**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 
 **FORM
        10-QSB**
 
 
 [
                  X
                  ]
              Quarterly
                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934
 
 For
        the
        quarterly period ended September 30, 2006
 
 [
                     ]
              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 small business issuer 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 issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days. Yes
        [  ]  No [ X  ]
 
 Indicate
        by checkmark whether the registrant is a shell company (as defined in Rule
        12b-2
        of the Exchange Act) YES o NO x
 
 
 As
        of
        December 11, 2007 the issuer had 175,933,752 shares of common stock, no par
        value, outstanding.
 
 Transitional
        Small Business Disclosure Format: Yes oNox
 
  
  
 **Page**
                **Number****PART
                  I**ITEM
                  1.
              Condensed
                  Financial Statements (unaudited)Condensed
                  Balance Sheets as of September 30, 2006 and December 31,
                  2005
              3Condensed
                  Statements of Operations
                  for the Three and Nine Months Ended September 30, 2006 and
                  2005
              4Condensed
                  Statements of Cash Flows
                  for the Nine Months Ended September 30, 2006 and
                  2005
              5Notes
                  to Condensed Financial
                  Statements
              7ITEM
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation.
              21ITEM
                  3.
              Controls
                  and Procedures.
              24**PART
                  II**ITEM
                  1.
              Legal
                  Proceedings
              25ITEM
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds.
              27ITEM
                  6.
              Exhibits.
              27Signatures
              28
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  2
  **DIATECT
        INTERNATIONAL CORPORATION**
 **CONDENSED
        BALANCE SHEETS**
 **(Unaudited)**
 
 **September
                  30,**
              
              
              **December
                  31,****2006**
              
              
              **2005****ASSETS****Current
                  Assets**Cash
              
              $
              41,076
              
              
              $
              6,382Trade
                  accounts receivable, net of allowance for doubtful accounts of
                  $24,333 and
                  $24,300, respectively
              
              
              60,125
              
              
              
              17,031Inventory
              
              
              309,817
              
              
              
              365,188Prepaid
                  expenses and other current assets
              
              
              199,825
              
              
              
              4,618**Total
                  Current Assets**
              
              
              610,843
              
              
              
              393,219**Property
                  and Equipment**, net of accumulated depreciation of $256,524 and
                  $237,839, respectively
              
              
              101,757
              
              
              
              144,631**Intangible
                  Assets - EPA Labels**, net of accumulated amortization of $620,000
                  and $620,000, respectively
              
              
              1,116,322
              
              
              
              1,116,322**Total
                  Assets**
              
              $
              1,828,922
              
              
              $
              1,654,172**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****Current
                  Liabilities**Trade
                  accounts payable
              
              $
              405,794
              
              
              $
              59,090Accrued
                  liabilities
              
              
              209,854
              
              
              
              508,039Checks
                  drawn in excess of cash in bank
              
              
              -
              
              
              
              10,481Accrued
                  interest payable
              
              
              663,065
              
              
              
              646,064Accrued
                  settlement obligations
              
              
              287,415
              
              
              
              360,540Current
                  portion of notes payable, net of unamortized discount of $98,468
                  and $0,
                  respectively
              
              
              1,086,448
              
              
              
              1,267,963**Total
                  Current Liabilities**
              
              
              2,652,576
              
              
              
              2,852,177**Long-Term
                  Notes Payable,**net of current portion
              
              
              1,785,563
              
              
              
              1,785,563**Stockholders'
                  Deficit**Common
                  stock, no par value; 300,000,000 shares authorized;  151,952,140
                  shares and 99,264,997 shares outstanding, respectively
              
              
              22,989,013
              
              
              
              21,836,822Warrants
                  outstanding
              
              
              593,162
              
              
              
              148,033Accumulated
                  deficit
              
              
              (26,191,392
              )
              
              
              (24,968,423
              )**Total
                  Stockholders' Deficit**
              
              
              (2,609,217
              )
              
              
              (2,983,568
              )**Total
                  Liabilities and Stockholders' Deficit**
              
              $
              1,828,922
              
              
              $
              1,654,172
 
   The
        accompanying notes are an integral part of these financial
        statements.
  3
  **DIATECT
        INTERNATIONAL CORPORATION**
 **CONDENSED
        STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 **Three
                  Months Ended September 30,**
              
              
              **Nine
                  Months Ended September 30,****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005****Sales**
              
              $
              275,517
              
              
              $
              224,823
              
              
              $
              853,637
              
              
              $
              449,935**Cost
                  of Goods Sold**
              
              
              64,913
              
              
              
              80,915
              
              
              
              263,781
              
              
              
              352,009**Gross
                  Profit**
              
              
              210,604
              
              
              
              143,908
              
              
              
              589,856
              
              
              
              97,926**Expenses**Marketing
                  and selling
              
              
              107,586
              
              
              
              56,881
              
              
              
              312,606
              
              
              
              226,825General
                  and administrative
              
              
              1,148,877
              
              
              
              123,611
              
              
              
              1,880,859
              
              
              
              1,036,349**Total
                  Expenses**
              
              
              1,256,463
              
              
              
              180,492
              
              
              
              2,193,465
              
              
              
              1,263,174**Loss
                  from Operations**
              
              
              (1,045,859
              )
              
              
              (36,584
              )
              
              
              (1,603,609
              )
              
              
              (1,165,248
              )**Other
                  Income (Expense)**Interest
                  expense
              
              
              (58,999
              )
              
              
              (58,875
              )
              
              
              (236,330
              )
              
              
              (275,931
              )Gain
                  from termination of debt
              
              
              138,500
              
              
              
              -
              
              
              
              616,970
              
              
              
              11,887Gain
                  from sale of building
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              72,360**Net
                  Other Income (Expense)**
              
              
              79,501
              
              
              
              (58,875
              )
              
              
              380,640
              
              
              
              (191,684
              )**Net
                  Loss**
              
              
              (966,358
              )
              
              
              (95,459
              )
              
              
              (1,222,969
              )
              
              
              (1,356,932
              )**Basic
                  and Diluted Loss Per Share**
              
              $
              (0.01
              )
              
              $
              (0.00
              )
              
              $
              (0.01
              )
              
              $
              (0.01
              )**Weighted-Average
                  Common Shares Outstanding**
              
              
              148,913,259
              
              
              
              95,762,866
              
              
              
              122,448,336
              
              
              
              95,192,100
 
 
 
    
    
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
  4
  
 **DIATECT
        INTERNATIONAL CORPORATION**
 **CONDENSED
        STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 **Nine
                  Months Ended September 30,****2006**
              
              
              **2005****Cash
                  Flows from Operating Activities**Net
                  loss
              
              $
              (1,222,969
              )
              
              $
              (1,356,932
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              41,317
              
              
              
              34,283Amortization
                  of discount on notes payable
              
              
              9,830
              
              
              
              -Amortization
                  of loan costs and license
              
              
              4,815
              
              
              
              124,000Gain
                  from debt termination
              
              
              (616,970
              )
              
              
              (11,886
              )Net
                  loss (gain) on disposal of property and equipment
              
              
              6,728
              
              
              
              (79,194
              )Issuance
                  of stock for services
              
              
              898,660
              
              
              
              55,111Issuance
                  of warrants for services
              
              
              307,682
              
              
              
              -Issuance
                  of stock for financing costs
              
              
              -
              
              
              
              122,398Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (43,094
              )
              
              
              (29,577
              )Inventory
              
              
              55,371
              
              
              
              85,332Prepaid
                  expenses and other current assets
              
              
              (4,076
              )
              
              
              (3,000
              )Accounts
                  payable
              
              
              357,161
              
              
              
              195,438Accrued
                  liabilities
              
              
              (246,022
              )
              
              
              (156,854
              )Accrued
                  interest payable
              
              
              139,909
              
              
              
              187,236**Net
                  Cash Used in Operating Activities**
              
              
              (311,658
              )
              
              
              (833,645
              )**Cash
                  Flows from Investing Activities**Payments
                  to purchase property and equipment
              
              
              (5,170
              )
              
              
              (7,130
              )**Net
                  Cash Used in Investing Activities**
              
              
              (5,170
              )
              
              
              (7,130
              )**Cash
                  Flow from Financing Activities**Proceeds
                  from borrowings under notes payable
              
              
              655,628
              
              
              
              453,389Cash
                  paid for loan costs
              
              
              (58,500
              )
              
              
              -Principal
                  payments on notes payable
              
              
              (162,000
              )
              
              
              (50,560
              )Payments
                  for accrued settlement obligations
              
              
              (73,125
              )
              
              
              (79,428
              )Proceeds
                  from issuance of common stock and warrants
              
              
              -
              
              
              
              170,000Collection
                  of receivable from shareholder
              
              
              -
              
              
              
              265,258(Payments)
                  proceeds from checks drawn in excess of cash in bank
              
              
              (10,481
              )
              
              
              6,818**Net
                  Cash Provided by Financing Activities**
              
              
              351,522
              
              
              
              765,477**Net
                  Increase (Decrease) in Cash**
              
              
              34,694
              
              
              
