**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 June 30, 2005





[    ]
      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 oNo
x








As
      of
      October 22, 2007 the issuer had 152,652,184
      shares of common stock, no par value, outstanding.





Transitional
      Small Business Disclosure
      Format: YesoNox




















**Page**
              **Number****PART
                I**ITEM
                1. Condensed Financial Statements (unaudited)Balance
                Sheets as of June 30, 2005 and December 31, 2004
            1Statements
                of Operations for the
                Three and Six Months Ended June 30, 2005 and 2004
            2Statements
                of Cash Flows for the
                Six Months Ended June 30, 2005 and 2004
            3Notes
                to Condensed Consolidated
                Financial Statements
            4ITEM
                2. Management’s Discussion and Analysis.
            19ITEM
                3. Controls and Procedures.
            22**PART
                II**ITEM
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds.
            23ITEM
                6. Exhibits.
            23Signatures
            24









































**DIATECT
      INTERNATIONAL CORPORATION**


**CONDENSED
      BALANCE SHEETS**


**(Unaudited)**





June
                30,
            
            
            December
                31,2005
            
            
            2004**ASSETS****Current
                Assets:**Cash
            
            $
            5,909
            
            
            $
            85,260Accounts
                receivable, net of allowance for doubtful accounts
            
            
            48,440
            
            
            
            54,919Inventory
            
            
            407,239
            
            
            
            461,911Prepaid
                expenses and other current assets
            
            
            6,750
            
            
            
            150,000**Total
                Current Assets**
            
            
            468,338
            
            
            
            752,090**Property
                and Equipment**, net of accumulated depreciation
            
            
            158,369
            
            
            
            1,009,323**Intangible
                Assets**, net of accumulated amortization
            
            
            1,116,322
            
            
            
            1,240,322**TOTAL
                ASSETS**
            
            $
            1,743,029
            
            
            $
            3,001,735**LIABILITIES
                AND STOCKHOLDERS' DEFICIT****Current
                Liabilities:**Trade
                accounts payable
            
            $
            399,985
            
            
            $
            88,442Accrued
                liabilities
            
            
            41,913
            
            
            
            268,728Checks
                drawn in excess of cash in bank
            
            
            1,551
            
            
            
            13,619Accrued
                payroll and related liabilities
            
            
            124,564
            
            
            
            285,590Accrued
                interest
            
            
            544,952
            
            
            
            506,924Accrued
                settlement obligations
            
            
            335,108
            
            
            
            418,541Current
                portion of notes payable
            
            
            1,388,406
            
            
            
            2,272,207**Total
                Current Liabilities**
            
            
            2,836,479
            
            
            
            3,854,051**Long-term
                Notes Payable,**net of current portion
            
            
            1,785,563
            
            
            
            1,785,563**Stockholders'
                Deficit:**Common
                stock, no par value, 100,000,000 shares authorized,
              95,665,040
                shares and 88,817,518 shares outstanding,respectively
            
            
            21,805,197
            
            
            
            20,784,858Warrants
                outstanding
            
            
            148,033
            
            
            
            148,033Accumulated
                deficit
            
            
            (24,832,243
            )
            
            
            (23,570,770
            )**Total
                Stockholders' Deficit**
            
            
            (2,879,013
            )
            
            
            (2,637,879
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT**
            
            $
            1,743,029
            
            
            $
            3,001,735














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








1





**DIATECT
      INTERNATIONAL CORPORATION**


**CONSENSED
      STATEMENTS OF OPERATIONS**


**(UNAUDITED)**








For
                the three months ended
            
            
            For
                the six months endedJune
                30,
            
            
            June
                30,2005
            
            
            2004
            
            
            2005
            
            
            2004**Revenue**
            
            $
            110,299
            
            
            $
            170,106
            
            
            $
            225,112
            
            
            $
            379,692**Cost
                of Revenue**
            
            
            148,372
            
            
            
            128,075
            
            
            
            271,094
            
            
            
            275,685**Gross
                Profit**
            
            
            (38,073
            )
            
            
            42,031
            
            
            
            (45,982
            )
            
            
            104,007**Operating
                Expenses:**Marketing
                and selling
            
            
            94,847
            
            
            
            8,832
            
            
            
            169,944
            
            
            
            117,606General
                and administrative
            
            
            413,788
            
            
            
            683,174
            
            
            
            914,109
            
            
            
            1,218,969**Total
                Operating Expenses**
            
            
            508,635
            
            
            
            692,006
            
            
            
            1,084,053
            
            
            
            1,336,575**Loss
                From Operations**
            
            
            (546,708
            )
            
            
            (649,975
            )
            
            
            (1,130,035
            )
            
            
            (1,232,568
            )**Other
                Income (Expense):**Other
                income / expense
            
            
            (566
            )
            
            
            -
            
            
            
            73,731
            
            
            
            -Gain
                from termination of debt
            
            
            9,809
            
            
            
            2,769
            
            
            
            11,887
            
            
            
            78,935Interest
                and financing expense
            
            
            (52,140
            )
            
            
            (230,032
            )
            
            
            (217,056
            )
            
            
            (486,342
            )**Total
                Other Income (Expense)**
            
            
            (42,897
            )
            
            
            (227,263
            )
            
            
            (131,438
            )
            
            
            (407,407
            )**Net
                Loss**
            
            $
            (589,605
            )
            
            $
            (877,238
            )
            
            $
            (1,261,473
            )
            
            $
            (1,639,975
            )**Basic
                and Diluted Loss Per Share**
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.02
            )**Weighted
                Average Common Shares Outstanding**
            
            
            97,704,600
            
            
            
            70,084,851
            
            
            
            94,901,987
            
            
            
            67,430,059














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











2





**DIATECT
      INTERNATIONAL CORPORATION**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**





For
                the six months endedJune
                30,2005
            
            
            2004**Cash
                Flows from Operating Activities:**Net
                loss
            
            $
            (1,261,473
            )
            
            $
            (1,639,976
            )Adjustments
                  to reconcile net loss to net cash used in operatingactivities:Gain
                from debt termination
            
            
            (11,887
            )
            
