common Shares
      Outstanding
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              215,350,959
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              208,309,726
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              215,350,959
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              
                                                                                                                                                                                                              205,603,078








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





2




DIATECT INTERNATIONAL
      CORPORATIONCONDENSED STATEMENTS OF CASH
      FLOWS(Unaudited)Six
      Months Ended June 30,2009
                                                                  
                                                                  
                                                                  2008Cash
      Flows from Operating ActivitiesNet
      loss
                                                                  
                                                                  $
                                                                  (1,023,739
                                                                  )
                                                                  
                                                                  $
                                                                  (1,454,901
                                                                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                                                                  
                                                                  
                                                                  45,513
                                                                  
                                                                  
                                                                  
                                                                  46,310Amortization
      of discount on notes payable
                                                                  
                                                                  
                                                                  33,474
                                                                  
                                                                  
                                                                  
                                                                  133,257Amortization
      of loan costs
                                                                  
                                                                  
                                                                  146,437
                                                                  
                                                                  
                                                                  
                                                                  94,446Gain
      from debt termination
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (4,283
                                                                  )Net
      gain on disposal of property and equipment
                                                                  
                                                                  
                                                                  (16,348
                                                                  )
                                                                  
                                                                  
                                                                  (18,141
                                                                  )Issuance
      of stock for services
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  163,200Issuance
      of warrants for services
                                                                  
                                                                  
                                                                  103,500
                                                                  
                                                                  
                                                                  
                                                                  87,000Changes
      in operating assets and liabilities:Accounts
      receivable
                                                                  
                                                                  
                                                                  (100,171
                                                                  )
                                                                  
                                                                  
                                                                  113,031Inventory
                                                                  
                                                                  
                                                                  (14,311
                                                                  )
                                                                  
                                                                  
                                                                  (27,619
                                                                  )Deferred
      loan costs and other current assets
                                                                  
                                                                  
                                                                  (21,969
                                                                  )
                                                                  
                                                                  
                                                                  (12,757
                                                                  )Accounts
      payable
                                                                  
                                                                  
                                                                  (27,875
                                                                  )
                                                                  
                                                                  
                                                                  389,538Accrued
      liabilities
                                                                  
                                                                  
                                                                  172,232
                                                                  
                                                                  
                                                                  
                                                                  (60,718
                                                                  )Accrued
      interest payable
                                                                  
                                                                  
                                                                  82,525
                                                                  
                                                                  
                                                                  
                                                                  79,678Net
      Cash Used in Operating Activities
                                                                  
                                                                  
                                                                  (620,732
                                                                  )
                                                                  
                                                                  
                                                                  (471,959
                                                                  )Cash
      Flows from Investing ActivitiesPurchase
      of property and equipment
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (2,834
                                                                  )Net
      Cash Flows used in Investing Activities
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (2,834
                                                                  )Cash
      Flow from Financing ActivitiesProceeds
      from borrowings under notes payable
                                                                  
                                                                  
                                                                  723,658
                                                                  
                                                                  
                                                                  
                                                                  -Cash
      paid for loan costs
                                                                  
                                                                  
                                                                  (50,000
                                                                  )
                                                                  
                                                                  
                                                                  -Proceeds
      from exercise of warrants
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  72,500Proceeds
      from issuance of stock and warrants
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  490,000Principal
      payments on notes payable
                                                                  
                                                                  
                                                                  (1,625
                                                                  )
                                                                  
                                                                  
                                                                  (11,815
                                                                  )Principal
      payments on lease obligation
                                                                  
                                                                  
                                                                  (37,660
                                                                  )
                                                                  
                                                                  
                                                                  (29,797
                                                                  )Accrued
      settlement obligation changes
                                                                  
                                                                  
                                                                  13,674
                                                                  
                                                                  
                                                                  
                                                                  (37,000
                                                                  )Net
      Cash Provided by Financing Activities
                                                                  
                                                                  
                                                                  648,047
                                                                  
                                                                  
                                                                  
                                                                  483,888Net
      Increase in Cash
                                                                  
                                                                  
                                                                  27,315
                                                                  
                                                                  
                                                                  
                                                                  9,095Cash
      at Beginning of Period
                                                                  
                                                                  
                                                                  587
                                                                  
                                                                  
                                                                  
                                                                  9,864Cash
      at End of Period
                                                                  
                                                                  $
                                                                  27,902
                                                                  
                                                                  
                                                                  $
                                                                  18,959





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





3




DIATECT INTERNATIONAL
      CORPORATIONCONDENSED STATEMENTS OF CASH FLOWS
      (continued)(Unaudited)Six
      Months Ended June 30,2009
                                                        
                                                        
                                                        2008Supplemental
      Disclosure of Cash Flow InformationCash
      paid for interest
                                                        
                                                        $
                                                        12,711
                                                        
                                                        
                                                        $
                                                        15,001Supplemental
      Schedule of Noncash Investing andFinancing
      ActivitiesDiscount
      on issuance of Notes payable and warrants
                                                        
                                                        $
                                                        45,904
                                                        
                                                        
                                                        $
                                                        -Purchase
      of equipment under capital lease obligations
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        15,067





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





4





DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS








NOTE
1 – BUSINESS AND ORGANIZATION, BASIS OF PRESENTATION





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.