              (75,298
              )**Cash
                  at Beginning of Year**
              
              
              6,382
              
              
              
              85,260**Cash
                  at End of Year**
              
              $
              41,076
              
              
              $
              9,962
 
   
 The
        accompanying notes are an integral part of these financial
        statements.
  5
  **DIATECT
        INTERNATIONAL CORPORATION**
 **CONDENSED
        STATEMENTS OF CASH FLOWS (continued)**
 **(Unaudited)**
 **Nine
                  Months Ended September 30,****2006**
              
              
              **2005****Supplemental
                  Disclosure of Cash Flow Information**Cash
                  paid during the year for interest
              
              $
              9,113
              
              
              $
              46,802**Supplemental
                  Schedule of Noncash Investing and Financing
                  Activities**Conversion
                  of notes payable into common stock
              
              $
              150,000
              
              
              $
              92,955Mortgage
                  note payable and accrued liabilities paid directly from the proceeds
                  from
                  the sale of land and building
              
              
              -
              
              
              
              900,000Common
                  stock issued for a receivable from shareholder
              
              
              -
              
              
              
              700,000Receivable
                  from shareholder offset against note payable, accrued interest
                  and accrued
                  liabilities
              
              
              -
              
              
              
              434,742Forfeiture
                  of unvested common shares upon concellation of consulting
                  agreement
              
              
              -
              
              
              
              112,500
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
  6
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 **NOTE
        1 – BUSINESS AND ORGANIZATION, BASIS OF PRESENTATION**
 
 ***Organization
        and Description of Business****–*Diatect International
        Corporation (the “Company”) is a California corporation operating in Utah as a
        developer and marketer of non-toxic pesticide products. The Company 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-QSB have been prepared in accordance with generally
        accepted accounting principles for interim financial information and with
        the
        instructions to Form 10-QSB and Item 310(b) of Regulation S-B of the Securities
        and Exchange Act of 1934, as amended. 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, 2005
        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, 2006 are not necessarily indicative of future
        results.
  **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
  ***Use
        of Estimates***– The preparation of financial statements in
        conformity with accounting principles generally accepted in the United States
        of
        America requires management to make estimates and assumptions that affect
        the
        reported amounts of assets and liabilities, disclosure of contingent assets
        and
        liabilities and the reported amounts of revenues and expenses during the
        reporting period. Actual results could differ from those estimates.
 
 ***Business
        Condition*****– The Company generated revenue of
        $853,637 and incurred a loss from operations of $1,603,609 during the nine
        months ended September 30, 2006. At September 30, 2006, the Company had a
        total
        stockholders’ deficit of $2,609,217 and its current liabilities exceeded current
        assets by $2,041,733.
 
 In
        June
        2005, three note holders of the Company filed suit in Federal Bankruptcy
        Court
        to force the Company into a Chapter 7 receivership and in February 2006 the
        Company filed a damage suit against those creditors. In April 2006 a settlement
        was reach whereby the creditor suit was dismissed and the Company was awarded
        damages through the relief of $248,175 in notes payable and $121,681 of accrued
        interest, the return to the Company of 207,275 shares of its common stock,
        which
        were cancelled, and the payment of $10,000. Accordingly, the Company was
        never
        under bankruptcy supervision of the court and the accompanying financial
        statements do not present any liabilities as subject to compromise.
 
 The
        ability of the Company to continue operations is dependent upon obtaining
        additional financing and being able to generate net profits in the future.
        Management believes that these events are likely to occur in the near future,
        even though no assurance thereof can be given. Additional financing arrangements
        have been negotiated and are discussed further in Notes 4 and 9.
 
 ***Cash
        and Cash Equivalents*** - Cash and cash equivalents include all
        highly liquid investments with original maturities of three months or
        less.
 
 ***Credit
        Risk*** - The carrying amounts of trade accounts receivable included
        in the balance sheets represent the Company’s exposure to credit risk in
        relation to its financial assets. The Company performs ongoing credit
        evaluations of each customer’s financial condition. The Company has not had any
        significant credit losses ion the past and maintains allowances for doubtful
        accounts and such allowances in the aggregate did not exceeded management’s
        estimations.
 
  7
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 ***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 is
        valued at the lower of cost or market, with cost being determined by the
        average
        cost method. Raw materials consist of the various active ingredients that
        comprise the Company’s products and shipping and packaging materials. When there
        is evidence that inventory values are less than original cost, the inventory
        is
        reduced to market value. The Company determines market value based on current
        prices and whether obsolescence exists.
 
 ***Property
        and Equipment –*** Property and equipment are stated at cost.
        Expenditures for normal repairs and maintenance are charged to operations
        as
        incurred. The cost of an asset and related accumulated depreciation are also
        charged to operations when retired or otherwise disposed. Depreciation is
        computed based on the estimated useful life of the assets using straight-line
        and accelerated methods. Useful lives for equipment range from 3 to 10
        years.
 
 ***Intangible
        Assets*****– The Company’s intangible assets consist of
        the labels that are placed on its products and that have been registered
        as
        non-toxic insecticide products with the United States Environmental Protection
        Agency pursuant to the Federal Insecticide, Fungicide and Rodenticide Act.
        The
        Company recorded these labels at cost; however, it impaired the value thereof
        by
        $2,869,570 in 2003. During 2004 and for the first 6 months of 2005, the Company
        amortized the unimpaired value over an estimated useful life of 7 years using
        the straight-line method. In July 2005, the Company concluded that the estimated
        useful life of the labels was indefinite and will henceforth subject the
        labels
        to impairment if and when appropriate. The Company has not impaired the value
        of
        the labels since making this determination.
 
 ***Long
        Lived Assets***– Long-lived assets are reviewed for impairment when
        events or changes in circumstances indicate that the carrying amount may
        not be
        recoverable. Recoverability of assets to be held and used is measured by
        comparison of the carrying amount of an asset to future net cash flows expected
        to be generated by the asset. If such assets are considered to be impaired,
        the
        impairment to be recognized is measured by the amount that the carrying amount
        of the assets exceeds the fair value of the assets. Assets to be disposed
        of are
        reported at the lower of the carrying amount or fair value less costs to
        sell.
 
 ***Fair
        Value of Financial Instruments***– Due to the short maturity of trade
        receivables and current liabilities, including trade payables, the carrying
        amount approximates fair value. The carrying amount reported for notes payable
        approximates fair value and interest rates on these notes approximate current
        interest rates given the current business condition of the Company.
 
 ***Revenue
        Recognition***– The Company recognizes revenue from the sale of its
        products when (a) persuasive evidence of an arrangement exists, (b) delivery
        has
        occurred and no significant obligations remain, (c) the sales price is fixed
        and
        determinable and (d) collection is determined to be probable. Sales credits
        and
        price concessions are treated as a reduction of revenue. Product returns
        are
        permitted, but historically have occurred within a short period after the
        sale
        and are recognized as a reduction of revenue.
 
 ***Shipping
        and Handling Costs***– Shipping and handling costs are billed to
        customers and are recorded as revenue and the associated costs are included
        in
        cost of revenues.
 
  8
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 ***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.
 
 ***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, 2006, there were
        8,200,000 potentially dilutive common shares related to convertible notes.
        At
        September 30, 2006 and 2005, there were potentially dilutive common shares
        outstanding relating to outstanding warrants to purchase 32,150,000 and
        4,650,000 shares of common stock, respectively that were not included in
        the
        computation of diluted net loss per share as their effect would have been
        anti-dilutive.
 
 ***Stock-Based
        Compensation Plans*** - Effective January 1, 2006, the Company
        adopted SFAS No. 123R "Share Based Payment". This statement is a revision
        of
        SFAS Statement No. 123, and supersedes APB Opinion No. 25, and its related
        implementation guidance. SFAS 123R addresses all forms of share based payment
        ("SBP") awards including shares issued under employee stock purchase plans,
        stock options, restricted stock and stock appreciation rights. Under SFAS
        123R,
        SBP awards will result in a charge to operations that will be measured at
        fair
        value on the awards grant date, based on the estimated number of awards expected
        to vest over the service period. Compensation cost for awards that vest will
        not
        be reversed if the awards expire without being exercised. The Company estimates
        the fair value of each stock option grant by using the Black-Scholes option
        pricing model.
 
 Prior
        to
        the Company's adoption to SFAS No. 123R, SFAS No. 123 required that the Company
        provide pro-forma information regarding net earnings and net earnings per
        share
        as if the Company's stock based awards had been determined in accordance
        with
        the fair value method described therein. The Company had previously adopted
        the
        disclosure portion of SFAS No. 148 "Accounting for Stock-Based Compensation
        -
        Transition and Disclosure," requiring quarterly SFAS No. 123 pro-forma
        disclosure. The pro-forma change for compensation cost related to stock-based
        awards granted was recognized over the service period. For stock options,
        the
        service period represents the period of time between the date of grant and
        the
        date each option becomes exercisable without consideration of acceleration
        provisions such as retirement or change of control.
 
