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 September 30, 2008





[    ] 
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
November 14, 2008 the issuer had 215,200,959 shares of common stock, no par
value, outstanding.












Page
      NumberPART
      I  Financial InformationITEM
      1.
            Condensed
      Financial Statements (unaudited)Balance
      Sheets as of September 30, 2008 and December 31, 2007
            1Statements
      of Operations for the Three and Nine Months Ended September 30, 2008 and
      2007
            2Statements
      of Cash Flows for the Nine Months Ended September 30, 2008 and
      2007
            3Notes
      to Condensed Financial Statements
            5ITEM
      2.
            Management’s
      Discussion and Analysis or Plan of Operation.
            16ITEM
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            N/AITEM
      4T.
            Controls
      and Procedures.
            18PART
      II Other InformationITEM
      1.
            Legal
      Proceedings
            19ITEM
      1A.
            Risk
      Factors
            N/AITEM
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds.
            20ITEM
      6.
            Exhibits.
            21Signatures
            
            22











DIATECT
      INTERNATIONAL CORPORATIONCONDENSED
      BALANCE SHEETS(unaudited)September
      30,
              
              
              December
      31,2008
              
              
              2007ASSETSCurrent
      AssetsCash
              
              $
              12,716
              
              
              $
              9,864Trade
      accounts receivable, net of allowance for doubtfulaccounts of
      $16,000 and $16,000, respectively
              
              
              142,288
              
              
              
              242,406Inventory
              
              
              62,386
              
              
              
              66,688Prepaid
      expenses and unamortized loan costs
              
              
              184,254
              
              
              
              306,206Total
      Current Assets
              
              
              401,644
              
              
              
              625,164Property and Equipment,
      net of accumulated depreciation of$166,597 and $140,673,
      respectively
              
              
              205,583
              
              
              
              258,229Intangible
      Assets - EPA Labels
              
              
              1,116,322
              
              
              
              1,116,322Other
      Assets
              
              
              12,781
              
              
              
              -Total
      Assets
              
              $
              1,736,330
              
              
              $
              1,999,715LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesTrade
      accounts payable
              
              $
              721,700
              
              
              $
              224,213Accrued
      liabilities
              
              
              92,397
              
              
              
              155,125Accrued
      interest payable
              
              
              566,484
              
              
              
              456,626Accrued
      settlement obligations
              
              
              32,904
              
              
              
              89,187Deferred
      gain on sale and leaseback of assets
              
              
              59,594
              
              
              
              86,806Notes
      payable, net of unamortizeddiscount of $0 and $135,855,
      respectively
              
              
              2,707,285
              
              
              
              2,578,265Current
      portion of capital lease obligations
              
              
              75,440
              
              
              
              60,021Total
      Current Liabilities
              
              
              4,255,804
              
              
              
              3,650,243Long-Term
      LiabilitiesCapital
      lease obligations, net of current portion
              
              
              73,712
              
              
              
              120,212Total
      Liabilities
              
              
              4,329,516
              
              
              
              3,770,455Stockholders'
      DeficitCommon
      stock, no par value; 500,000,000 shares authorized;215,200,959
      shares and 190,562,583 shares outstanding, respectively
              
              
              25,582,463
              
              
              
              24,587,396Warrants
      outstanding
              
              
              2,267,001
              
              
              
              1,561,367Accumulated
      deficit
              
              
              (30,442,650
              )
              
              
              (27,919,503
              )Total
      Stockholders' Deficit
              
              
              (2,593,186
              )
              
              
              (1,770,740
              )Total
      Liabilities and Stockholders' Deficit
              
              $
              1,736,330
              
              
              $
              1,999,715


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





1




DIATECT
      INTERNATIONAL CORPORATIONCONDENSED
      STATEMENTS OF OPERATIONS(unaudited)Three
      Months Ended September 30,
              
              
              Nine
      Months Ended
                September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(restated)
              
              
              
              
              
              (restated)Sales
              
              $
              568,848
              
              
              $
              657,274
              
              
              $
              1,575,746
              
              
              $
              1,517,615Cost
      of Goods Sold
              
              
              163,638
              
              
              
              177,676
              
              
              
              407,021
              
              
              
              416,076Gross
      Profit
              
              
              405,210
              
              
              
              479,598
              
              
              
              1,168,725
              
              
              
              1,101,539ExpensesMarketing
      and selling
              
              
              387,251
              
              
              
              362,777
              
              
              
              1,170,088
              
              
              
              833,080General
      and administrative
              
              
              1,003,389
              
              
              
              458,379
              
              
              
              2,187,678
              
              
              
              1,223,903Total
      Expenses
              
              
              1,390,640
              
              
              
              821,156
              
              
              
              3,357,766
              
              
              
              2,056,983Loss
      from Operations
              
              
              (985,430
              )
              
              
              (341,558
              )
              
              
              (2,189,041
              )
              