            
            (76,166
            )Depreciation
                and amortization
            
            
            160,278
            
            
            
            169,328Gain
                on disposal of property and equipment
            
            
            (79,194
            )
            
            
            20,756Issuance
                of stock for services
            
            
            79,111
            
            
            
            604,420Issuance
                of stock for finance charges and interest
            
            
            122,398
            
            
            
            164,838Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            6,479
            
            
            
            (32,358
            )Inventory
            
            
            54,672
            
            
            
            75,713Prepaid
                expenses and other current assets
            
            
            30,750
            
            
            
            (144,888
            )Trade
                accounts payable and accrued liabilities
            
            
            114,311
            
            
            
            28,876Accrued
                payroll and related liabilities
            
            
            (156,854
            )
            
            
            -Accrued
                interest
            
            
            137,113
            
            
            
            131,851Accrued
                settlement obligations
            
            
            -
            
            
            
            (59,481
            )**Net
                Cash Used in Operating Activities**
            
            
            (804,296
            )
            
            
            (757,087
            )**Cash
                Flows from Investing Activities:**Acquisition
                of property and equipment
            
            
            (6,130
            )
            
            
            (3,166
            )**Net
                Cash Used in Investing Activities**
            
            
            (6,130
            )
            
            
            (3,166
            )**Cash
                Flow from Financing Activities:**Proceeds
                from borrowings under notes payable
            
            
            428,259
            
            
            
            381,763Principal
                payments on notes payable
            
            
            (50,560
            )
            
            
            (21,275
            )Net
                change in accrued settlement obligations
            
            
            (83,433
            )
            
            
            -Proceeds
                from issuance of common stock and warrants
            
            
            170,000
            
            
            
            399,500Collection
                on receivable from shareholder
            
            
            265,258
            
            
            
            -Proceeds
                from checks drawn in excess of cash in bank
            
            
            1,551**Net
                Cash Provided by Financing Activities**
            
            
            731,075
            
            
            
            759,988**Net
                Increase (Decrease) in Cash**
            
            
            (79,351
            )
            
            
            (265
            )**Cash
                at Beginning of Period**
            
            
            85,260
            
            
            
            6,021**Cash
                at End of Period**
            
            $
            5,909
            
            
            $
            5,756








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








3





**DIATECT
      INTERNATIONAL CORPORATION**


**CONDENSED
      STATEMENTS OF CASH FLOWS (continued)**


**(UNAUDITED)**





For
                the six months endedJune
                30,2005
            
            
            2004**Supplemental
                Disclosures of Cash Flow Information:**Cash
                paid during the period for interest
            
            $
            46,802
            
            
            
            -**Non-cash
                Investing and Financing Activities:**Mortgage
                and accrued liabilities paid directly from the proceeds from the
                sale of
                land and building
            
            $
            900,000
            
            
            $
            -Common
                stock issued for a receivable from shareholder
            
            
            700,000
            
            
            
            -Receivable
                from shareholder offset against note payable, accrued interest and
                accrued
                liabilities
            
            
            434,742
            
            
            
            -Forfeiture
                of unvested common stock upon cancellation of consulting
                agreement
            
            
            112,500
            
            
            
            -Conversion
                of accounts and notes payable into common stock
            
            
            61,330
            
            
            
            123,826Conversion
                of notes and accrued interest into common stock
            
            
            -
            
            
            
            122,676Satisfaction
                of accrued settlement obligations with common stock
            
            
            -
            
            
            
            28,755
































The
        accompanying notes are an integral part of these condensed financial
        statements.
  4


**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 SB 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, 2004 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 ending June 30, 2005 are not necessarily indicative of future
      results.




**NOTE
      2 – RESTATEMENT**




The
      Company has restated its financial statements as of June 30, 2004 and for the
      six months then ended as follows:







**As
                previously**
            
            
            **Effect
                of****For
                the six months ended June 30, 2004**
            
            **Reported**
            
            
            **Restatement**
            
            
            **As
                Restated**Revenues
            
            
            385,121
            
            
            
            (5,429
            )
            
            
            379,692Cost
                of revenues
            
            
            154,017
            
            
            
            121,668
            
            
            
            275,685Gross
                profit
            
            
            231,104
            
            
            
            (127,097
            )
            
            
            104,007Operating
                expenses
            
            
            1,208,385
            
            
            
            128,190
            
            
            
            1,336,575Operating
                loss
            
            
            (977,281
            )
            
            
            (255,287
            )
            
            
            (1,232,568
            )Interest
                expense
            
            
            (309,529
            )
            
            
            (97,878
            )
            
            
            (407,407
            )Net
                loss
            
            
            (1,286,810
            )
            
            
            (353,165
            )
            
            
            (1,639,975
            )**As
                previously**
            
            
            **Effect
                of****As
                of June 30, 2004**
            
            **Reported**
            
            
            **Restatement**
            
            
            **As
                Restated**Current
                assets
            
            
            1,392,738
            
            
            
            (503,408
            )
            
            
            889,330Non-current
                assets
            
            
            14,834,286
            
            
            
            (12,395,034
            )
            
            
            2,439,252Total
                assets
            
            
            16,227,024
            
            
            
            (12,898,442
            )
            
            
            3,328,582Current
                liabilities
            
            
            5,688,191
            
            
            
            (1,695,930
            )
            
            
            3,992,261Long-term
                liabilities
            
            
            174,971
            
            
            
            1,937,021
            
            
            
            2,111,992Committments
            
            
            179,245
            
            
            
            (179,245
            )
            
            
            -Equity
            
            
            16,227,024
            
            
            
            (19,002,696
            )
            
            
            (2,775,672
            )








5





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








The
      primary adjustments made to the June
      30, 2004 financial statement are as follows:





Intangible
      assets relating to EPA labels
      were revised from having an indefinite life to being amortized over their
      estimated useful life of seven years, which resulted in recognition of
      $124,000
      of amortization expense during the
      period.





Interest
      expense was increased for
      interest that was paid through the issuance of equities of approximately
      $82,000.





The
      sale of mining property for a
      $12,000,000 note receivable was not substantive and was
      reversed.