Basis of
Presentation –
The unaudited condensed financial statements included in this Form 10-Q have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, these financial statements do not include all of the disclosures
required by U.S. generally accepted accounting principles for complete financial
statements.  These unaudited interim financial statements should be
read in conjunction with the audited financial statements for the fiscal year
ended December 31, 2008 in the Company’s annual report on Form
10-K.  The financial information furnished herein reflects all
adjustments consisting of normal, recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the Company's financial
position, the results of operations and cash flows for the periods
presented.  Operating results for the period ended June 30, 2009 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2009.




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





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 $555,374 and incurred a net loss of $1,023,739
during the six months ended June 30, 2009. At June 30, 2009 the Company had a
total stockholders’ deficit of $5,491,170 and its current liabilities exceeded
current assets by $5,626,150.
 
 The
ability of the Company to continue operations in the immediate short term is
totally dependent upon obtaining additional financing and over the longer term,
the Company must be able to generate increased  sales and a net profit
even though no assurance can be given that such events will occur.
 
 As a
result of reduced sales and increasing losses, the Company has arranged a series
of short term bridge loans in order to provide required working capital. As of
August 19, 2009, these bridge loans are in default. To address the immediate
need for additional capital, the Company is actively seeking sources of debt
and/or equity financing.
 
 In
addition, our independent registered accountants, Hansen Barnett and Maxwell,
P.C. expressed substantial doubt about the Company’s ability to continue as a
going concern in their audit opinion on our financial statements for the year
ended December 31, 2008.


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 has not had any significant credit losses in
the past and has maintained allowances for doubtful accounts and such allowances
in the aggregate did not exceed management’s estimations.





Trade Accounts
Receivable and Allowance for Doubtful Accounts - Trade accounts
receivables and other 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 standard 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.





5





DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS








Prepaid expenses
and unamortized loan costs-Prepaid expenses and
unamortized loan costs are comprised of prepaid insurance and the unamortized
portion of loan costs.





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. Equipment under capital
leases is amortized over the shorter of the estimated useful lives of the
equipment or the lease term. Leasehold improvements are depreciated over the
lesser of the remaining term of the lease or the remaining useful life of the
asset.





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 pesticides to retailers,
agricultural concerns and directly to the public through a Company and an
affiliate website. Revenue from the sale of its products are recognized 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 billed to customers are
recorded as revenue and the associated costs are recorded as marketing
expenses.  Total shipping and handling costs included in marketing
expenses for the six months ended June 30, 2009 and 2008 were $49,815 and
$79,970, respectively.





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.





6





DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED 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 June 30, 2009 and 2008, there were
potentially dilutive common shares outstanding as presented in the following
table that were not included in the computation of diluted loss per share as
their effect would have been anti-dilutive.


June 30,2009
                                        
                                        
                                        2008Outstanding
      warrants
                                        
                                        
                                        107,717,153
                                        
                                        
                                        
                                        78,460,444Convertible promissory notes
      convertible into:Common
stock
                                        
                                        
                                        5,500,000
                                        
                                        
                                        
                                        6,500,000Warrants
                                        
                                        
                                        500,000
                                        
                                        
                                        
                                        1,500,000Total potentially dilutive common
      shares
                                        
                                        
                                        113,717,153
                                        
                                        
                                        
                                        86,460,444





Share Based
Payments– The Company accounts for stock-based compensation expense in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 123(R), “Share-Based Payment” (SFAS
123R). Under SFAS 123R, stock-based compensation expense reflects the fair value
of stock-based awards measured at the grant date, is recognized over the
relevant service period, and is adjusted each period for anticipated
forfeitures. The Company estimates the fair value of each stock-based award on
the date of grant using the Black-Scholes option valuation model. The
Black-Scholes option valuation model incorporates assumptions as to stock price
volatility, the expected life of options, a risk-free interest rate and dividend
yield.  The Company has no stock options issued or outstanding for any
of the periods presented.





Recently Issued
Accounting Pronouncements-In June 2009, the FASB issued
SFAS No. 168, The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles or SFAS No. 168. SFAS No. 168 will become the
single source of authoritative nongovernmental U.S. GAAP, superseding existing
FASB, American Institute of Certified Public Accountants (AICPA), Emerging
Issues Task Force (EITF), and related accounting literature. SFAS No. 168
reorganizes the thousands of GAAP pronouncements into roughly 90 accounting
topics and displays them using a consistent structure. Also included is relevant
SEC guidance organized using the same topical structure in separate sections.
SFAS No. 168 will be effective for financial statements issued for reporting
periods ending after September 15, 2009. This will have an impact on our
financial disclosures since all future references to authoritative accounting
literature will be references in accordance with SFAS No. 168.