 The
        Company is using the modified prospective method. The impact of this statement
        will require the Company to record a charge for the fair value of stock options
        granted on a prospective basis over the vesting period in the consolidated
        financial statements.
 
 As
        of
        September 30, 2006 and December 31, 2005, the Company has no unvested options
        and did not grant any options to employees during the nine months ended
        September 30, 2006. The adoption of SFAS 123R did not effect the Company's
        financial position, results of operations or cash flows for those years,
        but may
        have a material impact if options are granted in the future.
 
  9
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 ***Recently
        Enacted Accounting Standards***– On January 1, 2006, the Company
        adopted SFAS No. 151, *Inventory Costs – An Amendment of ARB
        No. 43, Chapter 4* (“SFAS 151”). SFAS 151 amends the guidance
        in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting
        for abnormal amounts of idle facility expense, freight, handling costs, and
        wasted material (spoilage). Among other provisions, the new rule requires
        that
        items such as idle facility expense, excessive spoilage, double freight,
        and
        re-handling costs be recognized as current-period charges. Additionally,
        SFAS 151 requires that the allocation of fixed production overhead to the
        costs of conversion be based on the normal capacity of the production
        facilities. The effects of adoption of SFAS 151 were not material.
 
 In
        February 2006, the FASB issued SFAS No. 155, *Accounting for
        Certain Hybrid Financial Instruments — an amendment of FASB Statements
        No. 133 and 140* (“SFAS 155”). SFAS 155 amends
        SFAS No. 133, *Accounting for Derivative Instruments and Hedging
        Activities* and SFAS No. 140, *Accounting for Transfers and
        Servicing of Financial Assets and Extinguishments of Liabilities,* and
        related interpretations. SFAS 155 permits fair value remeasurement for any
        hybrid financial instrument that contains an embedded derivative that otherwise
        would require bifurcation and clarifies which interest-only strips and
        principal-only strips are not subject to recognition as liabilities. SFAS
        155
        eliminates the prohibition on a qualifying special-purpose entity from holding
        a
        derivative financial instrument that pertains to a beneficial interest other
        than another derivative financial instrument. SFAS 155 is effective for the
        Company for all financial instruments acquired or issued beginning
        January 1, 2007. The impact of adoption of this statement on the Company’s
        consolidated financial statements is not expected to be material.
 
 In
        March
        2006, the FASB issued SFAS No. 156, *Accounting for Servicing of Financial
        Assets – an amendment of FASB Statement No. 140* (SFAS 156). SFAS 156 amends
        SFAS 140 requires an entity to recognize a servicing asset or servicing
        liability each time it undertakes an obligation to service a financial asset.
        It
        also requires all separately recognized servicing assets and servicing
        liabilities to be initially measured at fair value, if practicable. SFAS
        156
        permits an entity to use either the amortization method or the fair value
        measurement method for each class of separately recognized servicing assets
        and
        servicing liabilities. SFAS 156 is effective for the Company as of January
        1,
        2007. The impact of adoption of this statement on the Company’s consolidated
        financial statements is not expected to be material.
 
 In
        June
        2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainties in
        Income Taxes*, (FIN 48).  FIN 48 clarifies the accounting for
        uncertainty in income taxes and prescribes a recognition threshold and
        measurement attribute for the financial statement recognition and measurement
        of
        a tax position taken or expected to be taken in a tax return.  FIN 48
        is effective for fiscal years beginning after December 15,
        2006.  Management believes that adoption of this standard will not
        have a material impact on the Company's financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*
        (SFAS 157), to eliminate the diversity in practice that exists due to the
        different definitions of fair value and the limited guidance for applying
        those
        definitions in GAAP that are dispersed among the many accounting pronouncements
        that require fair value measurements. SFAS No. 157 retains the exchange price
        notion in earlier definitions of fair value, but clarifies that the exchange
        price is the price in an orderly transaction between market participants
        to sell
        an asset or liability in the principal or most advantageous market for the
        asset
        or liability. Moreover, the SFAS states that the transaction is hypothetical
        at
        the measurement date, considered from the perspective of the market participant
        who holds the asset or liability. Consequently, fair value is defined as
        the
        price that would be received to sell an asset or paid to transfer a liability
        in
        an orderly transaction between market participants at the measurement date
        (an
        exit price), as opposed to the price that would be paid to acquire the asset
        or
        received to assume the liability at the measurement date (an entry
        price).
   10
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 SFAS
        No.
        157 also stipulates that, as a market-based measurement, fair value measurement
        should be determined based on the assumptions that market participants would
        use
        in pricing the asset or liability, and establishes a fair value hierarchy
        that
        distinguishes between (a) market participant assumptions developed based
        on
        market data obtained from sources independent of the reporting entity
        (observable inputs) and (b) the reporting entity’s own assumptions about market
        participant assumptions developed based on the best information available
        in the
        circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
        about the use of fair value to measure assets and liabilities in interim
        and
        annual periods subsequent to initial recognition. Entities are encouraged
        to
        combine the fair value information disclosed under SFAS No. 157 with the
        fair
        value information disclosed under other accounting pronouncements, including
        SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where
        practicable. The guidance in this Statement applies for derivatives and other
        financial instruments measured at fair value under SFAS No.133, “Accounting for
        Derivative Instruments and Hedging Activities,” at initial recognition and in
        all subsequent periods. The impact of adoption of this statement on the
        Company’s consolidated financial statements, if any, has not yet been
        determined.
  In
        September 2006, the FASB issued “Statement of Financial Accounting Standards No.
        158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement
        Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R)” (SFAS 158),
        which will require employers to fully recognize the obligations associated
        with
        single-employer defined benefit pension, retiree healthcare and other
        postretirement plans in their financial statements. Under past accounting
        standards, the funded status of an employer’s postretirement benefit plan (i.e.,
        the difference between the plan assets and obligations) was not always
        completely reported in the balance sheet. Past standards only required an
        employer to disclose the complete funded status of its plans in the notes
        to the
        financial statements. SFAS No. 158 applies to plan sponsors that are public
        and
        private companies and nongovernmental not-for-profit organizations. The
        requirement to recognize the funded status of a benefit plan and the disclosure
        requirements are effective as of the end of the fiscal year ending after
        December 15, 2006, for entities with publicly traded equity securities, and
        at
        the end of the fiscal year ending after June 15, 2007, for all other entities.
        The requirement to measure plan assets and benefit obligations as of the
        date of
        the employer’s fiscal year-end statement of financial position is effective for
        fiscal years ending after December 15, 2008. The Company does not expect
        that
        the adoption of SFAS No. 158 will have a significant impact on the consolidated
        results of operations or financial position of the Company.
 
 In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin 108 (SAB 108), “*Considering the Effects of Prior year Misstatements
        When Quantifying Misstatements in Current Year Financial Statement*”. SAB
        108 clarifies the staff’s view regarding the process of quantifying financial
        statement misstatements. More specifically, the staff noted that certain
        registrants do not consider the effects of prior year errors on current year
        financial statements, thereby allowing improper assets or liabilities to
        remain
        unadjusted. The staff believes this approach is not in the best interests
        of the
        users of the financial statements. SAB 108 is effective for fiscal years
        ending
        on or after November 15, 2006 with earlier adoption encouraged. The Company
        is
        currently evaluating the impact that the adoption of SAB 108 will have, if
        any,
        on its financial statements and notes thereto.
 
 **NOTE
        2 – INVENTORY**
 
 Inventory
        is comprised of the following:
 
 **September
                  30,**
              
              
              **December
                  31,****2006**
              
              
              **2005**Raw
                  materials
              
              $
              296,168
              
              
              $
              365,188Finished
                  goods
              
              
              13,649
              
              
              
              -Total
                  Inventory
              
              $
              309,817
              
              
              $
              365,188
 
 
  11
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 **NOTE
        3 – PROPERTY AND EQUIPMENT**
 
 Property
        and equipment are stated at cost. Expenditures for normal repairs and
        maintenance are charged to operations as incurred. The cost of an asset and
        related accumulated depreciation are also charged to operations when retired
        or
        otherwise disposed. Depreciation is computed based on the estimated useful
        life
        of the assets using straight-line and accelerated methods. Depreciation expense
        for the nine months ended September 30, 2006 and 2005 was $41,317 and $34,283,
        respectively. The components of property and equipment are as
        follows:
 
 **Estimated**
                **Useful**
                **Life
                  in**
              
              **September
                  30,**
              
              
              **December
                  31,****Years**
              
              **2006**
              
              
              **2005**Computer
                  equipment
              3
                  to 5
              
              $
              81,239
              
              
              $
              103,585Office
                  furniture and equipment
              5
              
              
              31,432
              
              
              
              33,275Manufacturing
                  equipment
              5
                  to 10
              
              
              245,610
              
              
              
              245,610Total
                  Property and Equipment
              
              
              
              358,281
              
              
              
              382,470Less:
                  Accumulated depreciation
              
              
              
              (256,524
              )
              
              
              (237,839
              )Net
                  Property and Equipment
              
              
              $
              101,757
              
              
              $
              144,631
 
 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**
 
 
 
 
 
 
 