Inventory
      was adjusted by $536,068 to
      reduce it to market value which was lower than cost.




Approximately
      $1,400,000 of notes
      payable were reclassified from long-term liabilities to current
      liabilities.




Stock
      options and warrants, which had
      expired or had been exercised, of $210,635 were reclassified to common
      stock.




**NOTE
      3 - 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
      $225,112 and incurred a loss from operations of $1,261,473 during the six months
      ended June 30, 2005. At June 30, 2005 the Company had a total stockholders’
deficit of $2,879,013 and its current liabilities exceeded current assets by
      $2,368,141.





In
      June,
      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 $354,175 in notes payable and
      $142,367.00 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 the Company entered into a one year non excusive Financial
      Advisory and Investment Banking Agreement (“Investment Banking Agreement”) with
      Pointe Capital L.L.C. (“Pointe”), and pursuant thereto, received $150,000. In
      addition, in June 2006 the Company, through Pointe, commenced a Convertible
      Promissory Note (“Convertible Note”) offering.  The terms of the
      Investment Banking Agreement, the Convertible Note, and other financial
      arrangements that the Company has entered into subsequent to June 30, 2005,
      are
      described in Note 11 to these financial statements. Through December 31, 2006,
      the Company received $700,000 pursuant to the Convertible Note
      offering.








6





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








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, even though no
      assurance thereof can be given.





***Cash
      and Cash Equivalents*** - Cash and cash equivalents include interest
      bearing and non-interest bearing bank deposits, money market accounts, and
      short-term certificates of deposit 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 maintains
      allowances for doubtful accounts and such allowances in the aggregate did not
      exceed management’s estimations.




***Trade
      Accounts Receivable and Allowance for Doubtful Accounts*** - Trade
      accounts receivables and other receivables are carried at original invoiced
      amounts less an allowance for doubtful accounts.





***Inventory***–
By
      the end of the second quarter of 2005, the Company determined that its
      finished goods inventory, as it was then constituted, required additional raw
      materials to bring it to the level of Company standards. Consequently, the
      existing finished goods inventory was reclassified as raw materials having
      a
      cost that is less than the cost of disposing of the product and acquiring new
      raw materials. Furthermore, the Company continues to sell the now reconstituted
      product at a price in excess of the cost of production. 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
      and
      30 years for buildings.





***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.








7





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








***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.





***Marketing
      and Selling Expenses***– Marketing and selling expenses include the
      salaries and wages of its in-house sales force, rent, 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.





***Stock-Based
      Compensation Plans*** - The Company utilizes the intrinsic-value
      method as provided by Accounting Principles Board Opinion (“APB”) No. 25 in
      accounting for its stock options and restricted stock plans and provides pro
      forma disclosure of the compensation expense determined under the fair value
      provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,
      Accounting for Stock-Based Compensation, as amended by SFAS No. 148, “Accounting
      for Stock-Based Compensation - Transition and Disclosure.” The effect on net
      loss and net loss per common share if the Company had applied the fair value
      recognition provisions of SFAS No. 123 to employee stock-based compensation
      would have resulted in no difference from reported amounts.  There are
      no options outstanding as of June 30, 2005.




***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.
      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 June 30, 2005 and 2004, there were
      potentially dilutive common shares outstanding relating to outstanding warrants
      to purchase 4,495,050 shares of common stock, that were not included in the
      computation of diluted net loss per share as their effect would have been
      anti-dilutive.





***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.








8





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based
      Payment*, which is an amendment to SFAS No. 123, *Accounting for
      Stock-Based Compensation* and supersedes Accounting Principles Board (“APB”)
      Opinion No. 25, “Accounting for Stock Issued to Employees.” This new standard
      eliminates the ability to account for share-based compensation transactions
      using APB No. 25 and requires such transactions to be accounted for using a
      fair-valued-based method, with the resulting cost recognized in the Company’s
      financial statements. This new standard is effective for annual periods
      beginning after June 15, 2005. The adoption of this standard is not expected
      to
      have a material impact on the Company’s financial statements until such time as
      stock options are granted.





In
      December 2004, the FASB issued SFAS No. 153, *Exchanges of
      Non-monetary Assets—An Amendment of APB Opinion No. 29*, Accounting for
      Non-monetary Transactions (“SFAS 153”). SFAS 153 eliminated the exception
      from fair value measurement for non-monetary exchanges of similar productive
      assets in paragraph 21(b) of APB Opinion No. 29, *Accounting for
      Non-monetary Transactions*, and replaces it with an exception for exchanges
      that do not have commercial substance. SFAS 153 specifies that a
      non-monetary exchange has commercial substance if the future cash flows of
      the
      entity are expected to change significantly as a result of the exchange. The
      effects of adoption of SFAS 153 were not material.





In
      June
      2005, the FASB issued SFAS No. 154, *Accounting Changes and Error
      Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
      No. 3, Reporting Accounting Changes in Interim Financial
      Statements*.  Statement 154 applies to all voluntary changes in
      accounting principles, and changes the requirements for accounting for and
      reporting of a change in accounting principle. Statement 154 requires
      retrospective application to prior periods' financial statements of a voluntary
      change in accounting principles unless it is impracticable. It is effective
      for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Earlier application is permitted for accounting changes
      and corrections of errors made occurring in fiscal years beginning after June
      1,
      2005. The effects of adoption of SFAS 154 were not material.





In
      June
      2005, the FASB Emerging Issues Task Force (the “EITF”) reached a consensus on
      Issue No. 05-6, *Determining the Amortization Period for Leasehold
      Improvements*. The guidance requires that leasehold improvements acquired in
      a business combination or purchased subsequent to the inception of a lease
      be
      amortized over the lesser of the useful life of the assets or a term that
      includes renewals that are reasonably assured at the date of the business
      combination or purchase. The guidance is effective for periods beginning after
      June 29, 2005. The effects of adoption of EITF No. 05-6 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, if any, has not yet been determined.








9





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








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, if any, has not yet been determined.