7





DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS








NOTE
3 – INVENTORY





Inventory
is comprised of the following:




June 30,
                          
                          
                          December
31,2009
                          
                          
                          2008Raw
    materials
                          
                          $
                          30,041
                          
                          
                          $
                          18,352Finished
    goods
                          
                          
                          22,685
                          
                          
                          
                          20,064Total
    Inventory
                          
                          $
                          52,726
                          
                          
                          $
                          38,416








NOTE
4 – PROPERTY AND EQUIPMENT





The
components of property and equipment are as follows:




EstimatedUseful Life
                                  
                                  
                                  June 30,
                                  
                                  
                                  December
31,in Years
                                  
                                  
                                  2009
                                  
                                  
                                  2008Computer
      equipment
                                  
                                  3 to 5
                                  
                                  
                                  $
                                  77,744
                                  
                                  
                                  $
                                  80,613Office furniture and
      equipment
                                  
                                  
                                  5
                                  
                                  
                                  
                                  40,724
                                  
                                  
                                  
                                  45,724Manufacturing
      equipment
                                  
                                  3 to 10
                                  
                                  
                                  
                                  237,743
                                  
                                  
                                  
                                  240,908Leasehold
      improvements
                                  
                                  
                                  15
                                  
                                  
                                  
                                  4,935
                                  
                                  
                                  
                                  4,935Total Property and
      Equipment
                                  
                                  
                                  
                                  
                                  
                                  
                                  361,146
                                  
                                  
                                  
                                  372,180Less: Accumulated
      depreciation
                                  
                                  
                                  
                                  
                                  
                                  
                                  (226,166
                                  )
                                  
                                  
                                  (189,894
                                  )Net Property and
      Equipment
                                  
                                  
                                  
                                  
                                  
                                  $
                                  134,980
                                  
                                  
                                  $
                                  182,286





Depreciation
expense for the six months ended June 30, 2009 and 2008 was $45,513 and $46,310,
respectively.





NOTE
5 – NOTES PAYABLE





Notes
payable are classified as current liabilities and are comprised of the
following:





8





DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS




June 30,
                          
                          
                          December
31,2009
                          
                          
                          2008Revolving line of credit with
      financial institution
                          
                          $
                          49,683
                          
                          
                          $
                          49,683Accounts receivable line of
      credit, in default/non compliance
                          
                          
                          185,000
                          
                          
                          
                          185,000Unsecured 10% notes payable to
      investors, in default
                          
                          
                          292,250
                          
                          
                          
                          292,250Unsecured 12% notes payable to
      investors, in default
                          
                          
                          95,000
                          
                          
                          
                          95,000Unsecured 15% notes payable to
      investors, in default
                          
                          
                          32,500
                          
                          
                          
                          32,500Promissory Note, 24%, secured by
      EPA Labels, in default
                          
                          
                          45,000
                          
                          
                          
                          45,000Unsecured 15% notes payable to
      investor, net of discount of $2,108, due July 30,
    2009
                          
                          
                          97,892
                          
                          
                          
                          -Unsecured 15% notes payable to
      investor, net of discount of $10,322, due July 31,
    2009
                          
                          
                          489,678
                          
                          
                          
                          -Unsecured 20% note payable to
      investor, due July 31, 2009
                          
                          
                          100,000
                          
                          
                          
                          -Unsecured 12% convertible
      promissory notes payable
                          
                          
                          275,000
                          
                          
                          
                          275,000Unsecured 5% notes payable to
      shareholders, in default
                          
                          
                          1,232,970
                          
                          
                          
                          1,210,937Unsecured 5% notes payable to
      vendors, in default
                          
                          
                          564,626
                          
                          
                          
                          564,626Total Notes
      Payable
                          
                          $
                          3,459,599
                          
                          
                          $
                          2,749,996








Revolving Lines
of Credit – The Company currently has unsecured, revolving credit
notes with a financial institution totaling $49,683. The line of credit bears
interest at 9.0% per annum, is due on demand and requires monthly interest only
payments. The line is unsecured and is personally guaranteed by a former
director of the Company.





Accounts
Receivable Line of Credit – On September 20, 2007 the Company
entered into an accounts receivable loan agreement with Aspen Opportunity Fund,
L.P. The loan as amended has a total available amount of $250,000 and 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.  At June 30, 2009 the Company’s borrowing base is less
than the amounts advanced under the loan.





Unsecured Notes
Payable – The Company has borrowed money from several entities, including
shareholders of the Company, with various terms including demand promissory
notes. The notes are unsecured and bear interest at rates from 5% to 15% and are
in default at June 30, 2009.





