UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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





For the
quarterly period ended March 31, 2009





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





For the
transition period from_____ to _____





Commission
File Number: 0-10147





DIATECT INTERNATIONAL
CORPORATION


(Exact
name of registrant as specified in its charter)





California
              82-0513109(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)




875 South Industrial
Parkway, Heber City, Utah 84032


(Address
of principal executive offices)





(435)
654-4370


(Registrant's
telephone number)





Check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No  ̈





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




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





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





As of May
20, 2009 the issuer had 215,350,959 shares of common stock, no par value,
outstanding.








Page
                NumberPART
      I  Financial InformationITEM
      1. Condensed Financial Statements (Unaudited)Balance
      Sheets as of March 31, 2009 and December 31, 2008
              1Statements
      of Operations for the Three Months Ended March 31, 2009 and
      2008
              2Statements
      of Cash Flows for the Three Months Ended March 31, 2009 and
      2008
              3Notes
      to Unaudited Condensed Financial Statements
              5ITEM
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              14ITEM
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              16ITEM
      4T. Controls and Procedures.
              16PART
      II Other InformationITEM
      1. Legal Proceedings
              17ITEM
      1A. Risk Factors
              17ITEM
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
              17ITEM
      6. Exhibits.
              18Signatures
              19





DIATECT
INTERNATIONAL CORPORATION


BALANCE
SHEETS


(Unaudited)





March 31,
                                      
                                      
                                      December 31,2009
                                      
                                      
                                      2008ASSETSCurrent
      AssetsCash
                                      
                                      $
                                      32,438
                                      
                                      
                                      $
                                      587Trade
      accounts receivable, net of allowance for doubtful accounts of $16,000 and
      $16,000, respectively
                                      
                                      
                                      74,206
                                      
                                      
                                      
                                      51,814Inventory
                                      
                                      
                                      54,667
                                      
                                      
                                      
                                      38,416Deferred loan costs and other current
      assets
                                      
                                      
                                      156,382
                                      
                                      
                                      
                                      135,719Total
      Current Assets
                                      
                                      
                                      317,693
                                      
                                      
                                      
                                      226,536Property and Equipment,
      net of accumulated depreciation of$206,616 and $189,894,
      respectively
                                      
                                      
                                      157,695
                                      
                                      
                                      
                                      182,286Total Assets
                                      
                                      $
                                      475,388
                                      
                                      
                                      $
                                      408,822LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesTrade
      accounts payable
                                      
                                      $
                                      1,329,011
                                      
                                      
                                      $
                                      1,009,133Accrued
      liabilities
                                      
                                      
                                      75,228
                                      
                                      
                                      
                                      75,833Accrued
      interest payable
                                      
                                      
                                      627,617
                                      
                                      
                                      
                                      606,556Accrued
      settlement obligations
                                      
                                      
                                      455,451
                                      
                                      
                                      
                                      502,251Deferred
      gain on sale and leaseback of assets
                                      
                                      
                                      41,452
                                      
                                      
                                      
                                      50,523Notes
      Payable, net of discount of $14,897 and $0, respectively
                                      
                                      
                                      2,958,757
                                      
                                      
                                      
                                      2,749,996Current portion of capital lease
      obligations
                                      
                                      
                                      84,440
                                      
                                      
                                      
                                      79,812Total Current Liabilities
                                      
                                      
                                      5,571,956
                                      
                                      
                                      
                                      5,074,104Long-Term
      LiabilitiesCapital lease obligations, net of current
      portion
                                      
                                      
                                      29,114
                                      
                                      
                                      
                                      52,041Total Long-Term Liabilities
                                      
                                      
                                      29,114
                                      
                                      
                                      
                                      52,041Stockholders'
      DeficitCommon
      stock, no par value; 500,000,000 shares authorized; 215,350,959 shares and
      215,350,959 shares outstanding, respectively
                                      
                                      
                                      25,589,213
                                      
                                      
                                      
                                      25,589,213Warrants
      outstanding
                                      
                                      
                                      2,388,103
                                      
                                      
                                      
                                      2,318,751Accumulated deficit
                                      
                                      
                                      (33,102,998
                                      )
                                      