 
 
  12
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 Notes
        payable is comprised of the following:
 
 **September
                  30,**
              
              
              **December
                  31,****2006**
              
              
              **2005**Revolving
                  lines of credit with financial institution
              
              $
              44,436
              
              
              $
              2,808Cash
                  advances from shareholder, unsecured
              
              
              97,000
              
              
              
              97,000Convertible
                  debenture payable to La Jolla Investment, LLC
              
              
              -
              
              
              
              278,500Unsecured
                  10% notes payable to investors, in default
              
              
              306,980
              
              
              
              323,155Unsecured
                  12% notes payable to investors, in default
              
              
              40,000
              
              
              
              240,000Unsecured
                  15% notes payable to investors, in default
              
              
              286,500
              
              
              
              286,500Unsecured
                  24% notes payable to investors
              
              
              -
              
              
              
              40,000Unsecured
                  12% convertible promissory notes payable, net of discount of $98,468 and
                  $0, respectively
              
              
              311,532
              
              
              
              -Unsecured
                  5% notes payable to shareholders, due in 2008
              
              
              1,220,937
              
              
              
              1,220,937Unsecured
                  5% notes payable to vendors, due in 2008
              
              
              564,626
              
              
              
              564,626Total
                  Notes Payable
              
              
              2,872,011
              
              
              
              3,053,526Less:
                  Current portion
              
              
              1,086,448
              
              
              
              1,267,963Long-Term
                  Notes Payable
              
              $
              1,785,563
              
              
              $
              1,785,563
 
 
 ***Revolving
        Lines of Credit***– As of December 31, 2005 the Company has
        unsecured, revolving credit notes with a financial institution totaling $2,808.
        Officers and shareholders of the Company guaranteed the credit notes payable.
        In
        July, 2006 the Company entered into a $50,000 line of credit with a
        bank.  The line of credit bears interest at 9.75% per annum, is due on
        demand and requires monthly interest only payments. The line is unsecured
        and is
        personally guaranteed by a director of the Company.  In July 2006, in
        conjunction with the issuance of the guarantee, the Company issued the director
        500,000 shares of common stock valued at $8,500 or $0.017 per share,
        representing the closing market price on the date of issuance.
 
 ***Cash
        Advances from Shareholder***– Prior to 2004, a shareholder advanced
        $97,000 of cash to the Company. During 2005, the shareholder agreed to not
        require any further interest payments. The cash advances are unsecured and
        have
        no stated maturity date.
 
 ***La
        Jolla Cove Investors*** – During December 2002, the Company
        entered into a convertible debenture agreement with La Jolla Cove Investors,
        Inc. (“La Jolla Cove”), who at the time was the named as an underwriter for a
        planned public offering of the Company’s common stock. La Jolla Cove advanced
        the Company $150,000 in 2002 and $100,000 in 2003, which advances were evidenced
        by a convertible debenture agreement that was to be repaid out of a portion
        of
        the proceeds from the public offering. On July 12, 2004, La Jolla Cove filed
        a
        complaint in the Superior Court of California, County of San Diego, naming
        the
        Company as the defendant. La Jolla Cove contended that the Company breached
        its
        contract with La Jolla Cove by failing to honor the convertible debenture
        agreement. La Jolla Cove claimed damages in the amount of $406,990 plus interest
        and penalties, which resulted in part from the $150,000 of advances to the
        Company in 2002 and $100,000 in 2003. The Company withdrew the registration
        statement for the public offering on November 18, 2004 and claimed that La
        Jolla
        Cove made unreasonable demands on the Company with respect to the registration
        statement. During 2005, the Company made principal payments on the convertible
        debenture of $7,763. The adjusted carrying amount of the convertible debenture
        was $278,500 at December 31, 2005.  In June 2006, the Company reached
        a settlement with La Jolla Cove under which the Company paid La Jolla Cove
        $140,000 through July 2006 in full satisfaction of all amounts due under
        the
        convertible debenture and related interest and penalties and recognized a
        gain
        from termination of debt in the amount of $138,500 during the third quarter
        of
        2006.
 
  13
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 ***Bruce
        L. Shannon******Attempted Bankruptcy Action***–
On February 28, 2005, Bruce L.
        Shannon, an individual doing business as K-Net,
        filed a complaint in the Fourth District Court in and for Wasatch County,
        State
        of Utah, naming the Company as the defendant. Mr. Shannon contended that
        a
        $200,000 note dated August 1, 2001 and bearing interest at 12% per annum
        was due
        on August 1, 2002. The Company contended that Mr. Shannon entered into a
        note
        extension with the Company and thereby delayed the payment due date of this
        note
        until May 1, 2005. The Company recognized a $200,000 12% note payable and
        accrued interest of $80,500 at December 31, 2005.
 
 In
        June
        2005, three note holders, Bruce L. Shannon, Brent Larson and the Robinson
        Family
        LLC, filed suit in Federal Bankruptcy Court to force the Company into a Chapter
        7 receivership. In February 2006, the Company filed a damage suit against
        those
        note holders. In April 2006, a settlement was reach whereby the note-holders’
bankruptcy suit was dismissed and the Company was awarded damages through
        the
        relief of $248,175 of notes payable and $121,681 of related accrued interest
        due
        to the note holders, the return of 207,275 shares of the Company’s common stock
        by the note holders, and the payment of $10,000 of legal fees for the Company.
        In conjunction with the settlement, the Company recognized a gain from
        termination of debt in the amount of $384,623 in the accompanying statement
        of
        operations in the second quarter of 2006.
 
 ***Unsecured
        Notes Payable***– The Company has borrowed money from several
        entities, including shareholders of the Company, with various terms including
        demand promissory notes. The notes are unsecured and bear interest at rates
        from
        5% to 24% payable at different times.
 
 ***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%.
 
 ***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.
 
 ***Bridge
        Financing*** – In February 2006, the Company entered into a one
        year non-exclusive Financial Advisory and Investment Banking Agreement
        (“Investment Banking Agreement”) with Pointe Capital L.L.C. (“Pointe”) as more
        fully described in Note 6. Pursuant to the Investment Banking Agreement,
        the
        Company received gross proceeds of $150,000 in the form of unsecured convertible
        notes.  These notes were convertible into the Company’s common stock
        at a price of $0.01 per share, representing the market price on the date
        of
        issuance. No beneficial conversion option was recognized on upon the issuance
        of
        these notes. During March 2006, the $75,000 received was converted in 7,500,000
        shares of common stock and in April 2006, the remaining $75,000 note was
        converted into 7,500,000 shares of the Company’s common stock.
 
 ***Convertible
        Promissory Notes Payable*** – In June 2006, the Company
        commenced a private placement offering of convertible promissory notes and
        warrants through Pointe. Through September 30, 2006, the Company received
        proceeds of $410,000 pursuant to the offering. From June through December
        31,
        2006, the Company issued $795,000 of convertible promissory notes that bear
        interest at 12% per annum, are unsecured and are due one year from the date
        of
        issuance. The effective interest rates of the notes issued in 2006 range
        from
        12% to 39%. The notes are convertible into units at $0.05 per unit, each
        unit
        consisting of one share of common stock and one warrant to purchase one share
        of
        common stock at $0.075 per share for a period of three years from the date
        of
        issuance. Thus, the notes are convertible into an aggregate of 15,900,000
        shares
        of common stock and warrants to purchase an additional 15,900,000 shares
        of
        common stock. The Company has the option to redeem the notes at their face
        value
        plus accrued interest if the average market price of the Company’s common stock
        is $0.10 per share for a period of twenty consecutive days. In conjunction
        with
        this offering, the Company paid Pointe loan fees of $63,600 that were
        capitalized and included in prepaid expenses and other assets. The loan costs
        are being amortized over the terms of the respective notes.  A total
        of $4,815 of amortization was recorded for the nine months ended September
        30,
        2006.
 
  14
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 Based
        upon the market price of the Company’s common stock on the dates the notes were
        issued, the investors received a beneficial conversion option of $239,895.
        The
        beneficial conversion option was computed as the difference between the fair
        value and the allocated proceeds of the common stock issuable upon conversion
        of
        the promissory notes. The recognition of the beneficial conversion option
        resulted in a discount to the notes payable that is being amortized over
        the
        term of the convertible notes using the effective interest method. The Company
        recognized $9,830 of interest expense related to the discount for the nine
        months ended September 30, 2006.
 
 In
        2007,
        the Company issued an additional $533,500 of convertible promissory notes
        on the
        same terms. The notes are convertible into an aggregate of 10,670,000 shares
        of
        common stock and warrants to purchase an additional 10,670,000 shares of
        common
        stock. The related beneficial conversion option was valued at $64,421. During
        the second quarter of 2007, a total of $107,500 of the above notes was repaid
        in
        cash.
 
 
 **NOTE
        5 – SETTLEMENT OBLIGATIONS AND LITIGATION CLAIMS**
 
 ***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:
 
 **September
                  30,**
              
              
              **December
                  31,****2006**
              
              
              **2005**Complete
                  Packaging, LLC d.b.a. Compax
              
              $
              94,622
              
              
              $
              144,622David
                  J. Stecher
              
              
              6,000
              
              
              
              28,325Litho-Flexo
                  Graphics, Inc.
              