In
      June
      2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainties in
      Income Taxes*, (FIN 48).  FIN 48 clarifies the accounting for
      uncertainty in income taxes and prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return.  FIN 48
      is effective for fiscal years beginning after December 15,
      2006.  Management believes that adoption of this standard will not
      have a material impact on the Company's financial statements.





In
      September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(SFAS 157), to eliminate the diversity in practice that exists due
      to the
      different definitions of fair value and the limited guidance for applying those
      definitions in GAAP that are dispersed among the many accounting pronouncements
      that require fair value measurements. SFAS No. 157 retains the exchange price
      notion in earlier definitions of fair value, but clarifies that the exchange
      price is the price in an orderly transaction between market participants to
      sell
      an asset or liability in the principal or most advantageous market for the
      asset
      or liability. Moreover, the SFAS states that the transaction is hypothetical
      at
      the measurement date, considered from the perspective of the market participant
      who holds the asset or liability. Consequently, fair value is defined as the
      price that would be received to sell an asset or paid to transfer a liability
      in
      an orderly transaction between market participants at the measurement date
      (an
      exit price), as opposed to the price that would be paid to acquire the asset
      or
      received to assume the liability at the measurement date (an entry
      price).




SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity’s own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition. Entities are encouraged to
      combine the fair value information disclosed under SFAS No. 157 with the fair
      value information disclosed under other accounting pronouncements, including
      SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where
      practicable. The guidance in this Statement applies for derivatives and other
      financial instruments measured at fair value under SFAS No.133, “Accounting for
      Derivative Instruments and Hedging Activities,” at initial recognition and in
      all subsequent periods. The impact of adoption of this statement on the
      Company’s consolidated financial statements, if any, has not yet been
      determined.







10





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








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
      4 – PROPERTY AND EQUIPMENT**





Depreciation
      expense for the six months ended June 30, 2005 and 2004 was $36,278 and $45,328,
      respectively. The components of property and equipment are as
      follows:





**Estimated**
              **Useful
                Life**
            
            **June
                30,**
            
            
            **December
                31,****in
                Years**
            
            **2005**
            
            
            **2004**Land
            
            
            $
            -
            
            
            $
            150,000Building
            30
            
            
            -
            
            
            
            725,500Computer
                equipment
            3
                to 5
            
            
            91,840
            
            
            
            88,437Office
                furniture and equipment
            5
            
            
            33,275
            
            
            
            33,275Manufacturing
                equipment
            5
                to 10
            
            
            245,610
            
            
            
            245,610Total
                Property and Equipment
            
            
            
            370,725
            
            
            
            1,242,822Less:
                Accumulated depreciation
            
            
            
            (212,356
            )
            
            
            (233,499
            )Net
                Property and Equipment
            
            
            $
            158,369
            
            
            $
            1,009,323





On
      March
      9, 2005, the Company sold its land
      and building inHeber
      City,Utahto a shareholder of the Company. The
      land and building were sold for$900,000 and the proceeds from the sale
      were paid directly by the purchaser to satisfy the balance due under the related
      mortgage note payable. The sale of the land and building resulted in the
      recognition of a gain of $70,822. At the time of the sale, the Company entered
      into a verbal lease agreement with the purchaser of the land and building to
      lease the land and building on a month-to-month basis for $10,000 per month.
      The Company uses the building
      as
      its manufacturing and office facilities.








11





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








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





**NOTE
      5 – NOTES PAYABLE**


**June
                30,**
            
            
            **December
                31,****2005**
            
            
            **2004**Revolving
                lines of credit with financial institutions, past due
            
            $
            13,065
            
            
            $
            15,404Cash
                advances from shareholder, unsecured
            
            
            97,000
            
            
            
            97,000Mortgage
                note payable, secured by real property
            
            
            -
            
            
            
            847,000Convertible
                debenture payable to La Jolla Investment , LLC
            
            
            278,500
            
            
            
            286,263Unsecured
                10% notes payable to investors, in default
            
            
            331,655
            
            
            
            392,155Unsecured
                12% notes payable to investors, in default
            
            
            366,686
            
            
            
            366,685Unsecured
                15% notes payable to investors, in default
            
            
            256,500
            
            
            
            260,000Unsecured
                24% notes payable to investors, in default
            
            
            40,000
            
            
            
            -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
            
            
            
            564,626Non-interest
                cash advances
            
            
            5,000
            
            
            
            7,700Total
                Notes Payable
            
            
            3,173,969
            
            
            
            4,057,770Less:
                Current portion
            
            
            1,388,406
            
            
            
            2,272,207Long-Term
                Notes Payable
            
            $
            1,785,563
            
            
            $
            1,785,563





***Revolving
      Lines of Credit*** – As of June 30, 2005 the Company has
      unsecured, revolving credit notes with a financial institution totaling $2,589.
      Officers and shareholders of the Company guarantee the credit notes payable.
      The
      amounts borrowed under revolving credit notes at June 30, 2005 were from another
      bank and subsequently were paid and closed.





***Cash
      Advances from Shareholder***– Prior to 2004, a shareholder advanced
      $97,000 of cash to the Company. The Company was obligated to issue 250,000
      shares of common stock to the shareholder every six months as payment of
      interest on the cash advances. In January 2005, the Company issued 750,000
      shares of common stock to this shareholder in payment of all accrued interest
      at
      that date and the shareholder agreed to not require any further interest
      payments in common stock or otherwise. The cash advances are unsecured and
      have
      no stated maturity date.





***Mortgage
      Note Payable*** – The Company was obligated under the terms of a
      mortgage note payable in the amount of $847,000. The note bore interest at
      13%
      per annum and was secured by land and building. Interest only payments were
      due
      monthly beginning February 17, 2003 through January 17, 2005 when the mortgage
      note was due. As described in Note 4, during March 2005, the land and building
      were sold to a shareholder of the Company and the proceeds from the sale were
      use to satisfy the balance due under the mortgage note and other short-term
      liabilities.