              
              (955,444
              )Other
      Income (Expense)Interest
      expense
              
              
              (82,816
              )
              
              
              (184,759
              )
              
              
              (338,389
              )
              
              
              (472,799
              )Gain
      from termination of debt
              
              
              -
              
              
              
              96,132
              
              
              
              4,283
              
              
              
              259,852Net
      Other Income (Expense)
              
              
              (82,816
              )
              
              
              (88,627
              )
              
              
              (334,106
              )
              
              
              (212,947
              )Net
      Loss
              
              
              (1,068,246
              )
              
              
              (430,185
              )
              
              
              (2,523,147
              )
              
              
              (1,168,391
              )Basic
      and Diluted Loss Per Share
              
              $
              (0.01
              )
              
              $
              (0.00
              )
              
              $
              (0.01
              )
              
              $
              (0.01
              )Weighted-Average
      Common Shares Outstanding
              
              
              212,436,132
              
              
              
              159,841,857
              
              
              
              207,897,388
              
              
              
              156,028,923







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





2


DIATECT
      INTERNATIONAL CORPORATIONCONDENSED
      STATEMENTS OF CASH FLOWS(unaudited)For
      the Nine Months EndedSeptember
      30,2008
              
              
              2007(restated)Cash
      Flows from Operating ActivitiesNet
      loss
              
              $
              (2,523,147
              )
              
              $
              (1,168,391
              )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
              
              
              69,607
              
              
              
              40,279Amortization
      of discount on notes payable
              
              
              135,855
              
              
              
              232,050Amortization
      of loan costs
              
              
              118,834
              
              
              
              45,039Gain
      from debt termination
              
              
              (4,283
              )
              
              
              (259,852
              )Net
      gain on disposal of property and equipment
              
              
              (27,212
              )
              
              
              (12,483
              )Issuance
      of common stock for services
              
              
              238,200
              
              
              
              43,250Issuance
      of warrants for services
              
              
              651,555
              
              
              
              192,716Issuance
      of warrant for interest
              
              
              5,446Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              100,118
              
              
              
              (131,396
              )Inventory
              
              
              4,302
              
              
              
              88,670Prepaid
      expenses and unamortized loan costs
              
              
              11,390
              
              
              
              (5,634
              )Accounts
      payable
              
              
              497,487
              
              
              
              (30,572
              )Accrued
      liabilities
              
              
              (62,726
              )
              
              
              (69,386
              )Accrued
      interest payable
              
              
              119,584
              
              
              
              219,580Net
      Cash Used in Operating Activities
              
              
              (664,990
              )
              
              
              (816,130
              )Cash
      Flows from Investing ActivitiesPayments
      for purchases of property and equipment
              
              
              (1,893
              )
              
              
              (71,811
              )Proceeds
      from sale of property and equipment
              
              
              -
              
              
              
              160,000Other
      assets
              
              
              (12,781
              )
              
              
              -Net
      Cash Used in Investing Activities
              
              
              (14,674
              )
              
              
              88,189Cash
      Flow from Financing ActivitiesProceeds
      from borrowings under notes payable
              
              
              55,000
              
              
              
              883,535Proceeds
      from exercise of warrants
              
              
              172,500
              
              
              
              75,000Proceeds
      from issuance of common stock and warrants
              
              
              565,000
              
              
              
              -Principal
      payments on notes payable
              
              
              (11,835
              )
              
              
              (121,968
              )Principal
      payments on capital lease obligations
              
              
              (46,149
              )
              
              
              (13,157
              )Payments
      on accrued settlement obligations
              
              
              (52,000
              )
              
              
              (96,000
              )Net
      Cash Provided by Financing Activities
              
              
              682,516
              
              
              
              727,410Net
      Increase (Decrease) in Cash
              
              
              2,852
              
              
              
              (531
              )Cash
      at Beginning of Period
              
              
              9,864
              
              
              
              61,743Cash
      at End of Period
              
              $
              12,716
              
              
              $
              61,212







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




3







DIATECT
      INTERNATIONAL CORPORATIONSTATEMENTS
      OF CASH FLOWS (continued)(unaudited)For
      the Nine Months EndedSeptember
      30,2008
              
              
              2007Supplemental
      Disclosure of Cash Flow InformationCash
      paid for interest
              
              $
              50,574
              
              
              $
              16,099Supplemental
      Schedule of Noncash Investing andFinancing
    ActivitiesPurchase
      of equipment under capital lease obligations
              
              
              15,067
              
              
              
              -Conversion
      of notes payable and interest into common stock and
    warrants
              
              
              65,174
              
              
              
              -




















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








4





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 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, 2007 in the Company’s annual report on Form
10-KSB.  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 September 30, 2008
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008.