              
              63,283
              
              
              
              63,283Williams
                  & Webster
              
              
              54,564
              
              
              
              54,564Xerox
              
              
              17,590
              
              
              
              17,590National
                  Bulk
              
              
              20,418
              
              
              
              20,418Downs
                  and Parkinson
              
              
              30,938
              
              
              
              31,738Total
              
              $
              287,415
              
              
              $
              360,540
 
 
 
  15
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 ***Complete
        Packaging, LLC d.b.a. Compax***– On October 17, 2003, Complete
        Packaging, LLC, doing business as Compax, filed a complaint in the Third
  District   Court   of   Salt   Lake   County,
        State of Utah, naming the Company as the defendant. Compax contended that
        the
        Company failed to make payment of a trade payable that, with interest and
        costs
        amounted to $323,892, which   amount continued to accrue interest from
        November 30, 2004. The complaint concluded in Compax obtaining a judgment
        against the Company. During 2005, the Company entered into a settlement
        agreement with Compax that required the Company to make three monthly payments
        of $25,000 through May 2005 and a lump sum payment of $145,000 in June 2005.
        As
        a result, the Company accrued a $220,000 settlement obligation liability
        at
        December 31, 2004. The Company made two of the monthly payments but failed
        to
        make the remaining payments due under the terms of the settlement agreement.
        In
        July 2006, the Company and Compax reached a further agreement dated June
        6, 2006
        under which Compax agreed to accept payment of $150,000 in total satisfaction
        of
        the Company’s obligation. The Company paid $75,000 of this obligation during
        2006.  The remaining amount was paid at prescribed intervals with the
        final payment made on September 1, 2007, which resulted in the Company being
        released from the judgment.
 
 ***David
        J. Stecher***– During 2002, the Company entered into a promissory
        note in the amount of $18,070, bearing interest at 15% per annum, due on
        demand.
        During 2004 a suit was filed to collect the principal amount due including
        accrued interest. At December 31, 2005, the accrued settlement obligation
        was
        $28,325 including accrued interest. During the quarter ended September 30,
        2006,
        the Company [aid $30,000 under this obligations.  Subsequent to
        September 30, 2006, the Company paid an additional $6,000 in full satisfaction
        of this obligation.
 
 ***Litho-Flexo
        Graphics, Inc.***– On May 23, 2003, Litho-Flexo Graphics, Inc. filed
        a complaint in the Fourth District Court in and for Wasatch   County, State
        of Utah, naming the Company as the defendant. Litho-Flexo contended that
        the
        Company failed to make payment of a trade payable that, with interest and
        costs
        amounted to $92,478. The Company contended that the packaging labels purchased
        from Litho-Flexo were defective and could not be used in the packaging of
        the
        Company’s products. The Company filed a counterclaim claiming in excess of
        $100,000 for damages resulting from the use of the defective labels. The
        Company
        accrued a $72,625 accrued settlement obligation liability at December 31,
        2004.
        During the year ended December 31, 2005, the Company paid $9,342 to the vendor,
        which decreased the recorded accrued settlement obligation liability to $63,283
        at September 30, 2006 and December 31, 2005. No resolution has been reached
        under the claims, which continue to be in litigation.
 
 
 **NOTE
        6 – COMMITMENTS AND CONTINGENCIES**
 
 The
        Company had a verbal lease agreement for its current office and production
        facilities based in Heber, Utah with annual rent payments due of $120,000.
        The
        Company has not made any payments related to this agreement in fiscal 2006.
        During the fourth quarter of 2006, the land and building where the Company
        maintains its offices and manufacturing facility was sold by a shareholder
        to an
        entity (the “Landlord”) that is affiliated with a director of the Company. In
        conjunction with this sale, $117,060 of unpaid rent was forgiven. Commencing
        on
        January 1, 2007, the Company entered into a five year lease with the Landlord,
        requiring monthly rental payments of $12,000 plus taxes and maintenance.
        The
        lease is renewable for two additional 5 year terms with 10% increases of
        the
        rental payments to $13,200 per month and $14,250 per month,
        respectively.
 
 In
        February 2006, the Company entered into a one year Investment Banking Agreement
        with Pointe. The terms of the Investment Banking Agreement required that
        the
        Company pay $25,000 upon completion of $150,000 in bridge financing. The
        Company
        subsequently received $150,000 under the terms of a convertible promissory
        note
        that was arranged by Pointe and the Company made the $25,000 payment to Pointe.
        Additionally, the Company issued Pointe 8,000,000 warrants to purchase common
        stock at $0.01 per share for a period of 3 years. The warrants issued pursuant
        to this agreement were valued at $125,892. This amount was recorded as a
        prepaid
        expense and is being amortized over the one-year term of the agreement. The
        Company further agreed to pay Pointe a 7% commission and a 1% unaccountable
        expense allowance upon receipt of financing brought to the Company by Pointe,
        agreed to pay Pointe a fee equal to 5% of the value of the transaction as
        defined in the agreement in the event of a merger or acquisition of the
        Company.
 
  16
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 In
        February 2006, the Company entered into a renewable two-year non-exclusive
        engagement letter ( the “Engagement Letter”) with Aspen Capital Partners, LLC,
        an entity that employs a person that was on the board of directors of the
        Company at that time for consulting services in a variety of areas relating
        to
        financial, strategic and developmental growth of the Company. The financial
        terms of the Engagement Letter required a non-refundable retainer fee of
        $25,000, the issuance of 2,500,000 shares of common stock and payments of
        $15,000 per month for a two-year period. Additional provisions of the Engagement
        Letter provide that the Company issue 8,000,000 warrants to purchase common
        stock at $0.01 per share for a period of five years and, upon the completion
        of
        the $150,000 bridge financing, the Company issued 4,500,000 warrants to purchase
        common stock at $.01 per share for a period of five years. The 8,000,000
        warrants issued pursuant to the Engagement Letter were valued at $125,892.
        This
        amount was recorded as a prepaid expense and will be amortized over the two
        year
        term of the agreement. The 4,500,000 warrants were valued at $76,410 and
        were
        recorded as interest expense. The agreement also provides for the issuance
        of
        5,000,000 warrants to purchase common stock at $0.05 per share for a period
        of
        five years upon the completion of one million dollars of funding. These warrants
        were issued in May, 2007.
 
 In
        November 2005, the Company started marketing its products under an Internet
        marketing program and entered into a verbal agreement with Saber Management
        for
        its Internet marketing services. The Company agreed to set aside 12 million
        shares of common stock to be issued to Saber Management as compensation for
        its
        services, of which four million shares were delivered to Saber Management
        through May 2006 for a down payment on the project. The Company issued 3,000,000
        shares in December, 2005 valued at $24,000 or $0.008 per share and 1,000,000
        shares in May, 2006 valued at $24,000 or $0.024 per share representing the
        closing market prices on the dates of issuance.
 
 Diatect
        was unable to reach a written agreement with Saber Management and during
        the
        third quarter of 2006, the verbal agreement with Saber Management was cancelled,
        with the four million shares of common stock remaining issued to Saber
        Management. The Company’s ongoing efforts under its Internet marketing program
        were thereafter brought in-house and managed by contract personal.
 
 The
        production of pesticides is subject to complex environmental regulations.
        As of
        the date of these financial statements and the date of this report, the Company
        is unaware of any significant pending environmentally related litigation
        or of
        any specific past or prospective matters involving environmental concerns,
        which
        could impair the marketing of its products.
 
 **NOTE
        7 - COMMON STOCK**
 
 During
        the nine months ended September
        30, 2006,the Company issued 15,000,000 shares of its common stock at a
        conversion price of $0.01 per share for the conversion of bridge financing
        of
        $150,000, 2,500,000 shares for employee bonuses valued at $70,000 or $0.028
        per
        share, 9,460,350 shares issued as compensation to our chief executive officer
        valued at $189,207 or $0.02 per share and 6,000,000 shares valued at $156,000
        or
        $0.026 per share as officer bonus, 500,000 shares to a director as compensation
        for his guarantee of a line of credit of the Company valued at $8,500 or
        $0.017
        per share, 2,500,000 shares for professional services valued at $45,000 or
        $0.018 per share and 15,154,068 shares for professional fees valued at $394,006
        or $0.026 per share and 1,780,000 shares valued at $35,948 to vendors in
        settlement of expenses and accrued liabilities.  All prices were the
        market price as of the date of issuance.
 
 
  17
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 **NOTE
        8 - STOCK WARRANTS**
 
 During
        February, 2006, the Company issued five year warrants to purchase an aggregate
        of 8,000,000 shares of its common stock at an exercise price of $0.01 per
        share
        pursuant to the Engagement Letter as discussed in Note 6.  In
        addition, the Company issued three year warrants to purchase an aggregate
        of
        8,000,000 shares of its common stock to Pointe pursuant to the investment
        banking agreement as discussed in Note 6. These warrants were each valued
        at
        $125,892 and were recorded as prepaid expenses in the accompanying balance
        sheet
        of September 30, 2006.  The values are being amortized to general and
        administrative expenses in the accompanying statement of operations over
        the
        lives of the respective agreements of 2 years and one year, respectively.
        Also,
        the Company, pursuant to the Engagement Letter issued five year warrants
        to
        purchase an aggregate of 4,500,000 shares of its common stock at an exercise
        price of $0.01 per share valued at $76,410.
 