12





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








***La
      Jolla Cove Investors*** – During December 2002, the Company
      entered into a convertible debenture agreement with La Jolla Cove Investors,
      Inc., who at the time was the named underwriter (the “Underwriter”) for a
      planned public offering of the Company’s common stock. The Underwriter 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, the Underwriter
      filed
      a complaint for breach of contract in the State ofCaliforniaclaiming a default under the terms of
      the convertible debenture in the amount of $406,990 plus interest and penalties.
      On November 18, 2004, prior to the registration statement relating to
      the
      public offering being declared effective, the Company withdrew the registration statement. During
      2005, the
      Company made principal payments to the Underwriter of $7,763. DuringJuly,2006,the
      Company reached a
      settlement agreement with the Underwriter whereby the Company paid the
      Underwriter $140,000 in full satisfaction of all amounts due under the
      convertible debenture and related interest and penalties.





***Unsecured
      12% Notes Payable to Investors***– The Robinson Family LLC filed
      suit in Fourth District Court in Wasatch County, State of Utah, to collect
      a
      $106,000 promissory note bearing interest at 12% per annum that was due on
      April
      1, 2002. At December 31, 2004, the note was carried at $126,686. Subsequently,
      the Robinson Family LLC became a party to a suit filed in Federal Bankruptcy
      Court to force the Company into involuntary bankruptcy. During the fourth
      quarter of 2005, the Company entered into a settlement agreement where the
      Company was released from any obligations.  The Company released
      Robinson Family LLC from any damages resulting from the involuntary bankruptcy
      suit. The settlement resulted in the Company recognizing a $126,686 gain from
      termination of debt.





On
      August
      1, 2001, the Company executed a $200,000 note payable to Bruce L. Shannon with
      interest at 12% per annum, due August 1, 2002 and extended (with dispute) to
      May
      1, 2005. In April 2006, all amounts of principal and interest due under the
      note
      were forgiven as part of a settlement discussed further in Note 6.





***Unsecured
      Notes Payable***– The Company has borrowed money from several
      entities, including shareholders of the Company, with various terms including
      demand promissory notes. The notes are unsecured and bear interest at rates
      from
      5% to 24% payable at different times. As additional consideration for certain
      loans, the Company issued common stock to the lenders. The shares of common
      stock issued to the lenders were valued at the market value of the common stock
      on the date issued and were recognized as interest expense on that date. During the years ended December
      31, 2005
      and 2004, the Company issued 1,927,034 and 2,736,565 shares of common stock,
      respectively, at prices ranging from $0.013 to $0.06 and $0.06 to $0.20 per
      share, respectively, having a total market value of $84,898 and $354,106,
      respectively. The proceeds received from the financing were allocated between
      the notes payable and the common stock based on their relative fair value.
      The
      allocation resulted in discounts on the notes payable of $84,898 and $354,106,
      respectively that were recognized immediately as interest
      expense.





***5%
      Notes Payable*** – 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.








13





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








**NOTE
      6 – SETTLEMENT OBLIGATIONS AND LITIGATION CLAIMS**





The
      Company has obligations due to creditors that arose from cash loans and the
      receipt of goods or services in the amount of $335,108 and $418,541,
      respectively, at June 30, 2005 and December 31, 2004. 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:





***Complete
      Packaging, LLC d.b.a. Compax***–On
      October 17, 2003,Complete Packaging, LLC,
      doing business
      asCompax,filed a complaintin
      theThirdDistrictCourtofSaltLakeCounty,
      State ofUtah,namingthe Companyas
      the defendant. Compax contended thatthe Companyfailed to make payment of a trade
      payable that, with interest and costs amountedto $323,892,which
      amount continued toaccrue interest from
      November 30, 2004.The complaint concluded
      in
      Compax obtaining a judgment against the Company.During 2005,the
      Companyentered into a settlement
      agreementwith Compaxthat
      requiredthe
      Company to makethreemonthly payments of$25,000 through May
      2005 and a lump sum
      payment of $145,000 in June 2005.As a result, the Companyaccrued a $220,000settlement obligationliability
      at December 31, 2004. TheCompanymadetwoof themonthlypayments
      but failed to make the
      remaining payments due under the terms of the settlement agreement.In July 2006,the Company and Compax reached
      afurtheragreement dated June 6,2006 under which Compax agreed to
      acceptpayment of$150,000intotal satisfactionof the Company’s obligation.
      This amount was paid at prescribed
      intervals with the final paymentmadeon
      September1,2007, which resulted intheCompany
      being released from thejudgment.





***La
      Jolla Cove Investors,
      Inc.***–
      On July 12,
      2004,La Jolla Cove Investors,
      Inc.(“La Jolla Cove”)filed
      a complaintin
      the Superior Court of California,CountyofSan Diego,
      namingthe Companyas the defendant. La Jolla Cove
      contendedthatthe Companybreacheditscontract withLa Jolla Coveby failing to honor a convertible
      debenture agreement entered into whenLa Jolla Cove wasnamed
      asanunderwriter
      forthe Company ina
      planned public offering ofthe Company’scommon stock. La JollaCoveclaimeddamages in the amount of
      $406,990, whichresultedin part from $150,000ofadvances
      tothe Companyin
      2002 and $100,000 in 2003, which
      amounts were to be repaid out of a portion of the proceeds from theplannedpublic
      offering.The Companywithdrew the registration statementfor the public offeringon November 18, 2004
      and
      claimedthat La JollaCovemade
      unreasonable demands onthe Companywith respect to the registration
      statement.The Companyaccrued
      a $268,132settlement obligationliabilityat
      December 31,2004which was increased to$278,500at
      December 31, 2005.  In June 2006,the Company reached a settlement with
      La JollaCove under which
      the Company paid La Jolla Cove$115,000throughJuly 2006,
      which resulted in thefull releaseofthe Company.





***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 June 30, 2005, the accrued settlement obligation was
      $20,651 including accrued interest. During 2006, the Company paid $36,000 in
      full satisfaction of this obligation.