Restatement
and reclassification




During
the second quarter of 2008 the Company realized that the September 30, 2007
financial statements needed to be revised to correct an overstatement of
inventory as of September 30, 2007 and an understatement of cost of goods sold
for the three and nine months ended September 30, 2007. As a result, the Company
corrected the financial statements for September 30, 2007 and for the three and
nine months then ended. The corrected statements of operations and statement of
cash flows are included in these financial statements.  There was no
effect of these adjustments on the financial statements as of December 31, 2007.
In addition, the Company has reclassified freight costs from cost of goods sold
to marketing and selling expense in the amount of $59,543 and $137,069 for the
three and nine months ended September 30, 2007 to conform to the current year
presentation. The
effects of the restatements and the reclassifications were as
follows:




As
      Reported
              
              
              Restatement
      and Reclassification
              
              
              As
      RestatedCondensed
      Balance Sheet as of September 30, 2007Inventory
              
              $
              386,870
              
              
              $
              (239,651
              )
              
              $
              147,219Total
      Current Assets
              
              
              485,728
              
              
              
              (239,651
              )
              
              
              246,077TOTAL
      ASSETS
              
              
              1,810,324
              
              
              
              (239,651
              )
              
              
              1,570,673Accumulated
      deficit
              
              
              (27,684,304
              )
              
              
              (239,651
              )
              
              
              (27,923,955
              )Total
      Stockholders' Deficit
              
              
              (3,386,400
              )
              
              
              (239,651
              )
              
              
              (3,626,051
              )Total
      Liabilities and Stockholders' Deficit
              
              $
              1,810,324
              
              
              $
              (239,651
              )
              
              $
              1,570,673Condensed
      Statement of OperationsFor
      the three months ended September 30, 2007Cost
      of Goods Sold
              
              $
              133,427
              
              
              $
              44,249
              
              
              $
              177,676Gross
      profit
              
              
              523,847
              
              
              
              (44,249
              )
              
              
              479,598Marketing
      and selling
              
              
              303,234
              
              
              
              59,543
              
              
              
              362,777Loss
      from Operations
              
              
              (237,766
              )
              
              
              (103,792
              )
              
              
              (341,558
              )Net
      Loss
              
              
              (326,393
              )
              
              
              (103,792
              )
              
              
              (430,185
              )Basic
      and Diluted Loss Per Share
              
              $
              -
              
              
              $
              -
              
              
              $
              -







5




Condensed
      Statement of OperationsFor
      the nine months ended September 30, 2007Cost
      of Goods Sold
              
              $
              313,494
              
              
              $
              102,582
              
              
              $
              416,076Gross
      profit
              
              
              1,204,121
              
              
              
              (102,582
              )
              
              
              1,101,539Marketing
      and selling
              
              
              696,011
              
              
              
              137,069
              
              
              
              833,080Loss
      from Operations
              
              
              (715,793
              )
              
              
              (239,651
              )
              
              
              (955,444
              )Net
      Loss
              
              
              (928,740
              )
              
              
              (239,651
              )
              
              
              (1,168,391
              )Basic
      and Diluted Loss Per Share
              
              $
              -
              
              
              $
              (0.01
              )
              
              $
              (0.01
              )Statement
      of Cash FlowsFor
      the nine months ended June 30, 2007Net
      loss
              
              $
              (928,740
              )
              
              $
              (239,651
              )
              
              $
              (1,168,391
              )Change
      in inventory
              
              
              (150,981
              )
              
              
              239,651
              
              
              
              88,670Net
      Cash used in Operating Activities
              
              
              (816,130
              )
              
              
              -
              
              
              
              (816,130
              )


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 $1,575,746 and incurred a net loss of $2,523,147
during the nine months ended September 30, 2008. At September 30, 2008 the
Company had a total stockholders’ deficit of $2,593,186 and its current
liabilities exceeded current assets by $3,854,160.





The
ability of the Company to continue operations is dependent upon obtaining
additional financing and being able to generate net profits in the future even
though no assurance can be given that such events will occur.





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





Trade Accounts
Receivable and Allowance for Doubtful Accounts - Trade accounts
receivables 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 average cost method. Raw materials consist of the various
active ingredients that comprise the Company’s products and shipping and
packaging materials. When there is evidence that inventory values are less than
original cost, the inventory is reduced to market value. The Company determines
market value based on current prices and whether obsolescence
exists.





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








6





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.





Intangible
Assets  –
The Company’s intangible assets consist of the labels that are placed on its
products and that have been registered with the United States Environmental
Protection Agency pursuant to the Federal Insecticide, Fungicide and Rodenticide
Act. The estimated useful life of the labels is indefinite and the labels are
assessed for impairment at least annually and when otherwise appropriate. The
Company has not impaired the value of the labels in 2008 or 2007.





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.
No impairment was recognized during 2008 or 2007.





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 three months ended September 30, 2008 and 2007 were $59,651 and
$70,044, respectively.  Total shipping and handling costs included in
marketing expenses for the nine months ended September 30, 2008 and 2007 were
$186,863 and $152,115, 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.