 In
        March,
        2006 the Company issued three year warrants to purchase 7,000,000 shares
        of its
        common stock at an exercise price of $0.01 per share to a consultant to the
        Company for marketing services.  The warrants were valued at $116,935
        which was charged to marketing and selling expense in the accompanying statement
        of operations.
 
 The
        estimated fair values of the above warrants were calculated using the
        Black-Scholes method and the following assumptions.
 
 Closing
                  price for the Company's common stock
              
              $0.018  to
                  $0.02Estimated
                  volatility
              
              130%
                  to 153%Risk
                  free interest rate
              
              4.77%Expected
                  dividend rate
              
              0%
 
 
 The
        following summarizes the outstanding warrants as of September 30,
        2006:
 
 **Exercise**
              
              **Warrants**
              
              **Weighted-Average
                  Remaining Contractual Life**
              
              **Number****Price**
              
              **Outstanding**
              
              **(Years)**
              
              **Exercisable**$0.01
              
              27,500,000
              
              3.3
              
              27,500,000$0.20
              
              2,912,500
              
              0.75
              
              2,912,500$0.50
              
              281,250
              
              0.75
              
              281,250$0.35
              
              1,456,250
              
              0.75
              
              1,456,25032,150,000
              
              
              
              32,150,000
 
 
 **NOTE
        9 – SUBSEQUENT EVENTS**
 
 Through
        November 30, 2007, an aggregate of $1,046,000 of the convertible promissory
        notes plus $118,079 of accrued interest have been converted at the conversion
        price of $0.05 per share into an aggregate of 23,281,549 shares of common
        stock.
        In addition, the Company issued an aggregate of 20,920,000 three year warrants
        to purchase the Company’s common stock at an exercise price of $0.075 per
        share.
 
  18
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 In
        May
        2007, the Company entered into a Master Lease Line with Gulf Pointe Capital,
        LLC.  The terms of the lease line are a credit limit of $500,000 that
        can be used for various new and used tier one production, material handling,
        computer, technology and fixture related equipment.  To date the
        Company has drawn $209,000 of the available credit.
 
 In
        July
        2007, the Company issued a 12% convertible promissory note for $250,000 and
        a
        five year warrant to purchase 5,000,000 shares of its common stock at an
        exercise price of $0.075 to Aspen Opportunity Fund in exchange for proceeds
        of
        $250,000.  The note is convertible at a rate of $0.05 per share for
        5,000,000 shares of common stock.  The shares issuable upon conversion
        and the shares underlying the warrants have certain registration rights and
        are
        required to file a registration statement no later than March 31,
        2008.  Should the Company fail to file the registration statement by
        the required date, the registration rights agreement stipulates penalties
        of 1%
        of the purchase price per month as liquidated damages.  Should the
        Company be unable to have the registration statement declared effective within
        120 days, the same penalty of 1% per month will be assessed.  The
        penalty is payable in either cash or stock at the option of the note
        holder.
 
 On
        September 20, 2007, the Company entered into an accounts receivable loan
        agreement with Aspen Opportunity Fund, L.P. for advances up to $500,000 in
        $100,000 increments, subject to maintaining a borrowing base of 80% of eligible
        accounts receivable as defined in the agreement. The note bears interest
        at a
        rate of 12.0%, is secured by eligible accounts receivable as defined in the
        agreement, requires monthly interest payments and is due on September 30,
        2009.  Mandatory prepayments of principal are required in the event
        that the eligible borrowing base falls below amounts advanced under the
        agreement.  In conjunction with the loan agreement, the Company issued
        a five year warrant to purchase 4,000,000 shares of the Company’s common stock
        at an exercise price of $0.075 per share. The shares underlying the warrants
        have certain registration rights and the Company is required to file a
        registration statement no later than March 31, 2008.  Should the
        Company fail to file the registration statement by the required date, the
        registration rights agreement stipulates penalties of 1% of the purchase
        price
        per month as liquidated damages.  Should the Company be unable to have
        the registration statement declared effective within 120 days, a penalty
        of 1%
        per month of the total warrant exercise price of $300,000 will be
        assessed.
 
 In
        October, 2007 the Company issued three year warrants to purchase 1,000,000
        shares of its common stock to a vendor at an exercise price of $0.05 for
        services.
 
 **Administrative
        Proceeding – U.S. Securities and Exchange Commission**
 
 One
        September 27, 2007, the Commission entered an order instituting a proceeding
        under Section 12(j) of the Securities Exchange Act of 1934 (“1934 Act”) naming
        us as a respondent.  This administrative proceeding has file no.
        3-12843.
 
 Section
        12(j) empowers the Commission to revoke a company’s registration under the 1934
        Act for not filing the required periodic reports such as Form 10-QSB’s and Form
        10-KSB’s. The order states that we have not filed periodic reports since we
        filed a report on Form 10-QSB for the period ended March 31,
        2005.  The order also set a hearing date which has since been
        postponed.  We answered the allegations of the Order.  On
        November 1, 2007, Administrative Law Judge Kelly allowed the parties to proceed
        by summary disposition.  Recently, we filed two of the delinquent
        reports and we intend to file the other delinquent reports with
        dispatch.  Our plan is to file the most delinquent reports
        first.
 
 Section
        12(j) provides that the Commission may suspend the trading of our shares
        for a
        period of up to twelve months.
   19
  **DIATECT
        INTERNATIONAL CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 
 
 ***U.S.
        Securities and Exchange Commission*** ,  On October 1,
        2007, the Company and its acting president and a director through their attorney
        accepted service of a Complaint filed on September 24, 2007, by the U.S.
        Securities and Exchange Commission in the U.S. District Court, District of
        Utah,
        Central Division having Case No.: 2:07cv00709.  The caption on the
        Complaint is *Securities and Exchange Commission v. Diatect International
        Corporation et al.* The four defendants are the acting president
        who is also a director, a former officer and director, a former director,
        and
        the Company.   The allegations of the Complaint claim that the
        Defendants engaged in a transaction in 2003 involving the sale of mining
        claims
        located in the State of Oregon which transaction was improperly recorded
        on the
        Company’s financial statements causing the overstatement of revenues and
        assets.   The allegations of the Complaint also claim that
        certain revenues were improperly recorded in the Company’s 2002 financial
        statements because the sales were consignment sales and not actual
        sales.   The Complaint alleges various violations of the federal
        securities laws and regulations promulgated thereunder including violations
        of
        the anti-fraud provisions and violations of regulations pertaining to periodic
        reports filed by the Company with the SEC in 2003 and 2004.   On
        April 14, 2005, the Company issued restated financial statement as of December
        31, 2004, which restated the sale of the mining claims and our
        revenues.  The Complaint seeks injunctive action against the
        defendants including the Company and seeks fines from the three individual
        defendants, and from two individual defendant’s disgorgement of stock sale
        proceeds and a bar as an officer and director.  We intend to
        vigorously defend the allegations of the Complaint.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  20
  **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-QSB 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-QSB 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 Consolidated Financial Statements and Notes thereto appearing
        elsewhere in this Form 10-QSB.
 
 **Overview**
 
 Diatect
        International Corporation (the “Company”) is a California corporation operating
        in Utah as a developer and marketer of non-toxic pesticide products. The
        Company
        sells its products to both wholesale distributors and retail customers in
        the
        United States.  As of the date of this filing, we have established an
        internet presence as well to sell directly to the consumer via our website
        at
        www.diatect.com.  The results from operations for the periods
        presented do not have any costs or results from the website for any period
        presented.
 In
          April
          2005, three note holders of the Company filed suit in Federal Bankruptcy
          Court
          to force the Company into a Chapter 7 receivership. In February, 2006 the
          Company filed a damage suit against those note holders.  In June, 2006
          a settlement was reached whereby the creditor suit was dismissed and the
          Company
          was awarded damages through the relief of $248,175 in notes payable and
          $121,681
          of accrued interest, the return to the Company of 207,275 shares of its
          common
          stock, which were cancelled, and the payment of $10,000. Accordingly, the
          Company was never under bankruptcy supervision of the court and the accompanying
          financial statements do not present any liabilities as subject to
          compromise.
 
 In
          February 2006, we entered into a two year Financial Advisory and Investment
          Banking Agreement (“Investment Banking Agreement”) with Pointe Capital L.L.C.
          (“Pointe”), and pursuant thereto, received $150,000. In addition, in June 2006
          we commenced a Convertible Promissory Note (“Convertible Note”) offering through
          Pointe.  The terms of the Investment Banking Agreement, the
          Convertible Note, and other financial arrangements that we entered into
          are
          described in Note 6 to these financial statements. Through December 31,
          2006,
          the Company received $795,000 pursuant to the Convertible Note
          offering.
 