                                      
                                      (32,625,287
                                      )Total Stockholders' Deficit
                                      
                                      
                                      (5,125,682
                                      )
                                      
                                      
                                      (4,717,323
                                      )Total Liabilities and Stockholders'
      Deficit
                                      
                                      $
                                      475,388
                                      
                                      
                                      $
                                      408,822




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




1





DIATECT
INTERNATIONAL CORPORATION


STATEMENTS
OF OPERATIONS


(Unaudited)





For the Three Months EndedMarch 31,2009
                                  
                                  
                                  2008Sales
                                  
                                  $
                                  188,427
                                  
                                  
                                  $
                                  372,964Cost of Goods Sold
                                  
                                  
                                  118,407
                                  
                                  
                                  
                                  153,673Gross Profit
                                  
                                  
                                  70,020
                                  
                                  
                                  
                                  219,291ExpensesMarketing
      and selling
                                  
                                  
                                  120,687
                                  
                                  
                                  
                                  260,551General and administrative
                                  
                                  
                                  354,262
                                  
                                  
                                  
                                  596,188Total Expenses
                                  
                                  
                                  474,949
                                  
                                  
                                  
                                  856,739Loss
      from Operations
                                  
                                  
                                  (404,929
                                  )
                                  
                                  
                                  (637,448
                                  )Other
      Income (Expense)Interest
      expense
                                  
                                  
                                  (72,782
                                  )
                                  
                                  
                                  (117,114
                                  )Gain from termination of
    debt
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,283Net Other Income
                                  
                                  
                                  (72,782
                                  )
                                  
                                  
                                  (112,831
                                  )Net Loss
                                  
                                  $
                                  (477,711
                                  )
                                  
                                  $
                                  (750,279
                                  )Basic and Diluted Loss Per
      Share
                                  
                                  $
                                  (0.00
                                  )
                                  
                                  $
                                  (0.00
                                  )Weighted-Average Basic and Diluted Common Shares
      Outstanding
                                  
                                  
                                  215,350,959
                                  
                                  
                                  
                                  203,066,759




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


2


DIATECT
INTERNATIONAL CORPORATION


STATEMENTS
OF CASH FLOWS


(Unaudited)





For the Three Months EndedMarch 31,2009
                                
                                
                                2008Cash
      Flows from Operating ActivitiesNet
      loss
                                
                                $
                                (477,711
                                )
                                
                                $
                                (750,279
                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                                
                                
                                22,798
                                
                                
                                
                                23,155Amortization
      of discount on notes payable
                                
                                
                                2,705
                                
                                
                                
                                54,971Amortization
      of loan costs
                                
                                
                                30,674
                                
                                
                                
                                53,754Gain
      from debt termination
                                
                                
                                -
                                
                                
                                
                                (4,283
                                )Net
      gain on disposal of property and equipment
                                
                                
                                (7,278
                                )
                                
                                
                                (9,071
                                )Issuance
      of stock for services
                                
                                
                                -
                                
                                
                                
                                48,000Issuance
      of warrants for services
                                
                                
                                51,750
                                
                                
                                
                                34,272Changes
      in operating assets and liabilities:Accounts
      receivable
                                
                                
                                (22,391
                                )
                                
                                
                                (27,956
                                )Inventory
                                
                                
                                (16,252
                                )
                                
                                
                                10,000Deferred
      loan costs and other current assets
                                
                                
                                (51,337
                                )
                                
                                
                                (58,701
                                )Accounts
      payable
                                
                                
                                319,879
                                
                                
                                
                                179,501Accrued
      liabilities
                                
                                
                                (605
                                )
                                
                                
                                (34,595
                                )Accrued interest payable
                                
                                
                                21,061
                                
                                
                                
                                39,253Net Cash Used in Operating
      Activities
                                
                                
                                (126,707
                                )
                                
                                
                                (441,979
                                )Cash Flows from Investing
      Activities
                                
                                
                                -
                                
                                
                                
                                -Cash
      Flow from Financing ActivitiesProceeds
      from borrowings under notes payable
                                