***Litho-Flexo
      Graphics, Inc.***– On
      May 23, 2003,Litho-Flexo
      Graphics, Inc.filed
      a complaintin
      the Fourth District Court in and forWasatchCounty,
      State ofUtah,
      namingthe Companyas
      the defendant. Litho-Flexo
      contendedthatthe Companyfailed to make payment of a trade
      payable that, with interest and costs amountedto $92,478.The Companycontendedthat the packaging labels purchased
      from Litho-Flexo were defective and could not be used in the packaging ofthe Company’sproducts.The Companyfiled a counterclaimclaimingin
      excess of $100,000 for damages
      resulting from the use of the defective labels.The Companyaccrueda$72,625accrued
      settlement obligationliability at December
      31,
      2004.During the
      year ended December 31, 2005, the Company paid $9,342 to the vendor,which decreased the recorded
      accrued
      settlement obligation liability to$63,283
      at December 31, 2005.No resolution
      has been
      reached under the claims, which continue to be in litigation.








14





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








***Bruce
      L.
      Shannon******Attempted Bankruptcy
      Action***– On
      February 28, 2005,Bruce L. Shannon,anindividualdoing
      business asK-Net,filed
      a complaintin
      the Fourth District Court in and forWasatchCounty,
      State ofUtah,
      namingthe Companyas
      the defendant. Mr. Shannon
      contendedthat a $200,000 note dated August 1,
      2001 and bearing interest at 12% per annum was due on August 1, 2002.The Companycontendedthat Mr. Shannon entered into a note
      extension withthe
      Companyand thereby delayedthepaymentdue
      dateof this note until May
      1,
      2005. The Companyaccrued
      a $280,500settlement obligationat December 31,
      2004and
      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 reached whereby the note-holders,
      bankruptcy suit was dismissed and the Company was awarded damages through the
      relief of $354,175 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.





***L.
      Craig Hunt***– Pursuant to the non-payment of a $42,750 promissory
      note dated August 28, 1995, a judgment was entered against the Company on
      February 1, 1999 in the amount of $61,543. The plaintiff did not pursue the
      collection of this judgment and the Company recorded this amount as a gain
      from
      extinguishment of debt during 2004. During 2006 the Plaintiff’s estate made
      demand on the Company for payment of the judgment amount. The Company contends
      that the period allowed for the collection of the judgment had expired and
      no
      further obligation exists. No amount has been accrued for this claim in the
      accompanying financial statements.





**NOTE
      7 - COMMON STOCK**





In
      February 2006, the shareholders approved an increase of the authorized common
      stock of the Company from 100,000,000 shares to 300,000,000 shares. The
      accompanying balance sheets have been restated to reflect the increase in the
      authorized number of shares.





During
      March 2005, the Company entered
      into a stock subscription agreement with a shareholder of the Company
      (“Subscriber”) and issued 3,500,000 shares of common stock to the Subscriber for
      $700,000 receivable from the Subscriber. During March 2005, the Company also
      sold its real property, consisting of its manufacturing facilities located
      inHeber City,Utah,
      to the Subscriber and in conjunction
      therewith entered into a note payable in the amount of $402,000 bearing interest
      at 10% per annum. Upon the sale of this real estate, the Company entered into
      a
      verbal rental agreement with the Subscriber whereby the Company would pay
      $10,000 per month rent for the real estate that was sold. In addition to the
      foregoing, the Company issued 1,500,000 shares of its common stock to the
      Subscriber in February 2005 for $150,000 and issued 1,577,034 shares to the
      Subscriber in March 2005 as financing fees, valued at $80,523, the market value
      of the Company’s common stock on the date of issuance.





During
      March, April and May of 2005, the
      Company collected $265,258 of the receivable from the Subscriber and in June
      2005, the Company was informed by the Subscriber that the balance of the
      receivable would not be paid. The subscription agreement provided the Company
      with the right to offset any and all obligations that the Company may have
      to
      the Subscriber against the amount due from the Subscriber. Upon notification
      that the balance of the subscription agreement would not be paid, theCompany offset the $402,000
      note payableto the
      Subscriber and related accrued interest of $9,802 against the unpaid balance
      of
      $434,742 receivable from the Subscriber. The remaining $22,940 was offset
      against the $10,000 per month rental payments. The Company has not made any
      payments since the inception of the verbal rental agreement exceptfor the amount offset. During 2007, the
      Subscriber forgave the amounts due pursuant to the verbal rental agreement,
      in
      conjunction with the Subscriber’s sale of the real estate described herein. See
      Note 11.








15





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








During
      the six months ended June 30,
      2005, the Company issued the following shares of common
      stock:





·
            2,218,908
                shares of common stock were issued to employees, directors and service
                providers as compensation. The shares issued were valued based on
                the
                closing market price on each issuance date, which resulted in the
                recognition of $130,938 of compensation at a weighted-average price
                of
                $0.06 per share.





·
            250,000
                shares of common stock were issued to an officer of the Company as
                reimbursement for expenses paid on behalf of the Company. The shares
                issued were value at a price of $0.05 per share, or $12,500, based
                on the
                closing market price on the date
                issued.





·
            3,226,290
                shares of common stock were issued to third-parties for $435,258
                of cash,
                at a weighted-average price of $0.13 per
                share.





·
            4,152,461
                shares of common stock were issued upon conversion of notes payable
                and
                satisfaction of accrued expenses totaling $553,143, or at a
                weighted-average price of $0.13 per share. The price per share was
                based
                upon the closing market price on each issuance
                date.





·
            The
                cancellation of 3,000,000 shares of common stock upon the cancellation
                of
                a consulting agreement with a third party. The 3,000,000 shares were
                issued in 2004 and were valued at $150,000, or $0.05 per share. The
                cancellation of the shares resulted in the reversal of the related
                remaining $112,500 of prepaid consulting expense and the recognition
                of
                the reversal of $37,500 of consulting
                expense.





**NOTE
      8 - STOCK WARRANTS**





During
      2004, the Company issued2,912,500 shares of common
      stock,warrants to purchase
      2,912,500 shares of common stock at $0.20 per share and warrants to purchase
      1,456,250 shares of common stock at $0.35 per share for net proceeds of
      $232,923. The proceeds were allocated to the common stock and the warrants
      base
      upon their relative fair value, with $84,890 allocated to the common stock,
      $100,631 allocated to the $0.20 warrants and $47,402 allocated to the $0.35
      warrants. The Black-Scholes Option Pricing Model determined the fair value
      of
      the warrants. The fair value of the $0.20 and the $0.35 warrants was $295,079
      and $138,991, respectively, based upon the following assumptions: risk-free
      interest rates of 3.0%, expected dividend yield of 0%, expected volatility
      of
      172% and expected life of 3 years.