7





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 September 30, 2008 and 2007, 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.




September
      30,
              
              September
      30,2008
              
              2007Outstanding
      warrants
              94,383,820
              
              29,000,000Convertible
      promissory notes convertible into:Common
      stock
              5,500,000
              
              29,420,000Warrants
              500,000
              
              29,420,000Total
      potentially dilutive common shares
              100,383,820
              
              87,840,000





Share Based
Payments– The Company accounts for stock-based compensation expense in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 123(R), “Share-Based Payment” (SFAS
123R). Under SFAS 123R, stock-based compensation expense reflects the fair value
of stock-based awards measured at the grant date, is recognized over the
relevant service period, and is adjusted each period for anticipated
forfeitures. 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 Enacted
Accounting Standards - In September 2006, the Financial Accounting
Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements”, which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
extended the effective date for certain nonfinancial assets and nonfinancial
liabilities to fiscal years beginning after November 15, 2008.  The
adoption of the portions of SFAS No. 157 that were not postponed did not have a
material impact on our financial statements. The Company does not expect the
adoption of the postponed portions of SFAS No. 157 to have a material
impact on our financial statements.





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








8





Effective
January 1, 2008, the Company adopted SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities – Including an
amendment of FASB Statement No. 115,” which permits entities to elect to
measure eligible items at fair value at specified dates. The
Company did not elect the fair value option for any eligible
items.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities", an amendment of SFAS No. 133. SFAS
161 applies to all derivative instruments and non-derivative instruments that
are designated and qualify as hedging instruments pursuant to paragraphs 37 and
42 of SFAS 133 and related hedged items accounted for under SFAS 133. SFAS 161
requires entities to provide greater transparency through additional disclosures
about how and why an entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for under SFAS 133 and its
related interpretations, and how derivative instruments and related hedged items
affect an entity's financial position, results of operations, and cash flows.
SFAS 161 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2008. The Company does not expect SFAS 161 to have a
material impact on its results of operations or financial position.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 will provide a framework for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. SFAS 162 will be effective 60 days following the
Securities and Exchange Commission’s approval of amendments to the Public
Company Accounting Oversight Board’s standards. The Company does not expect the
adoption of SFAS 162 will have a material impact on its financial condition or
results of operation.





NOTE
2 – INVENTORY





Inventory
is comprised of the following:




September
      30,
              
              
              December
      31,2008
              
              
              2007Raw
      materials
              
              $
              43,501
              
              
              $
              32,836Finished
      goods
              
              
              18,885
              
              
              
              33,852Total
      Inventory
              
              $
              62,386
              
              
              $
              66,688





NOTE
3 – PROPERTY AND EQUIPMENT





The
components of property and equipment are as follows:




EstimatedUseful
      Life
              
              
              September
      30,
              
              
              December
      31,in
      Years
              
              
              2008
              
              
              2007Computer
      equipment
              
              3
      to 5
              
              
              $
              80,613
              
              
              $
              89,774Office
      furniture and equipment
              
              5
              
              
              
              45,724
              
              
              
              48,024Manufacturing
      equipment
              
              3
      to 10
              
              
              
              240,908
              
              
              
              256,169Leasehold
      improvements
              
              15
              
              
              
              4,935
              
              
              
              4,935Total
      Property and Equipment
              
              
              
              
              
              
              372,180
              
              
              
              398,902Less:
      Accumulated depreciation
              
              
              
              
              
              
              (166,597
              )
              
              
              (140,673
              )Net
      Property and Equipment
              
              
              
              
              
              $
              205,583
              
              
              $
              258,229





9





Depreciation
expense for the nine months ended September 30, 2008 and 2007 was $69,607 and
$40,279, respectively.





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





NOTE
4 – NOTES PAYABLE





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




September
      30,
              
              
              December
      31,2008
              
              
              2007Revolving
      line of credit with financial institution
              
              $
              49,972
              
              
              $
              49,807Accounts
      receivable line of credit
              
              
              185,000
              
              
              
              185,000Unsecured
      10% notes payable to investors, in default
              
              
              292,250
              
              
              
              292,250Unsecured
      12% notes payable to investors, in default
              
              
              40,000
              
              
              
              40,000Unsecured
      12% notes payable due February 28, 2009
              
              
              55,000
              
              
              
              -Unsecured
      15% notes payable to investors, in default
              
              
              34,500
              
              
              
              36,500Unsecured
      12% convertible promissory notes payable, netof
      unamortized discount of $0 and $135,855, respectively, in
      default
              
              
              275,000
              
              
              
              189,145Unsecured
      5% notes payable to shareholders, due in 2008, in default
              
              
              1,210,937
              
              
              
              1,220,937Unsecured
      5% notes payable to vendors, due in 2008, in default
              
              
              564,626
              
              
              
              564,626Total
      Notes Payable
              
              $
              2,707,285
              
              
              $
              2,578,265





Revolving Lines
of Credit – The Company currently has unsecured, revolving credit
notes with a financial institution totaling $49,972. The line of credit bears
interest at 7.0% per annum, is due on demand and requires monthly interest only
payments. The line is unsecured and is personally guaranteed by a former
director of the Company.