On March 1, 2009 the Company issued a
$100,000 note payable due on August 1, 2009 bearing interest at a rate of 15%
per annum and a two-year warrant to purchase 1,000,000 shares of common stock at
an exercise price of $0.025 per share.  The proceeds of the note were
allocated among the note and the warrant, resulting in the recording of a
discount to the note payable in the amount of $9,910, representing the fair
value of the warrant issued.  The discount is being amortized over the
term of the note as additional interest expense.  A total of $7,802 of
additional interest expense was recognized during the six months ended June 30,
2009.  The value of the warrant was determined using the Black Scholes
valuation method and the following assumptions: closing market price of common
stock of $0.02,risk free interest rate of 0.89%, expected dividend yield
of 0%, expected volatility of 128% and an expected life of 2 years.





On March 30, 2009 the Company issued a
$100,000 note payable due on April 30, 2009 bearing interest at a rate of 20%
per annum and a two-year warrant to purchase 833,333 shares of common stock at
an exercise price of $0.03 per share. The Note is personally guaranteed by an
affiliate of the Company. The proceeds of the note were allocated among the note
and the warrant, resulting in the recording of a discount to the note payable in
the amount of $7,692, representing the fair value of the warrant
issued.  The discount was fully amortized over the term of the note as
additional interest expense.  The value of the warrant was determined
using the Black Scholes valuation method and the following assumptions: closing
market price of common stock of $0.02,risk free interest rate of 0.84%,
expected dividend yield of 0%, expected volatility of 115% and an expected life
of 2 years. On April 30, 2009, the Company entered into a promissory note
agreement in the amount of $100,000 that satisfied and replaced the March 30,
2009 note.  This second note bears interest at the rate of 20% per
annum and is due and payable on May 31, 2009.  Pursuant to this
note, the Company entered into a common stock purchase warrant agreement
granting the noteholder the right to purchase a total of 1,250,000 shares
of the Company’s common stock at a price of $0.02 per share for two years from
the date of the agreement. The estimated fair value of the warrant of
$15,213 was recorded as additional loan costs over the remaining term of the
note.  On May 31, 2009 the Company entered into a promissory note agreement
in the amount of $100,000 that satisfied and replaced the April 30, 2009
note.  This third note bears interest at the rate of 20% per annum and
is due and payable on June 15, 2009.  Pursuant to this note, the
Company entered into a common stock purchase warrant agreement granting the
noteholder the right to purchase a total of 500,000 shares of the Company’s
common stock at a price of $0.03 per share for two years from the date of the
agreement. The estimated fair value of the warrant of $7,970 was recorded
as additional loan costs over the remaining term of the note. On June 15,
2009 the Company entered into a promissory note agreement in the amount of
$100,000 that satisfied and replaced the May 31, 2009 note.  This
fourth note bears interest at the rate of 20% per annum and is due and
payable on July 31, 2009.  Pursuant to this note, the Company entered
into a common stock purchase warrant agreement granting the noteholder the
right to purchase a total of 750,000 shares of the Company’s common stock
at a price of $0.03 per share for two years from the date of the
agreement. The estimated fair value of the warrant of $8,985 was recorded
as additional loan costs over the remaining term of the note.  The value of the warrants issued pursuant to the April 30, May
31 and June 15, 2009notesweredetermined using the Black Scholes
valuation method and the following assumptions: closing market price of common
stock of $0.019-$0.025,risk free interest rate of 0.91
– 1.26%, expected dividend yield of 0%, expected volatility of 120% - 137% and
an expected life of 2 years.





9





DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS








On May 7,
2009, the Company entered into a promissory note agreement in the amount of
$500,000.  The note bears interest at the rate of 18% per annum and
is due and payable on July 31, 2009.  Pursuant to this note, the
Company entered into a common stock purchase warrant agreement granting the
noteholder the right to purchase a total of 3,000,000 shares of the
Company’s common stock at a price of $0.025 per share for two years from the
date of the agreement.  The proceeds of the note were allocated
among the note and the warrant, resulting in the recording of a discount to the
note payable in the amount of $28,302, representing the fair value of the
warrant issued.  The discount is being amortized over the term of the
note as additional interest expense.  A total of $17,980 of additional
interest expense was recognized during the six months ended June 30,
2009.





On May 7,
2009, the Company entered into a common stock purchase warrant agreement with
the co-guarantor of the $500,000 note and granted the right to purchase a total
of 3,000,000 shares of the Company’s common stock at a price of $0.025 per share
for two years from the date of the agreement. The value of the warrant of
$29,280 was recorded as loan costs and is being amortized over the term of the
loan.





Also on
May 7, 2009, the Company entered into a common stock purchase warrant agreement
with the guarantor of the April 30, 2009 note and the co-guarantor of the
$500,000 note and granted the right to purchase a total of 4,000,000 shares of
the Company’s common stock at a price of $0.025 per share for two years from the
date of the agreement. The co-guarantor is an affiliate of the Company. The
value of the warrant of $39,040 was recorded as loan costs and is being
amortized over the term of the loan.