The
      following summarizes the warrants outstanding at June 30, 2005:





**Weighted-Average****Exercise**
            
            **Warrants**
            
            **Remaining
                Contractual****Price**
            
            **Outstanding**
            
            **Life
                (Years)**$0.20
            
            2,912,500
            
            2.0$0.35
            
            1,456,250
            
            2.04,368,750











16





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








**NOTE
      9 – CONTINGENCIES**





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
      10 – ACQUISITION AGREEMENT**





On
      March
      9, 2005 the Company entered into a memorandum of understanding with Paul
      Morrell, Inc., d.b.a. The Event Source (“TES”). Under the terms of the
      memorandum of understanding, as subsequently modified, the Company agreed to
      purchase the business operations and the intangible assets of TES ; however,
      TES withdrew from the transaction on
      June 6, 2005, with no further obligations or commitments on the part of the
      Company.





**NOTE
      11 – SUBSEQUENT EVENTS**





Subsequent
      to June 30, 2005, the Company issued additional shares of its common stock
      as
      follows:





·
            On
                September 5, 2005 the Company issued 250,000 shares at a price of
                $0.013
                per share based on the closing market price as of that date to a
                director
                for legal services rendered in the amount of
                $3,250.





·
            On
                September 15, 2005 the Company issued 350,000 shares at a price of
                $0.013
                per share based on the closing market price as of that date to a
                two
                vendors for services rendered in the amount of
                $4,375.





·
            On
                September 15, 2005 the Company issued 3,000,000 shares at a price
                of
                $0.008 per share based on the closing market price as of that date
                to a
                vendor for services rendered in the amount of
                $24,000.





On
      September 15, 2005 the Company received cash in exchange for two unsecured,
      one
      year notes bearing interest at 15% in the aggregate amount of
      $30,000.





In
      November 2005, the Company started marketing its products under an Internet
      marketing program and verbally entered into an 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 in
      April 2006 for a down payment on the project. 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 personnel.





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.
      Additionally, the Company issued Pointe 8,000,000 warrants to purchase common
      stock at $0.01 per share for a period of 3 years; agreed to pay a 7% commission,
      1% unaccountable expenses; a 5% fee in the event of a merger or acquisition
      of
      the Company; and 2% of gross sales of the Company’s products initiated by
      Pointe. The Company subsequently received  a $150,000 convertible
      promissory note that was arranged by Pointe. This note was later converted
      into
      15,000,000 shares of the Company’s common stock.








17





**DIATECT
      INTERNATIONAL CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**








In
      February 2006, the Company also entered into a renewable two-year non-exclusive
      engagement letter (“Engagement Letter”) with an entity that employs one of the
      Company’s directors, 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 require a non-refundable retainer fee of $25,000
      and the issuance of 2,500,000 shares of the Company’s common stock and $15,000
      per month for 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 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.





In
      June
      2006, the Company commenced a private placement offering of convertible
      promissory notes and warrants. Through December 31, 2006, the Company issued
      $700,000 of convertible promissory notes. The notes bear interest at 12% per
      annum, are unsecured and are due one year from the date of issuance. The notes
      are convertible into units at $0.05 per unit, each unit consisting of one share
      of common stock and a warrant to purchase one share of common stock at $0.075
      per share for a period of three years. The Company has the option to redeem
      the
      notes at their face value plus accrued interest if the average price of the
      Company’s common stock is 200% of the conversion price for a period of twenty
      consecutive days. In conjunction with this offering, the Company paid Pointe
      $33,500.





Subsequent
      to December 31, 2006 and under the terms of the on-going private placement
      offering, the Company issued an additional $771,000 of 12% convertible
      promissory notes. These notes are also convertible into units of common stock
      and warrants under the terms described above.





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, $187,060 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.




During
      2006, the Company issued 10,737,350 shares of common stock valued at $276,617.
      The Company issued 2,500,000 shares of the common shares as employee bonus
      valued at $70,000. The Company issued 500,000 shares of common stock valued
      at
      $8,500 to a director as compensation for his guarantee of a line of credit
      of
      the Company.

















18





**ITEM
      2. MANAGEMENT'S DISCUSSION AND
      ANALYSIS.**




**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
      June
      2005 three note holders of the Company filed suit in Federal Bankruptcy Court
      to
      force the Company into a Chapter 7 receivership and in February 2006 the Company
      filed a damage suit against those note holders.  In April 2006 a
      settlement was reach whereby the creditor suit was dismissed and the Company
      was
      awarded damages through the relief of $248,175 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 the Company 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 the Company, through Pointe, commenced a Convertible Promissory
      Note (“Convertible Note”) offering.  The terms of the Investment
      Banking Agreement, the Convertible Note, and other financial arrangements that
      the Company has entered into subsequent to June 30, 2005, are described in
      Note
      8 to these financial statements. Through December 31, 2006, the Company has
      received $700,000 pursuant to the Convertible Note offering.











19





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, even though no
      assurance thereof can be given.








**Results
      of Operations**





Comparison
      results for the three months ended June 30, 2005





Revenues
      for the three months ended June 30, 2005 were $110,299 as compared to $170,106
      for the three months ended June 30, 2004, a decrease of $59,807.  The
      decrease is primarily due to the restructuring done of the Company’s sales force
      during the three months ended June 30, 2005.





Cost
      of
      revenues for the three months ended June 30, 2005 were $148,372 as compared
      to
      $128,075, an increase of $20,297.  Included in the cost of sales for
      the three months ended June 30, 2005 and 2004 is non-cash amortization of the
      EPA license for the product in the amount of $62,000 for each period. Subsequent
      to June 30, 2005, the Company determined that the EPA licenses had an indefinite
      life and has ceased amortization of the license as of that date. The increase
      in
      cost of revenue is due primarily to higher fixed costs of
      production.