Accounts
Receivable Line of Credit – On September 20, 2007 the Company
entered into an accounts receivable loan agreement with Aspen Opportunity Fund,
L.P. for advances up to $500,000 in $5,000 increments, subject to maintaining a
borrowing base of 80% of eligible accounts receivable as defined in the
agreement. The Note bears interest at a rate of 12.0%, is secured by eligible
accounts receivable as defined in the agreement, requires monthly interest
payments and is due on September 30, 2009.  Mandatory prepayments of
principal are required in the event that the eligible borrowing base falls below
amounts advanced under the agreement.  In conjunction with the loan
agreement, the Company issued a five year warrant to purchase 4,000,000 shares
of the Company’s common stock at an exercise price of $0.075 per share. The
warrant was valued at $169,294 and was recorded as prepaid expenses and
unamortized loan costs and is being amortized over the life of the
loan.  A total of $62,370 was amortized for the nine months ended
September 30, 2008.





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





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 September 30, 2008.





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








10





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. Based upon the market price of the Company’s common stock on the date the
note was issued, the investor received a beneficial conversion option. The
beneficial conversion option was computed as the difference between the fair
value and the allocated proceeds of the common stock issuable upon conversion of
the promissory notes. The recognition of the beneficial conversion option
resulted in a discount to the note payable that was amortized over the term of
the convertible notes using the effective interest method.  The
discount was fully amortized at September 30, 2008. A total of $3,523 and
$206,756 was recognized as interest expense during the nine months ended
September 30, 2008 and 2007 for the notes issued pursuant to the private
placement.





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 is fully amortized as of September 30,
2008.  A total of $132,333 of the discount was recognized as interest
expense for the nine months ended September 30, 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 agreed to extend the terms of outstanding
accounts payables by converting them into promissory notes that are due in 2008
and accrue interest at 5% per annum.  These notes are presently in
default.




NOTE
5 – 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.








11





The
accrued settlement obligations include the following:




September
      30,
              
              
              December
      31,2008
              
              
              2007Litho-Flexo
      Grafics, Inc.
              
              $
              10,000
              
              
              $
              63,283Other
              
              
              22,904
              
              
              
              25,904Total
              
              $
              32,904
              
              
              $
              89,187





Litho-Flexo
Grafics, Inc. – On May 23, 2003, Litho-Flexo Grafics, Inc.
(“Litho-Flexo”) filed a complaint in the Fourth District Court in and for
Wasatch County, State of Utah, naming the Company as the defendant. Litho-Flexo
contended that the Company failed to make payment of a trade payable that, with
interest and costs amounted to $92,478. The Company contended that the packaging
labels purchased from Litho-Flexo were defective and could not be used in the
packaging of the Company’s products. The Company filed a counterclaim claiming
in excess of $100,000 for damages resulting from the use of the defective
labels. The Company accrued a $72,625 accrued settlement obligation liability at
December 31, 2004. During 2005, the Company paid $9,342 to the vendor, which
decreased the recorded accrued settlement obligation liability to $63,283 at
December 31, 2007.  In March, 2008 the Company entered into a
settlement agreement by which all claims of both parties will be settled upon
the payment by the Company of an aggregate of $60,000 to
Litho-Flexo.  A payment of $30,000 was due May 31, 2008 with six
monthly payments of $5,000 due on the first of each month beginning in July,
2008.  Should the Company fail to make any of the payments within 10
days of the due dates, Litho-Flexo is entitled to have a judgment entered
against the Company for $150,000 less any amounts paid according to the
schedule. The Company has made the required payments on a timely
basis.








NOTE
6 – COMMITMENTS AND CONTINGENCIES





Administrative
Proceeding – U.S. Securities and Exchange Commission





One
September 27, 2007, the Commission entered an order instituting a proceeding
under Section 12(j) of the Securities Exchange Act of 1934 (“1934 Act”) naming
the Company as a respondent.  This administrative proceeding has file
no. 3-12843.The administrative
proceeding sought to revoke the Company’s registration under the Securities
Exchange Act of 1934 (“Exchange Act”) under which the Company files quarterly
and annual financial reports.  The Company had not filed nine
quarterly and annual financial reports.  All of these reports have
been filed.





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








12





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





On
January 1, 2007, the Company entered into a five year lease for their
manufacturing and office building facilities located in Heber, Utah with Aspen
Capital Management, LLC, an entity that is affiliated with a one of our former
directors, requiring monthly rental payments of $12,000 plus taxes and
maintenance. The lease is renewable for two additional 5 year terms with 10%
increases of the rental payments to $13,200 per month and $14,250 per month,
respectively.