10





DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS








The value of the warrants issued on May
7, 2009 were determined using the Black Scholes valuation method and the
following assumptions: closing market price of common stock of $0.02,risk free interest rate of 0.84%, expected dividend yield of 0%, expected
volatility of 120% and an expected life of 2 years.





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





Convertible
Promissory Notes Payable–The
Company has a past due 12% unsecured convertible promissory note with a face
amount of $25,000 issued in conjunction with a private placement in 2007. The
note is 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. The note
is convertible into 500,000 shares of common stock and a warrant to purchase
500,000 shares of common stock. The Company has the option to redeem the note at
its 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 July
2007, the Company issued a 12% convertible promissory note for $250,000 and
five-year warrants to purchase 5,000,000 shares of 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 investor received a beneficial conversion option
resulting in a discount which was fully amortized during 2008.





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





Notes Payable to
Vendors – In 2004, vendors converted outstanding accounts payables
into promissory notes that were due in 2008 and accrue interest at 5% per
annum.  These notes are presently in default.





NOTE
6 – SETTLEMENT OBLIGATIONS AND LITIGATION CLAIMS





Accrued
Settlement Obligations – 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:


June 30,
                                
                                
                                December
31,2009
                                
                                
                                2008Litigation
      Claim
                                
                                $
                                282,367
                                
                                
                                $
                                282,367Jack Stites
                                
                                
                                150,180
                                
                                
                                
                                150,180Other
                                
                                
                                83,378
                                
                                
                                
                                69,704Total
                                
                                $
                                515,925
                                
                                
                                $
                                502,251




11





DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS








Litigation Claim
- The Company has been threatened with litigation regarding a loan
agreement on which the statute of limitations was believed by management to have
expired.  Although the Company has not received a formal complaint
regarding this claim, the Company accrued an estimated loss in 2008 from this
threatened litigation in the amount of $282,367.


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





NOTE
7 – COMMITMENTS AND CONTINGENCIES





U.S. Securities
and Exchange Commission ,  The U.S. Securities and Exchange
Commission in the U.S. District Court, District of Utah, Central Division having
Case No.: 2:07cv00709.  The caption on the Complaint is Securities and Exchange Commission
v. Diatect International Corporation et al. The four
defendants were the former president who was also a director, a former officer
and director, a former director, and the Company.   The
allegations of the Complaint claim that the Defendants engaged in a transaction
in 2003 involving the sale of mining claims located in the State of Oregon which
transaction was improperly recorded on the Company’s financial statements
causing the overstatement of revenues and assets.   The
allegations of the Complaint also claim that certain revenues were improperly
recorded in the Company’s 2002 financial statements because the sales were
consignment sales and not actual sales.   The Complaint alleges
various violations of the federal securities laws and regulations promulgated
thereunder including violations of the anti-fraud provisions and violations of
regulations pertaining to periodic reports filed by the Company with the SEC in
2003 and 2004.   On May 17, 2004 the Company issued restated
financial statements as of December 31, 2003.  On April 14, 2005, the
Company issued restated financial statements as of December 31,
2004.  These filings restated the sale of the mining claims and
revenues for those years. The Complaint seeks injunctive action against the
defendants including the Company and seeks fines from the three individual
defendants, and from two individual defendant’s disgorgement of stock sale
proceeds and bars each from acting as an officer and director. In February,
2008 a scheduling conference was held and a tentative trial date has been set
for January, 2010. The Company is seeking to constructively resolve this
issue by settlement with the SEC.





On
January 1, 2007, the Company entered into a five year lease with Aspen Capital
Management, LLC, requiring monthly rental payments of $12,000 plus taxes and
maintenance. The lease is renewable for two additional 5 year terms with 10%
increases of the rental payments to $13,200 per month and $14,520 per month,
respectively.





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





12





DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS








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





On May
22, 2007 the Company entered into a Master Lease Line with Gulf Pointe Capital,
LLC.  The terms of the lease line provide a credit limit of $500,000
that can be used for various new and used tier one production, material
handling, computer, technology and fixture related equipment. Upon entering
into the lease agreement, the Company sold certain manufacturing, computer and
office furniture and equipment to Pointe for $160,000 and leased the assets back
from Pointe under the terms of a three-year lease agreement. The assets sold had
a net book value of $51,152.  The resultant gain on sale of $108,848
was deferred and is being recognized over the three-year term of the capital
lease obligation. During the six months ended June 30, 2009 and 2008, the
Company recognized $18,142 and $18,142 of this gain, respectively.





In
conjunction with the Master Lease Line, the Company issued a five-year warrant
to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per
share. All of these warrants were fully vested in 2008. The Company had recorded
deferred loan costs related to the value of the warrants which is being
amortized over the term of the respective capital lease obligations. A total of
$20,226 and $58,362 was recorded as amortization expense during the six months
ended June 30, 2009 and 2008, respectively.