                                
                                223,658
                                
                                
                                
                                -Proceeds
      from exercise of warrants
                                
                                
                                -
                                
                                
                                
                                72,500Proceeds
      from issuance of stock and warrants
                                
                                
                                -
                                
                                
                                
                                390,000Principal
      payments on notes payable
                                
                                
                                -
                                
                                
                                
                                (6,062
                                )Principal
      payments on lease obligation
                                
                                
                                (18,300
                                )
                                
                                
                                (14,340
                                )Accrued settlement obligation
      changes
                                
                                
                                (46,800
                                )
                                
                                
                                (2,000
                                )Net Cash Provided by Financing
      Activities
                                
                                
                                158,558
                                
                                
                                
                                440,098Net
      Increase (Decrease) in Cash
                                
                                
                                31,851
                                
                                
                                
                                (1,881
                                )Cash at Beginning of Period
                                
                                
                                587
                                
                                
                                
                                9,864Cash at End of Period
                                
                                $
                                32,438
                                
                                
                                $
                                7,983




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


3


DIATECT
INTERNATIONAL CORPORATION


STATEMENTS
OF CASH FLOWS (continued)





For the Three Months EndedMarch 31,2009
                          
                          
                          2008Supplemental
      Disclosure of Cash Flow InformationCash paid for interest
                          
                          $
                          709
                          
                          
                          $
                          17,694Supplemental
      Schedule of Noncash Investing andFinancing
      ActivitiesDiscount
      on issuance of Notes payable and warrants
                          
                          $
                          17,602
                          
                          
                          $
                          -Purchase of equipment under capital lease
      obligations
                          
                          
                          -
                          
                          
                          
                          15,067




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


4




DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS


NOTE
1 – BUSINESS AND ORGANIZATION, BASIS OF PRESENTATION





Organization and
Description of Business– Diatect International Corporation (the “Company”) develops and markets
non-toxic pesticide products. The Company sells its products to both wholesale
distributors and retail customers in the United States. The Company's
administrative offices, manufacturing facilities and operations are located in
Heber, Utah.




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




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Use of
Estimates–
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates may also affect
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates upon subsequent resolution of
identified matters.





Business
Condition–
The Company generated sales of $188,427 and incurred a net loss of $477,711
during the three months ended March 31, 2009. At March 31, 2009 the Company had
a total stockholders’ deficit of $5,125,682 and its current liabilities exceeded
current assets by $5,254,263.





In
addition, our independent registered accountants, Hansen Barnett and Maxwell,
P.C. expressed substantial doubt about the Company’s ability to continue as a
going concern in their audit opinion on our financial statements for the year
ended December 31, 2008.





The
ability of the Company to continue operations is dependent upon obtaining
additional financing and being able to generate net profits in the future even
though no assurance can be given that such events will
occur.  Additional financing arrangements have been arranged and are
discussed further in Note 9.  The Company is continuing to seek out
additional sources of debt and/or equity financing.





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





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


5


DIATECT
INTERNATIONAL CORPORATION
 UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS


Inventory
– The Company’s current inventory consists primarily of raw materials and
finished goods and is valued at the lower of cost or market, with cost being
determined by the average cost method. Raw materials consist of the various
active ingredients that comprise the Company’s products and shipping and
packaging materials. When there is evidence that inventory values are less than
original cost, the inventory is reduced to market value. The Company determines
market value based on current prices and whether obsolescence
exists.





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





Property and
Equipment – Property and equipment are stated at cost. Expenditures for
normal repairs and maintenance are charged to operations as incurred. The cost
of an asset and related accumulated depreciation are also charged to operations
when retired or otherwise disposed. Depreciation is computed based on the
estimated useful life of the assets using straight-line and accelerated methods.
Useful lives for equipment range from 3 to 10 years. Equipment under capital
leases is amortized over the shorter of the estimated useful lives of the
equipment or the lease term. Leasehold improvements are depreciated over the
lesser of the remaining term of the lease or the remaining useful life of the
asset.





Long Lived
Assets – Long-lived assets are reviewed for impairment when events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount that the carrying amount
of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.