In
February 2006, the Company entered into a renewable two-year non-exclusive
engagement letter ( the “Engagement Letter”) with Aspen Capital Partners, LLC,
an entity that employs a person that was on the board of directors of the
Company at that time for consulting services in a variety of areas relating to
financial, strategic and developmental growth of the Company. The ongoing
financial terms of the Engagement Letter require payments of $15,000 per month
for a two-year period. The agreement has been extended on a month to month basis
with monthly payments increasing to $20,000.





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 nine months ended September 30, 2008, the Company
recognized $18,141 of this gain.





In
conjunction with the Master Lease Line, the Company issued a five-year warrant
to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per
share.  A total of 2,500,000 of these warrants vested upon the
execution of the Master Lease Line.  The remaining 7,500,000 warrants
vest pro-rata upon the funding of the credit limit of $500,000.  Based
upon the estimated total funding that will take place under the Master Lease
Line, the Company has estimated that it is probable that 5,809,984 of the
warrants will vest and have been valued at $212,994. That amount has been
recorded as deferred loan costs and is being amortized to interest expense over
the term of the respective capital lease obligations. A total of $68,474 was
recorded as amortization expense during the nine months ended September 30,
2008.  In August, 2008 the Company executed an amendment to the Master
Lease Line who agreed to exercise 2,000,000 warrants to purchase common stock at
an exercise price of $0.05 per share in exchange for past due payments totaling
$51,943 and cash of $48,057.  In addition, the Company agreed to vest
the remaining 4,190,016 of the warrants to purchase common stock at an exercise
price of $0.05 per share issued in conjunction with the Master Lease Line. Upon
vesting, the Company expensed the remaining fair value at issuance of $153,630
as additional loan cost amortization.








13





During
the second quarter of 2008, the Company terminated an agreement with a vendor
which included the potential issuance of three year warrants to purchase 750,000
shares of common stock at an exercise price of $0.05 per share.  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
7 - COMMON STOCK





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





For the
nine months ended September 30, 2008, the Company issued 1,600,000 shares valued
at $115,200 or $0.072 per share, as compensation to a vendor, 1,640,000 shares
valued at $123,000 or $0.075 per share, as compensation to employees and two
vendors. The values represent the market price of the Company’s common stock on
the dates of issuance.





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





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





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





14




NOTE
8 - STOCK WARRANTS





In May,
2008 the Company issued a warrant to purchase 1,000,000 shares of common stock
at an exercise price of $0.10 per share to a vendor for services which expires
November 30, 2011.  The value of the warrant of $61,000 was charged to
General and Administrative expenses on the issuance date. The fair value of the
warrants, determined using the Black-Scholes Option Pricing Model, was
calculated using the following assumptions: risk free interest rate of 2.7%,
expected dividend yield of 0%, expected volatility of 117% and an expected life
of 3.55 years.




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





On
September 25, 2008 the Company issued 12,000,000 three-year warrants to purchase
common stock at an exercise price of $0.07 per share its officers and
directors.  The Chief Executive Officer received 5,000,000 warrants,
the Chief Financial Officer received 3,000,000 warrants, and four directors each
received 1,000,000 warrants. The director warrants vested on the date of
issuance.  The warrant issued to the Chief Executive Officer vests
1,000,000 shares on the date of issuance, with 2,000,000 warrants vesting on
September 25, 2009 and 2010, respectively.  The warrant issued to the
Chief Financial Officer vests 1,000,000 shares on issuance, with 1,000,000
shares vesting on September 25, 2009 and 2010, respectively.  The
warrants were valued at $552,000, of which $276,000 was recognized as General
and Administrative expenses, representing the vested portion of the fair value
of the warrants on the issuance date.  The fair value was determined
using the Black Scholes Option Pricing Model using the following assumptions:
risk free interest rate of 2.4%, expected dividend yield of 0%, expected
volatility of 112% and an expected life of 3 years.  The exercise
price exceeded the closing market price on the date of issuance.





15




The
following summarizes the outstanding warrants as of September 30,
2008:




Weighted-AverageExercise
              
              Warrants
              
              Remaining
      Contractual
              
              NumberPrice
              
              Outstanding
              
              Life
      (Years)
              
              Exercisable$0.01
              
              12,750,000
              
              1.1
              
              12,750,000$0.05
              
              15,075,000
              
              3.6
              
              15,075,000$0.07
              
              12,500,000
              
              3.0
              
              7,500,000$0.075
              
              51,904,975
              
              2.1
              
              51,904,975$0.10
              
              1,000,000
              
              3.1
              
              1,000,000$0.13
              
              1,153,845
              
              1.8
              
              1,153,84594,383,820
              
              
              
              89,383,820









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 California corporation operating
in Utah as a developer and marketer of pesticide products. The Company sells its
products to both wholesale distributors and retail customers in the United
States.  We have established an internet presence as well to sell
directly to the consumer via our website.  In addition, in November,
2008 we became a distributor of products for Source Direct, Inc., a provider of
a proprietary line of green, all-purpose, all-surface, non-toxic, biodegradable
cleaning products, for a term of ten years.