Marketing
      and selling expenses were $94,847 for the three months ended June 30, 2005
      as
      compared to $8,832 for the three months ended June 30, 2004, an increase of
      $86,015.  The increase is due to increased expenditures on sales
      salaries during the three months ended June 30, 2005 when compared to the three
      months ended June 30, 2004.





General
      and administrative expenses were $413,788 for the three months ended June 30,
      2005 as compared to $683,174 for the three months ended June 30, 2004, a
      decrease of $269,386.  The decrease is primarily due to the reduction
      of full time staff and decreases in professional fees for the three months
      ended
      June 30, 2005 when compared to the three months ended June 30,
      2004.





Other
      income and expense is comprised of other income, gain from settlement of debt
      and interest expense.  Other expense for the three months ended June
      30, 2005 was $566. There was no amount for the three months ended June 30,
      2004.
      Gain from settlement of debt is comprised of settling certain liabilities for
      less than stated value. Gain from settlement of debt was $9,809 for the three
      months ended June 30, 2005.  There was no prior year amount for the
      three months ended June 30, 2004.  Interest and financing expense was
      $52,140 for the three months ended June 30, 2005 as compared to $230,032 for
      the
      three months ended June 30, 2004, a decrease of $177,892.  The
      decrease is due primarily to the decrease in debt due to settlements made of
      outstanding debt and decreased financing fees paid during the three months
      ended
      June 30, 2005 when compared to the three months ended June 30,
      2004.








Comparison
      results for the six months ended June 30, 2005





Revenues
      for the six months ended June 30, 2005 were $225,112 as compared to $379,692
      for
      the six months ended June 30, 2004, a decrease of $154,580.  The
      decrease is primarily due to the restructuring done of the Company’s sales force
      during the six months ended June 30, 2005.





Cost
      of
      revenues for the six months ended June 30, 2005 were $271,094 as compared to
      $275,685, a decrease of $4,591.  Included in the cost of sales for the
      six months ended June 30, 2005 and 2004 is non-cash amortization of the EPA
      license for the product in the amount of $124,000 for each period. Subsequent
      to
      June 30, 2005, the Company determined that the EPA licenses had an indefinite
      life and has ceased amortization as of that date.








20





Marketing
      and selling expenses were $169,944 for the six months ended June 30, 2005 as
      compared to $117,606 for the six months ended June 30, 2004, an increase of
      $52,338.  The increase is due to increased expenditures on sales
      salaries during the six months ended June 30, 2005 when compared to the six
      months ended June 30, 2004.





General
      and administrative expenses were $914,109 for the six months ended June 30,
      2005
      as compared to $1,218,969 for the six months ended June 30, 2004, a decrease
      of
      $304,860. The decrease is primarily due to the reduction of full time staff
      and
      decreases in professional fees for the six months ended June 30, 2005 when
      compared to the six months ended June 30, 2004.





Other
      income and expense is comprised of other income, gain from settlement of debt
      and interest expense.  Other income for the six months ended June 30,
      2005 was $73,731 and is primarily comprised of the gain on the sale of the
      building in the amount of $74,297.  There was no amount for the six
      months ended June 30, 2004.  Gain from settlement of debt is comprised
      of settling certain liabilities for less than stated value. Gain from settlement
      of debt was $11,887 for the six months ended June 30, 2005 as compared to
      $78,935 for the six months ended June 30, 2004.  The decrease for the
      six months ended June 30, 2005 is primarily due to the lack of cash available
      to
      pay negotiated settlements.  Interest and financing expense was
      $217,056 for the six months ended June 30, 2005 as compared to $486,342 for
      the
      six months ended June 30, 2004, a decrease of $269,286.  The decrease
      is due primarily to the decrease in debt due to settlements made of outstanding
      debt and decreased financing fees paid during the six months ended June 30,
      2005
      when compared to the six months ended June 30, 2004.





**Liquidity
      and Capital Resources**





Our
      cash
      and cash equivalents of $5,909 as of June 30, 2005 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.





On
      September 15, 2005 the Company received cash in exchange for two unsecured,
      one
      year notes bearing interest at 15% in the aggregate amount of
      $30,000.





In
      February 2006 the Company entered into a two 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, Pointe commenced a Convertible Promissory Note (“Convertible Note”)
      offering for the Company. In conjunction with this offering, the Company paid
      $10,000 and issued 500,000 shares of its common stock in legal fees. 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.
      The
      Company has 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 $700,000 pursuant to the Convertible Note offering.  Subsequent to
      December 31, 2006, the Company has received an aggregate of
      $771,000.  The Company will account for the proceeds and costs of the
      offering in the respective fiscal 2006 and 2007 periods in which the
      transactions occur.








21





During
      June 2006 the Company also negotiated a settlement with La Jolla Cove Investors,
      Inc., and paid $140,000 in full satisfaction of this liability.





We
      believe, based on our current cash levels in conjunction with the above
      mentioned offering proceeds we will have sufficient funds to finance our current
      operations for at least the next 12 months.





**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 June 30, 2005.





There
      have been no changes in our internal controls over financial reporting in
      connection with this evaluation that occurred during the second quarter of
      fiscal 2005 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.





















































22





**PART
      II - OTHER INFORMATION**




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





·
            On
                April 1, 2005 we issued
                400,000 shares at a price of $0.08 per share in a private placement
                of our
                stock to an investor for proceeds of $27,500. We have relied on an
                exemption from registration pursuant to Section 4(2) of the Securities
                Act
                of 1933 in the issuance of our
                securities.






**ITEM
      5. OTHER INFORMATION**





In
      June
      2005 three note holders of the Company filed suit in Federal Bankruptcy Court
      to
      force the Company into a Chapter 7 receivership and in February 2006 the Company
      filed a damage suit against those note holders.  In April 2006 a
      settlement was reach whereby the creditor suit was dismissed and the Company
      was
      awarded damages through the relief of $354,175 in notes payable and $142,367
      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.







**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



























































23





**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:
                October 23, 2007By:/s/
                David AndrusDavid
                S. AndrusPrincipal
                Executive OfficerPrincipal
                Financial Officer



























































24