 Our
        ability to continue operations is dependent upon obtaining additional financing
        and being able to generate net profits in the future. Management believes
        that
        these events are likely to occur, even though no assurance thereof can be
        given.
 
 
  21
  **Results
        of Operations**
 
 Comparison
        results for the three months ended September 30, 2006
 
 Revenues
        for the three months ended September 30, 2006 were $275,517 as compared to
        $224,823 for the three months ended September 30, 2005, an increase of $50,694.
        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 three months ended September 30, 2006 were $64,913 as compared
        to $80,915 for the three months ended September 30, 2005, a decrease of $16,002.
        Although sales of product were higher, costs did not increase proportionately
        as
        internet sales carry a higher margin as they are to the end user of the product
        and require no additional discounting for wholesale suppliers.
 
 Marketing
        and selling expenses were $107,586 for the three months ended September 30,
        2006
        as compared to $56,881 for the three months ended September 30, 2005, an
        increase of $50,705. The increase is primarily due to an increase in internet
        marketing during the quarter.
 
 General
        and administrative expenses were $1,148,877 for the three months ended September
        30, 2006 as compared to $123,611 for the three months ended September 30,
        2005,
        an increase of $1,025,266. Included in the amount for the three months ended
        September 30, 2006 are the value of stock issuances to our Chief Executive
        officer of $189,207 and issuances of common stock for professional fees in
        the
        aggregate amount of $550,306.  The remainder of the increase is due to
        increased professional and consulting fees and generally higher overhead
        levels.
 
 Other
        income and expense is comprised of interest expense and gain from termination
        of
        debt. Interest expense was $58,999 for the three months ended September 30,
        2006
        as compared to $58,875 for the three months ended September 30, 2005, an
        increase of $124. Included in interest expense for the three months ended
        September 30, 2006 is the amortization of the convertible promissory note
        recorded as interest expense in the amount of $9,830. The increase is due
        primarily to the decrease in debt due to settlements made of outstanding
        debt
        partially offset by higher debt levels from the private placement. Gain from
        termination of debt was $138,500 for the three months ended September 30,
        2006
        and is comprised of the settlement with La Jolla Cove Investors for which
        no
        amount exists for the three months ended September 30, 2005.
 
 Comparison
        results for the nine months ended September 30, 2006
 
 Revenues
        for the nine months ended September 30, 2006 were $853,637 as compared to
        $449,935 for the nine months ended September 30, 2005, an increase of $403,702.
        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, 2006 were $263,781 as compared
        to $352,009 for the nine months ended September 30, 2005, a decrease of
        $88,228.  The decrease is primarily due to the amortization of our EPA
        licenses in the amount of $124,000 included in the nine months ended September
        30, 2005.  In July, 2005 the Company determined that the lives of the
        EPA licenses were indefinite and therefore ceased amortization effective
        July 1,
        2005.  As a result there is no amortization amount for the nine months
        ended September 30, 2006.  This decrease is partially offset by higher
        volumes of sales of product.
 
 Marketing
        and selling expenses were $312,606 for the nine months ended September 30,
        2006
        as compared to $226,825 for the nine months ended September 30, 2005, an
        increase of $85,781. The increase is primarily due to the value of the warrant
        issued to a consultant in the amount of $116,935 and an increase in internet
        marketing partially offset by a decrease in marketing related salaries for
        the
        nine months ended September 30, 2006 when compared to the nine months ended
        September 30, 2005.
 
 General
        and administrative expenses were $1,880,659 for the nine months ended September
        30, 2006 as compared to $1,036,349 for the nine months ended September 30,
        2005,
        an increase of $844,510.  The primary reason for the increases in the
        amount for the nine months ended September 30, 2006 are the value of common
        stock issuances to our Chief Executive officer of $189,207, issuances of
        common
        stock for professional fees in the aggregate amount of $630,954 and issuances
        of
        common stock for employee bonuses in the amount if $70,000 for which no prior
        year amounts exist.
 
  22
  Other
        income and expense is comprised of interest expense, gain from termination
        of
        debt and gain from sale of building. Interest expense was $236,330 for the
        nine
        months ended September 30, 2006 as compared to $275,931 for the nine months
        ended September 30, 2005, a decrease of $39,601.  The decrease is due
        primarily to the decrease in debt due to settlements made of outstanding
        debt.
        Included in interest expense for the nine months ended September 30, 2006
        is the
        value of the warrant issued in conjunction with the bridge financing in the
        amount of $76,410 and the amortization of the convertible promissory note
        recorded as interest expense in the amount of $9,830. Included in interest
        expense for the nine months ended September 30, 2005 is the value of common
        stock issued for financing fees in the amount of $69,901. Gain from termination
        of debt was $616,970 for the nine months ended September 30, 2006 as compared
        to
        $11,887 for the nine months ended September 30, 2005, an increase of
        $605,083.  The increase is primarily due to the gain recognized during
        the nine months ended September 30, 2006 for the settlement of notes related
        to
        the attempted Chapter 7 receivership action and the gain recognized on the
        settlement with LaJolla Cove Investors for which no amounts exist for the
        nine
        months ended September 30, 2005. The gain from sale of building in the nine
        months ended September 30, 2005 was $72,360.  There is no comparable
        amount in the current period.
 
 **Liquidity
        and Capital Resources**
 
 Our
        cash
        and cash equivalents of $41,076 as of September 30, 2006 are not considered
        sufficient to support our current levels of operations for the next 12
        months.  According, we intend to seek additional financing through
        debt or equity offerings.
 
 In
        February 2006 the Company entered into a one year Financial Advisory and
        Investment Banking Agreement with Pointe Capital L.L.C. (“Pointe”), and pursuant
        thereto, received $150,000. In addition, in June 2006 the Company, through
        Pointe, commenced a Convertible Promissory Note (“Convertible Note”)
        offering.
 
 In
        June
        2006, we commenced a Convertible Promissory Note (“Convertible Note”) offering
        through Pointe. The Convertible Notes issued pursuant to the offering bear
        interest at the rate of 12%, are unsecured and are due one year from the
        date of
        issuance.  The notes are convertible into units comprised of the
        Company’s common stock with a conversion price of $0.05 per share. For each
        share of common stock, the note holder will receive 1 warrant to purchase
        the
        Company’s common stock. The warrants that comprise the unit are exercisable into
        common stock at $.075 per share and are exercisable for a period of 3 years.
        We
        have the option to redeem the Convertible Note under certain conditions at
        its
        face value plus accrued interest if the average price of the Company’s common
        stock is 200% of the conversion price per share for a period of twenty
        consecutive days. Through December 31, 2006, the Company received gross proceeds
        of $795,000 pursuant to the Convertible Note offering.
 
 Subsequent
        to December 31, 2006 we continued the Convertible Promissory Note private
        placement offering, and have received gross proceeds in 2007 of an additional
        $533,500.  We have repaid an aggregate of $107,500 of the Convertible
        Promissory Notes issued in 2006 and 2007.  Through November 30, 2007,
        an aggregate of $1,046,000 of the convertible promissory notes plus $118,079
        of
        accrued interest have been converted at the conversion price of $0.05 per
        share
        into an aggregate of 23,281,549 shares of common stock. In addition, the
        Company
        issued an aggregate of 20,920,000 three year warrants to purchase the Company’s
        common stock at an exercise price of $0.075 per share.
 
  23
  In
        May
        2007 we entered into a Master Lease Line with Gulf Pointe Capital,
        LLC.  The terms of the lease line are a credit limit of $500,000 that
        can be used for various new and used tier one production, material handling,
        computer, technology and fixture related equipment.  To date the
        company has drawn $209,000 of the available credit.  Lease payments
        vary, but are based on the following terms 24 months 5.163%, 30 Months 4.338%,
        36 month 2.793%.
 
 In
        July
        2007, we issued a 12% convertible promissory note for $250,000 and a five
        year
        warrant to purchase 5,000,000 shares of its common stock at an exercise price
        of
        $0.075 to Aspen Opportunity Fund LP in exchange for proceeds of
        $250,000.  The note is convertible at a rate of $0.05 per share for
        5,000,000 shares of common stock.
 
 In
        September 2007 we entered into an accounts receivable line of credit agreement
        with Aspen Opportunity Fund LP, with a credit line of $500,000.  The
        company can draw advances against accounts receivable, in $100,000 increments
        as
        needed.
 
 We
        believe that, with the proceeds of the Convertible Promissory Notes, the
        Master
        Lease Line, the accounts receivable credit line and our working capital that
        we
        will have sufficient resources for the next 12 months from this date of this
        report on Form 10-QSB.
 
 **Off-Balance
        Sheet Arrangements**
  We
        have
        no off-balance sheet arrangements.
  **ITEM
        3. 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, 2006.
 
 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
        2006 that has materially affected, or is reasonably likely to materially
        affect,
        our internal control over financial reporting.
  Disclosure
        controls and procedures are controls and other procedures that are designed
        to
        ensure that information required to be disclosed in our reports filed or
        submitted under the Exchange Act (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.
 