Fair Value of
Financial Instruments – Due to the short maturity of trade receivables
and current liabilities, including trade payables, the carrying amount
approximates fair value. The carrying amount reported for notes payable
approximates fair value and interest rates on these notes approximate current
interest rates given the current business condition of the Company.





Revenue
Recognition – The Company manufactures and sells pesticides to retailers,
agricultural concerns and directly to the public through a Company and an
affiliate website. Revenue from the sale of its products are recognized when (a)
persuasive evidence of an arrangement exists, (b) delivery has occurred and no
significant obligations remain, (c) the sales price is fixed and determinable
and (d) collection is determined to be probable. Sales credits and price
concessions are treated as a reduction of revenue. Product returns are
permitted, but historically have occurred within a short period after the sale
and are estimated and recognized as a reduction of revenue at the time of the
sale.





Shipping and
Handling Costs – Shipping and handling costs billed to customers are
recorded as revenue and the associated costs are recorded as marketing
expenses.  Total shipping and handling costs included in marketing
expenses for the three months ended March 31, 2009 and 2008 were $15,888 and
$47,242, respectively.





Marketing and
Selling Expenses – Marketing and selling expenses include the salaries
and wages of its in-house sales force, advertising, product samples and
promotional expenses. The Company designs and prints literature and marketing
materials for its products, as well as promotional materials used in trade
shows.


6


DIATECT
INTERNATIONAL CORPORATION
 UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS


Income Taxes
– No income taxes have been paid or accrued for Federal tax purposes
because the Company has had no net taxable income since inception. In accordance
with SFAS 109, the Company recognizes the amount of income taxes payable or
refundable for the current year and recognizes deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement amounts of certain assets and liabilities and their
respective tax bases. Deferred tax assets and deferred liabilities are measured
using enacted tax rates expected to apply to taxable income in the years those
temporary differences are expected to be recovered or settled. Deferred tax
assets are reduced by a valuation allowance to the extent that uncertainty
exists as to whether the deferred tax assets will ultimately be
realized.





Basic and Diluted
Loss Per Share  – Basic loss per share
is computed by dividing the net loss by the weighted average number of shares
outstanding during the period presented. At March 31, 2009 and 2008, there were
potentially dilutive common shares outstanding as presented in the following
table that were not included in the computation of diluted loss per share as
their effect would have been anti-dilutive.





March 31,2009
                  
                  
                  2008Outstanding
      warrants
                  
                  
                  96,217,153
                  
                  
                  
                  75,460,444Convertible
      promissory notes convertible into:Common
      stock
                  
                  
                  5,500,000
                  
                  
                  
                  6,500,000Warrants
                  
                  
                  500,000
                  
                  
                  
                  1,500,000Total
      potentially dilutive common shares
                  
                  
                  102,217,153
                  
                  
                  
                  83,460,444





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





NOTE
3 – INVENTORY





Inventory
is comprised of the following:





March 31,
                          
                          
                          December 31,2009
                          
                          
                          2008Raw
      materials
                          
                          $
                          20,601
                          
                          
                          $
                          18,352Finished goods
                          
                          
                          34,066
                          
                          
                          
                          20,064Total Inventory
                          
                          $
                          54,667
                          
                          
                          $
                          38,416


7


DIATECT
INTERNATIONAL CORPORATION
 UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS


NOTE
4 – PROPERTY AND EQUIPMENT





The
components of property and equipment are as follows:





EstimatedUseful Life
                                
                                
                                March 31,
                                
                                
                                December 31,in Years
                                
                                
                                2009
                                
                                
                                2008Computer
      equipment
                                
                                3
      to 5
                                
                                
                                $
                                77,744
                                
                                
                                $
                                80,613Office
      furniture and equipment
                                
                                5
                                
                                
                                
                                40,724
                                
                                
                                
                                45,724Manufacturing
      equipment
                                
                                3
      to 10
                                
                                
                                
                                240,908
                                
                                
                                
                                240,908Leasehold improvements
                                
                                15
                                
                                
                                
                                4,935
                                
                                
                                
                                4,935Total
      Property and Equipment
                                
                                
                                
                                
                                
                                
                                364,311
                                
                                
                                
                                372,180Less: Accumulated
    depreciation
                                
                                
                                
                                
                                
                                
                                (206,616
                                )
                                
                                
                                (189,894
                                )Net Property and Equipment
                                
                                
                                
                                
                                
                                $
                                157,695
                                
                                
                                $
                                182,286





Depreciation
expense for the three months ended March 31, 2009 and 2008 was $22,798 and
$23,155, respectively.