The
Company continues to have agreements with two vendors to issue three year
warrants to purchase of an aggregate of 3,750,000 shares of common stock at a
price of $0.05 per share upon the achievement of certain performance milestones
as defined in the respective agreements.  None of the contractually
defined milestones has been achieved and no warrants have been issued pursuant
to these agreements.





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





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








NOTE
8 - STOCK WARRANTS





On March
1, 2009 we issued two year warrants to purchase 1,000,000 shares of common stock
at an exercise price of $0.025 per share in conjunction with a $100,000 note
payable as discussed in Note 5.





On March
30, 2009 we issued two year warrants to purchase 833,333 shares of common stock
at an exercise price of $0.03 per share in conjunction with a $100,000 note
payable as discussed in Note 5.





13





DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS








On April
30, 2009 we issued two year warrants to purchase 1,250,000 shares of common
stock at an exercise price of $0.02 per share in conjunction with a $100,000
note payable as discussed in Note 5.





On May 7,
2009 we issued two year warrants to purchase 10,000,000 shares of common stock
at an exercise price of $0.025 per share in conjunction with a Note and related
co-guarantors as discussed in Note 5.





On May
31, 2009 we issued two year warrants to purchase 500,000 shares of common stock
at an exercise price of $0.03 per share in conjunction with a $100,000 note
payable as discussed in Note 5.





On June
15, 2009 we issued two year warrants to purchase 750,000 shares of common stock
at an exercise price of $0.03 per share in conjunction with a $100,000 note
payable as discussed in Note 5.




Warrants
to purchase 1,000,000 shares of common stock at an exercise price of $0.07 per
share expired during the six months ended June 30, 2009.





The
following summarizes the outstanding warrants as of June 30, 2009:




Weighted-AverageExercise
                                                
                                                
                                                Warrants
                                                
                                                
                                                Remaining
      Contractual
                                                
                                                
                                                NumberPrice
                                                
                                                
                                                Outstanding
                                                
                                                
                                                Life
(Years)
                                                
                                                
                                                Exercisable$0.01
                                                
                                                
                                                
                                                12,750,000
                                                
                                                
                                                
                                                1.6
                                                
                                                
                                                
                                                12,750,000$0.02
                                                
                                                
                                                
                                                1,250,000
                                                
                                                
                                                
                                                1.8
                                                
                                                
                                                
                                                1,250,000$0.025
                                                
                                                
                                                
                                                11,000,000
                                                
                                                
                                                
                                                2.9
                                                
                                                
                                                
                                                11,000,000$0.03
                                                
                                                
                                                
                                                2,083,333
                                                
                                                
                                                
                                                1.9
                                                
                                                
                                                
                                                2,083,333$0.05
                                                
                                                
                                                
                                                15,075,000
                                                
                                                
                                                
                                                2.8
                                                
                                                
                                                
                                                15,075,000$0.07
                                                
                                                
                                                
                                                11,500,000
                                                
                                                
                                                
                                                2.2
                                                
                                                
                                                
                                                5,500,000$0.075
                                                
                                                
                                                
                                                51,904,975
                                                
                                                
                                                
                                                1.3
                                                
                                                
                                                
                                                51,904,975$0.10
                                                
                                                
                                                
                                                1,000,000
                                                
                                                
                                                
                                                2.4
                                                
                                                
                                                
                                                1,000,000$0.13
                                                
                                                
                                                
                                                1,153,845
                                                
                                                
                                                
                                                1.1
                                                
                                                
                                                
                                                1,153,845107,717,153
                                                
                                                
                                                
                                                1.7
                                                
                                                
                                                
                                                101,717,153





NOTE
9 – SUBSEQUENT EVENTS




On July
31, 2009 the $100,000 note payable originally issued March 30, 2009 discussed in
Note 5 to the financial statements is in default.  No formal demand
has been made to the Company or the guarantor.
 
 On July
31, 2009 the $500,000 Note payable issued on May 7, 2009 is in default and will
bear interest from that date at a rate of 18%. On August 3, 2009 the Company
received a formal demand notice for immediate payment of the note and accrued
interest thereon.
 
 On August
11, 2009, the Company was served with a summons regarding a 12% promissory note
that was issued on August 1, 2008 and is in default. The principal amount of the
promissory note of $55,000.and related accrued interest are recorded on the
balance sheet as of June 30, 2009.


14





ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.




Forward
Looking Statements




We are
including the following cautionary statement in this Quarterly Report on Form
10-Q 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 Quarterly Report on Form 10-Q 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.





The
following discussion and analysis should be read in conjunction with the
Condensed Financial Statements and Notes thereto appearing elsewhere in this
Form 10-Q.