 
 
 
 
 
 
 
  24
  **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
        us as a respondent.  This administrative proceeding has file no.
        3-12843.
 
 Section
        12(j) empowers the Commission to revoke a company’s registration under the 1934
        Act for not filing the required periodic reports such as Form 10-QSB’s and Form
        10-KSB’s.  The order states that we have not filed periodic reports
        since we filed a report on Form 10-QSB for the period ended June 30,
        2005.  The order also set a hearing date which has since been
        postponed.  We answered the allegations of the Order.  On
        November 1, 2007, Administrative Law Judge Kelly allowed the parties to proceed
        by summary disposition.  Recently we filed two of the delinquent
        reports and we intend to file the other delinquent reports with
        dispatch.  Our plan is to file the most delinquent reports
        first.
 
 Section
        12(j) provides that the Commission may suspend the trading of our shares
        for a
        period of up to twelve months.
  ***U.S.
        Securities and Exchange Commission*** ,  On October 1,
        2007, the Company and its acting president and a director through their attorney
        accepted service of a Complaint filed on September 24, 2007, by the U.S.
        Securities and Exchange Commission in the U.S. District Court, District of
        Utah,
        Central Division having Case No.: 2:07cv00709.  The caption on the
        Complaint is *Securities and Exchange Commission v. Diatect International
        Corporation et al.* The four defendants are the acting president
        who is also a director, a former officer and director, a former director,
        and
        the Company.   The allegations of the Complaint claim that the
        Defendants engaged in a transaction in 2003 involving the sale of mining
        claims
        located in the State of Oregon which transaction was improperly recorded
        on the
        Company’s financial statements causing the overstatement of revenues and
        assets.   The allegations of the Complaint also claim that
        certain revenues were improperly recorded in the Company’s 2002 financial
        statements because the sales were consignment sales and not actual
        sales.   The Complaint alleges various violations of the federal
        securities laws and regulations promulgated thereunder including violations
        of
        the anti-fraud provisions and violations of regulations pertaining to periodic
        reports filed by the Company with the SEC in 2003 and 2004.   On
        April 14, 2005, the Company issued restated financial statement as of December
        31, 2004, which restated the sale of the mining claims and our
        revenues.  The Complaint seeks injunctive action against the
        defendants including the Company and seeks fines from the three individual
        defendants, and from two individual defendant’s disgorgement of stock sale
        proceeds and a bar as an officer and director.  We intend to
        vigorously defend the allegations of the Complaint.
  ***Complete
        Packaging, LLC d.b.a. Compax***– On October 17, 2003, Complete
        Packaging, LLC, doing business as Compax, filed a complaint in the Third
        District Court of Salt Lake County, State of Utah, naming the Company as
        the
        defendant. Compax claimed a trade payable, with interest and costs of $323,892.
        Compax obtained a judgment against the Company. During 2005, we entered into
        a
        settlement agreement with Compax that required us to make three monthly payments
        of $25,000 through May 2005 and a lump sum payment of $145,000 in June 2005.
        We
        accrued a $220,000 settlement obligation liability at December 31, 2004.
        The
        Company made two of the monthly payments but failed to make the remaining
        payments due under the terms of the settlement agreement. In July 2006, the
        Company and Compax reached a further agreement dated June 6, 2006 under which
        Compax agreed to accept payment of $150,000 as total satisfaction of our
        obligation.   We made the payments and received a judgment release on
        September 1, 2007.
   25
  ***La
        Jolla Cove Investors*** – During December 2002, the Company
        entered into a convertible debenture agreement with La Jolla Cove Investors,
        Inc. (“La Jolla Cove”), who at the time was the named as an underwriter for a
        planned public offering of the Company’s common stock. La Jolla Cove advanced
        the Company $150,000 in 2002 and $100,000 in 2003, which advances were evidenced
        by a convertible debenture agreement that was to be repaid out of a portion
        of
        the proceeds from the public offering. On July 12, 2004, La Jolla Cove filed
        a
        complaint in the Superior Court of California, County of San Diego, naming
        the
        Company as the defendant. La Jolla Cove contended that the Company breached
        its
        contract with La Jolla Cove by failing to honor the convertible debenture
        agreement. La Jolla Cove claimed damages in the amount of $406,990 plus interest
        and penalties, which resulted in part from the $150,000 of advances to the
        Company in 2002 and $100,000 in 2003. The Company withdrew the registration
        statement for the public offering on November 18, 2004 and claimed that La
        Jolla
        Cove made unreasonable demands on the Company with respect to the registration
        statement. During 2005, the Company made principal payments on the convertible
        debenture of $7,763. The adjusted carrying amount of the convertible debenture
        was $278,500 at December 31, 2005.  In June 2006, the Company reached
        a settlement with La Jolla Cove under which the Company paid La Jolla Cove
        $140,000 through July 2006 in full satisfaction of all amounts due under
        the
        convertible debenture and related interest and penalties and recognized a
        gain
        from termination of debt in the amount of $138,500 during the third quarter
        of
        2006.
  ***David
        J. Stecher***– During 2002, the Company entered into a demand
        promissory note in the amount of $18,070, bearing interest at 15% per annum.
        During 2004 a suit was filed to collect the principal amount and accrued
        interest. At December 31, 2005, we accrued a settlement obligation of $28,325.
        During 2006, we paid $36,000 to satisfy this obligation.
  ***Litho-Flexo
        Graphics, Inc.***– On May 23, 2003, we were named as defendant in a
        complaint filed by Litho-Flexo Graphics, Inc. in the Fourth District Court
        in
        and for Wasatch County, State of Utah. Litho-Flexo claimed a trade payable
        of
        $92,478. We contended that the packaging labels we received from Litho-Flexo
        were defective and could not be used in the packaging of our products. We
        filed
        a counterclaim claiming damages in excess of $100,000 caused by the defective
        labels. We accrued a $72,625 settlement obligation liability at December
        31,
        2004. During the year ended December 31, 2005, we paid $9,342 to Litho-Flexo,
        which decreased the accrued settlement obligation liability to $63,283 at
        December 31, 2006.   We intend to defend the complaint and pursue our
        counterclaim.
 
 ***Alleged******Bankruptcy
        -*** In June 2005, three note holders, Bruce L. Shannon, Brent
        Larson
        and the Robinson Family LLC, filed suit in Federal Bankruptcy Court to force
        the
        Company into a Chapter 7 receivership. In February 2006, the Company filed
        a
        damage suit against those note holders. In April 2006, a settlement was reach
        whereby the note-holders’ bankruptcy suit was dismissed and the Company was
        awarded damages through the relief of $248,175 of notes payable and $121,681
        of
        related accrued interest due to the note holders, the return of 207,275 shares
        of the Company’s common stock by the note holders, and the payment of $10,000 of
        legal fees for the Company.
 
 ***The
        Robinson Family, L.L.C.***–   The Robinson Family LLC filed suit
        in Fourth District Court in Wasatch County, State of Utah, to collect a $106,000
        promissory note bearing interest at 12% per annum that was due on April 1,
        2002.
        At December 31, 2004, we carried the note at $126,686. The Robinson Family
        LLC
        was party to a suit filed in Federal Bankruptcy Court seeking to force us
        into
        involuntary bankruptcy. During the fourth quarter of 2005, we entered into
        a
        settlement agreement with the Robinson Family LLC, where they forgave their
        note
        and interest; in return we released the Robinson Family LLC from any counter
        claims based on the involuntary bankruptcy suit.
 
 
 
  26
  **ITEM
        2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
        PROCEEDS.**
 
 During
        the nine months ended September
        30, 2006,the Company issued 15,000,000 shares of its common stock at a
        conversion price of $0.01 per share for the conversion of bridge financing
        of
        $150,000, 2,500,000 shares for employee bonuses valued at $70,000 or $0.028
        per
        share, 9,460,350 shares valued at $189,207 or $0.02 per share and 6,000,000
        shares valued at $156,000 or $0.026 per share as officer bonus, 500,000 shares
        to a director as compensation
        for
        his guarantee of a line of credit of the Company valued at $8,500 or
        $0.017 per share, 2,500,000 shares for professional services valued at $45,000
        or $0.018 per share and 15,154,068 shares for professional fees valued at
        $394,006 or $0.026 per share and 1,780,000 shares valued at $35,948 to vendors
        in settlement of expenses and accrued liabilities.  All prices were
        the market price as of the date of issuance.
 
 **ITEM
        6.**
  (a)
        Exhibits
 
  31.1
              Rule
                  13a-14(a)/15d-14(a) Certification of David Andrus, Principal Executive
                  Officer and Principal Financial
                  Officer
  32.1
              Certification
                  of David Andrus, Principal Executive Officer and Principal Financial
                  Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                  to
                  Section 906 of the Sarbanes-Oxley Act of
                  2002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  27
  **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:
                  December 14, 2007By:
              /s/
                  David AndrusDavid
                  S. AndrusPrincipal
                  Executive OfficerPrincipal
                  Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 28