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





16




Results
of Operations





Comparison
results for the three months ended September 30, 2008 and 2007





Revenues
for the three months ended September 30, 2008 were $568,848 as compared to
$657,274 for the three months ended September 30, 2007, a decrease of $88,426.
The decrease is due to decreases in agricultural sales offset by increases in
internet based sales.





Cost of
revenues for the three months ended September 30, 2008 were $163,638 as compared
to $177,676 for the three months ended September 30, 2007, a decrease of
$14,038. The decrease is due the decrease in sales volumes partially offset by
decreased product costs associated with internet based sales.





Marketing
and selling expenses were $387,251 for the three months ended September 30, 2008
as compared to $362,777 for the three months ended September 30, 2007, an
increase of $24,474. The increase is primarily due to increases in internet
marketing and increases in media content related expenses in the three months
ended September 30, 2008 when compared to the prior year period.





General
and administrative expenses were $1,003,387 for the three months ended September
30, 2008 as compared to $458,379 for the three months ended September 30, 2007,
an increase of $545,010.  The increase is primarily due to increases
in director and officer compensation, increases in professional fees, and
increases in amortization of loan costs.  Included in general and
administrative expenses for the three months ended September 30, 2008 and 2007
are the non-cash costs of shares and warrants to purchase common stock valued at
$410,925 and $15,693, respectively issued for officer, director and professional
service fees. In addition, the three months ended September 30, 2008 and 2007
include non-cash costs for the amortization of loan costs in the amount of
$176,517 and $13,807, respectively.




Other
income and expense is comprised of interest expense and gain from termination of
debt. Interest expense was $82,816 for the three months ended September 30, 2008
as compared to $184,759 for the three months ended September 30, 2007, a
decrease of $101,943.  Included in interest expense is the
amortization of discount related to the convertible promissory notes in the
amount of $2,598 and $90,148 for the three months ended September 30, 2008 and
2007, respectively.  The remaining decrease is due to lower levels of
debt during the three months ended September 30, 2008.  Gain from
termination of debt for the three months ended September 30, 2007 was $96,132
pertains primarily to the settlement of certain liabilities at less than the
recorded value.  There was no comparable amount for the three months
ended September 30, 2008.





Comparison
results for the nine months ended September 30, 2008 and 2007





Revenues
for the nine months ended September 30, 2008 were 1,575,746 as compared to
$1,517,615 for the nine months ended September 30, 2007, an increase of $58,131.
The increase is due to an increase in sales to the agriculture supply market and
increases in internet based sales.





Cost of
revenues for the nine months ended September 30, 2008 were $407,021 as compared
to $416,076 for the nine months ended September 30, 2007, an decrease of $4,983.
The increase is due to higher sales volumes partially offset by decreased
product costs associated with internet based sales.





Marketing
and selling expenses were $1,170,088 for the nine months ended September 30,
2008 as compared to $833,080 for the nine months ended September 30, 2007, an
increase of $337,008. The increase is primarily due to increases in internet
marketing, increases in freight and commissions expenses due to increased sales
and increases in media content related expenses in the nine months ended
September 30, 2008 when compared to the prior year period.





17




General
and administrative expenses were $2,187,678 for the nine months ended September
30, 2008 as compared to $1,223,903 for the nine months ended September 30, 2007,
an increase of $963,775.  The increase is primarily due to increases
in director and officer compensation, professional fees, investor relations fees
and amortization of loan costs.  Included in general and
administrative expenses for the nine months ended September 30, 2008 and 2007
are the non-cash costs of shares and warrants to purchase common stock valued at
$497,925 and $127,657, respectively issued for director and officer
compensation, professional services and investor relations
services.  In addition, the nine months ended September 30, 2008 and
2007 include non-cash costs for the amortization of loan costs in the amount of
$270,963 and $45,039, respectively.





Other
income and expense is comprised of interest expense and gain from termination of
debt. Interest expense was $338,389 for the nine months ended September 30, 2008
as compared to $472,799 for the nine months ended September 30, 2007, a decrease
of $134,410.  Included in interest expense is the amortization of
discount related to the convertible promissory notes in the amount of $135,055
and $232,050 for the nine months ended September 30, 2008 and 2007,
respectively.  The remaining decrease is due to lower levels of debt
during the nine months ended September 30, 2008.  Gain from
termination of debt for the nine months ended September 30, 2008 and 2007 was
$4,283 and $259,852, respectively and pertains primarily to the settlement of
certain liabilities at less than the recorded value.








Liquidity
and Capital Resources





Our cash
and cash equivalents of $12,716 as of September 30, 2008 are not considered
sufficient to support our current levels of operations for the next 12
months.  Accordingly, we are actively seeking additional financing
through debt or equity offerings.