Overview




Diatect
International Corporation (the “Company”) is a developer and marketer of
non-toxic pesticide products, selling its products to wholesale distributors and
retail customers in the United States.  We also sell directly to the
consumer via our website at www.diatect.com.  The
Company was incorporated under the laws of the State of California in 1979 as
San Diego Bancorp., and we changed our name to Diatect International Corporation
in 1998.  During 2002, we consolidated our operations in Utah, moving
our administrative offices from Idaho and our manufacturing facilities from
Kansas.
 
 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 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. We rely on five registrations that we obtained
from the Environmental Protection Agency (EPA) that allowed us to formulate
eight labels for retail sales. These registrations are required for the
production and marketing of our insect control products. Obtaining EPA
registrations and approval of our labels represents an essential asset of the
Company and is the result of lengthy and costly effort.
 
 The
ability of the Company to continue operations in the immediate short term is
totally dependent upon obtaining additional financing and over the longer term,
the Company must be able to generate increased  sales and a net profit
even though no assurance can be given that such events will occur.
 
 Our
independent registered accountants, Hansen Barnett and Maxwell, P.C. expressed
substantial doubt about the Company’s ability to continue as a going concern in
their audit opinion on our financial statements for the year ended December 31,
2008.


15




Results
of Operations





Comparison
results for the three months ended June 30, 2009 and 2008





Revenues
for the three months ended June 30, 2009 were $367,000 as compared to $634,000
for the three months ended June 30, 2008, a decrease of $267,000. The decrease
is primarily due to a decrease in internet based sales.





Cost of
goods sold for the three months ended June 30, 2009 were $156,000 as compared to
$130,000 for the three months ended June 30, 2008, a decrease of $26,000. The
decrease is primarily due to lower sales volumes, but due to low production
volumes, this is offset by higher costs per unit sold.





Marketing
and selling expenses for the three months ended June 30, 2009 were $139,000 as
compared to $482,000 for the three months ended June 30, 2008, a decrease of
$343,000. The decrease is primarily due to decreases in internet marketing in
the three months ended June 30, 2009 when compared to the prior year
period.





General
and administrative expenses for the three months ended June 30, 2009 were
$490,000 as compared to $588,000 for the three months ended June 30, 2008, a
decrease of $98,000. The decrease is primarily due to decreases in professional
fees, consulting fees and amortization of loan costs.





Other
income and expense is comprised of interest expense and gain from termination of
debt. Interest expense was $129,000 for the three months ended June 30, 2009 as
compared to $138,000 for the three months ended June 30, 2008, a decrease of
$9,000.  Included in interest expense is the amortization of discount
related to the convertible promissory notes in the amount of $31,000 and $78,000
for the three months ended June 30, 2009 and 2008, respectively.  Gain
from termination of debt for the three months ended June 30, 2008 was $4,000 and
pertains primarily to the settlement of certain liabilities at less than the
recorded value.  There was no comparable amount for the three months
ended June 30, 2009.








Comparison
results for the six months ended June 30, 2009 and 2008





Revenues
for the six months ended June 30, 2009 were $555,000 as compared to $1,007,000
for the six months ended June 30, 2008, a decrease of $452,000. The decrease is
primarily due to a decrease in internet based sales.





Cost of
goods sold for the six months ended June 30, 2009 were $274,000 as compared to
$243,000 for the six months ended June 30, 2008, an increase of $31,000. The
decrease is primarily due to lower sales volumes, but due to low production
volumes, this is offset by higher costs per unit sold.





Marketing
and selling expenses for the six months ended June 30, 2009 were $260,000 as
compared to $783,000 for the six months ended June 30, 2008, a decrease of
$523,000. The decrease is primarily due to decreases in internet marketing in
the six months ended June 30, 2009 when compared to the prior year
period.





General
and administrative expenses for the six months ended June 30, 2009 were $844,000
as compared to $1,184,000 for the six months ended June 30, 2008, a decrease of
$340,000. The decrease is primarily due to decreases in professional fees,
consulting fees and amortization of loan costs.





Other
income and expense is comprised of interest expense and gain from termination of
debt. Interest expense was $202,000 for the six months ended June 30, 2009 as
compared to $256,000 for the six months ended June 30, 2008, a decrease of
$54,000.  Included in interest expense is the amortization of discount
related to the convertible promissory notes in the amount of $33,000 and
$133,000 for the six months ended June 30, 2009 and 2008,
respectively.  Gain from termination of debt for the six months ended
June 30, 2008 was $4,000 and pertains primarily to the settlement of certain
liabilities at less than the recorded value.  There was no comparable
amount for the six months ended June 30, 2009.