We must
raise working capital to fund our on-going operations through one or more debt
or equity financings. Our efforts to raise capital may not be successful, and
even if we are able to obtain additional financing, the terms of any such
financing may be unfavorable to us and may be highly dilutive to existing
stockholders. Any future debt or equity financings, when and if made, may not be
sufficient to sustain our required levels of operations. Any inability to obtain
additional cash as needed would have a material adverse effect on our financial
position and results of operations and may result in our having to severely
curtail or even cease our operations.








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 September 30, 2008.


18


There
have been no changes in our internal controls over financial reporting in
connection with this evaluation that occurred during the third quarter of fiscal
2008 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.





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PART
II - OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS.





Administrative
Proceeding – U.S. Securities and Exchange Commission





One
September 27, 2007, the Commission entered an order instituting a proceeding
under Section 12(j) of the Securities Exchange Act of 1934 (“1934 Act”) naming
the Company as a respondent.  This administrative proceeding has file
no. 3-12843.The administrative
proceeding sought to revoke the Company’s registration under the Securities
Exchange Act of 1934 (“Exchange Act”) under which the Company files quarterly
and annual financial reports.  The Company had not filed nine
quarterly and annual financial reports.  All of these reports have
been filed as of January 2, 2008.





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





U.S. Securities
and Exchange Commission ,  The U.S. Securities and Exchange
Commission in the U.S. District Court, District of Utah, Central Division having
Case No.: 2:07cv00709.  The caption on the Complaint is Securities and Exchange Commission
v. Diatect International Corporation et al. The four
defendants are the 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 as an officer and director. In February, 2008 a
scheduling conference was held and a tentative trial date has been set for
January, 2010. The Company intends to vigorously defend the allegations of
the Complaint.




Litho-Flexo
Grafics, Inc. – On May 23, 2003, Litho-Flexo Grafics, Inc.
(“Litho-Flexo”) filed a complaint in the Fourth District Court in and for
Wasatch County, State of Utah, naming us as the defendant. Litho-Flexo contended
that we failed to make payment of a trade payable that, with interest and costs
amounted to $92,478. We contended that the packaging labels purchased from
Litho-Flexo were defective and could not be used in the packaging of our
products. We filed a counterclaim claiming in excess of $100,000 for damages
resulting from the use of the defective labels. We accrued a $72,625 accrued
settlement obligation liability at December 31, 2004. During 2005, the Company
paid $9,342 to the vendor, which decreased the recorded accrued settlement
obligation liability to $63,283 at December 31, 2007.  In March, 2008
we entered into a settlement agreement by which all claims of both parties will
be settled upon the our payment of an aggregate of $60,000 to
Litho-Flexo.  A payment of $30,000 was paid May 31, 2008 with six
monthly payments of $5,000 due on the first of each month beginning in July,
2008.  Should we fail to make any of the payments within 10 days of
the due dates, Litho-Flexo is entitled to have a judgment entered against us for
$150,000 less any amounts paid according to the schedule.  The Company
has made the required payments on a timely basis.








20





ITEM
1A. RISK FACTORS





Not
Applicable





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





We issued
1,000,000 shares valued at $75,000 or $0.075 per share as compensation to a
vendor. The value represents the market price of our common stock on the dates
of issuance.





We issued
1,153,845 shares of common stock and two-year warrants to purchase 1,143,845
shares of common stock at an exercise price of $0.13 per share for gross
proceeds of $75,000 in a private placement.





We issued
three-year warrants to purchase 1,500,000 shares of common stock at an exercise
price of $0.075 per share to two vendors for services.





We issued
a three-year warrant to purchase 1,500,000 shares of common stock at an exercise
price of $0.075 per share to two vendors for services.





We issued
1,194,531 shares and a two-year warrant to purchase 1,194,531 shares of common
stock at an exercise price of $0.75 per share upon the conversion of a note
payable in the amount of $50,000 and related interest of $9,728.





We issued
three-year warrants to purchase 12,000,000 shares of common stock at an exercise
price of $0.07 per share as compensation to our officers and
directors.  The exercise price exceeded the market price on the date
of grant.





We issued
a three-year warrant to purchase 500,000 shares of common stock at an exercise
price of $0.07 per share as compensation to a vendor.





We issued
2,000,000 shares of common stock upon the exercise of a warrant to purchase
common stock at an exercise price of $0.05 per share for proceeds of 48,057 and
the conversion of amounts due the warrant holder of $51,943.











ITEM
5. OTHER INFORMATION.





Not
Applicable







21





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









22





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:
      November 14, 2008By:
            /s/ Patrick
      CarrPatrick
      CarrPrincipal
      Executive OfficerBy:
            /s/ Robert
      RudmanRobert
      RudmanPrincipal
      Accounting Officer








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