16




Liquidity
and Capital Resources




Our cash
and cash equivalents of $27,902 as of June 30, 2009 are not sufficient to
support our current levels of operations for the next 12 months.  As a
result of reduced sales and increasing losses, the Company has arranged a series
of short term bridge loans in order to provide required working capital. As of
August 19, 2009, these bridge loans are in default. To address the immediate
need for additional capital, the Company is actively seeking sources of debt
and/or equity financing.
  Our
efforts to raise capital may not be successful, and even if we are able to
obtain additional financing, the terms of any such financing may be unfavorable
to us and may be highly dilutive to existing stockholders. Any future debt or
equity financings, when and if made, may not be sufficient to sustain our
required levels of operations. Any inability to obtain additional cash as needed
would have a material adverse effect on our financial position and results of
operations and may result in our having to severely curtail or even cease our
operations.
  All of
our assets are currently held as collateral to secure repayment of certain notes
payable (See Note 5 to our consolidated financial statements).  In the
event that we cease operations or are otherwise unable to repay the notes as
they become due, these note holders will have full rights as secured creditors
with respect to our assets, including the right to take control of our assets,
sell the assets at a public or private sale, or take any other action permitted
by applicable law.
  If we
cease operations or file for protection under the bankruptcy laws, any cash and
assets we have would be used first to satisfy claims of creditors and to
discharge liabilities.  We cannot predict whether our stockholders
would receive any return on their shares.


Off-Balance
Sheet Arrangements




We have
no off-balance sheet arrangements.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
Applicable





ITEM
4T. CONTROLS AND PROCEDURES





As
required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal
period covered by this report, we have carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures.  This evaluation was carried out under the supervision and
with the participation of management, including our chief executive officer and
chief financial officer.  Based upon that evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective at June 30, 2009.





There
have been no changes in our internal controls over financial reporting in
connection with this evaluation that occurred during the second quarter of
fiscal 2009 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 (a) is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and (b) is accumulated and communicated to
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.




17





PART
II - OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS.





U.S. Securities
and Exchange Commission ,  The U.S. Securities and Exchange
Commission in the U.S. District Court, District of Utah, Central Division having
Case No.: 2:07cv00709.  The caption on the Complaint is Securities and Exchange Commission
v. Diatect International Corporation et al. The four
defendants were the former president who was also a director, a former officer
and director, a former director, and the Company.   The
allegations of the Complaint claim that the Defendants engaged in a transaction
in 2003 involving the sale of mining claims located in the State of Oregon which
transaction was improperly recorded on the Company’s financial statements
causing the overstatement of revenues and assets.   The
allegations of the Complaint also claim that certain revenues were improperly
recorded in the Company’s 2002 financial statements because the sales were
consignment sales and not actual sales.   The Complaint alleges
various violations of the federal securities laws and regulations promulgated
thereunder including violations of the anti-fraud provisions and violations of
regulations pertaining to periodic reports filed by the Company with the SEC in
2003 and 2004.   On May 17, 2004 the Company issued restated
financial statements as of December 31, 2003.  On April 14, 2005, the
Company issued restated financial statements as of December 31,
2004.  These filings restated the sale of the mining claims and
revenues for those years. The Complaint seeks injunctive action against the
defendants including the Company and seeks fines from the three individual
defendants, and from two individual defendant’s disgorgement of stock sale
proceeds and bars each from acting as an officer and director. In February,
2008 a scheduling conference was held and a tentative trial date has been set
for January, 2010. The Company is seeking to constructively resolve this
issue by settlement with the SEC.




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





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





ITEM
1A. RISK FACTORS





Not
Applicable





ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.





The
following provides information regarding sales of equity securities by us during
the three months ended June 30, 2009 which were not registered under the
Securities Act.  All issuances pertained to the Company’s no par
common stock. The
Company relied upon the exemption from registration of the issuance of the
securities discussed below provided by Section 4(2) of the Securities Act of
1933 (the “Securities Act”), in view of the close relationships that each
of the purchasers acquiring such securities had with the Company and the access
to all material information about the Company provided to all such
purchasers.





18




On April
30, 2009 we issued two year warrants to purchase 1,250,000 shares of common
stock at an exercise price of $0.02 per share in conjunction with a $100,000
note payable.





On May 7,
2009 we issued two year warrants to purchase 10,000,000 shares of common stock
at an exercise price of $0.025 per share in conjunction with a Note and related
co-guarantors.





On May
31, 2009 we issued two year warrants to purchase 500,000 shares of common stock
at an exercise price of $0.03 per share in conjunction with a $100,000 note
payable.





On June
15, 2009 we issued two year warrants to purchase 750,000 shares of common stock
at an exercise price of $0.03 per share in conjunction with a $100,000 note
payable.




ITEM
5. OTHER INFORMATION.





Not
Applicable





ITEM 6. EXHIBITS




31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Patrick Carr, Principal Executive
      Officer




31.2
            Rule
      13a-14(a)/15d-14(a) Certification of Robert Rudman Principal Financial
      Officer




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





19





SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.











Diatect
      International Corporation(Registrant)Dated:
      August 19, 2009By:
                  /s/ Patrick
      CarrPatrick
      CarrPrincipal
      Executive OfficerBy:
                  /s/ Robert
      RudmanRobert
      RudmanPrincipal
      Accounting
Officer









20