NOTE
5 – NOTES PAYABLE





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





March 31,
                      
                      
                      December 31,2009
                      
                      
                      2008Revolving
      line of credit with financial institution
                      
                      $
                      49,683
                      
                      
                      $
                      49,683Accounts
      receivable line of credit
                      
                      
                      185,000
                      
                      
                      
                      185,000Unsecured
      10% notes payable to investors, in default
                      
                      
                      292,250
                      
                      
                      
                      292,250Unsecured
      12% notes payable to investors, in default
                      
                      
                      95,000
                      
                      
                      
                      95,000Unsecured
      15% notes payable to investors, in default
                      
                      
                      32,500
                      
                      
                      
                      32,500Promissory
      Note, 12%, secured by EPA Labels, in default
                      
                      
                      45,000
                      
                      
                      
                      45,000Unsecured
      15% notes payable to investor, net of discount of $7,453, due July 30,
      2009
                      
                      
                      92,547
                      
                      
                      
                      -Unsecured
      20% note payable to investor, net of discount of $7,444, due April 30,
      2009
                      
                      
                      92,556
                      
                      
                      
                      -Unsecured
      12% convertible promissory notes payable
                      
                      
                      275,000
                      
                      
                      
                      275,000Unsecured
      5% notes payable to shareholders, in default
                      
                      
                      1,234,595
                      
                      
                      
                      1,210,937Unsecured 5% notes payable to vendors, in
      default
                      
                      
                      564,626
                      
                      
                      
                      564,626Total Notes Payable
                      
                      $
                      2,958,757
                      
                      
                      $
                      2,749,996





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





Accounts
Receivable Line of Credit – On September 20, 2007 the Company
entered into an accounts receivable loan agreement with Aspen Opportunity Fund,
L.P. The loan as amended has a total available amount of $250,000 and bears
interest at a rate of 12.0%, is secured by eligible accounts receivable as
defined in the agreement, requires monthly interest payments and is due on
September 30, 2009.  Mandatory prepayments of principal are required
in the event that the eligible borrowing base falls below amounts advanced under
the agreement.  At March 31, 2009 the Company’s borrowing base is less
than the amounts advanced under the loan.


8


DIATECT
INTERNATIONAL CORPORATION
 UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS


Unsecured Notes
Payable – The Company has borrowed money from several entities, including
shareholders of the Company, with various terms including demand promissory
notes. The notes are unsecured and bear interest at rates from 5% to 15% and are
in default at March 31, 2009.





On March
1, 2009 the Company issued a $100,000 note payable due on August 1, 2009 bearing
interest at a rate of 15% per annum and two-year warrants to purchase 1,000,000
shares of common stock at an exercise price of $0.025 per share.  The
proceeds of the note were allocated among the note and the warrant, resulting in
the recording of a discount to the note payable in the amount of $9,910,
representing the fair value of the warrant issued.  The discount is
being amortized over the term of the note as additional interest
expense.  A total of $2,457 of additional interest expense was
recognized during the three months ended March 31, 2009.  The value of
the warrant was determined using the Black Scholes valuation method and the
following assumptions: closing market price of common stock of $0.02, risk free
interest rate of 0.89%, expected dividend yield of 0%, expected volatility of
128% and an expected life of 2 years.





On March
30, 2009 the Company issued a $100,000 note payable due on April 30, 2009
bearing interest at a rate of 20% per annum and two-year warrants to purchase
833,333 shares of common stock at an exercise price of $0.03 per
share.  The proceeds of the note were allocated among the note and the
warrant, resulting in the recording of a discount to the note payable in the
amount of $7,692, representing the fair value of the warrant
issued.  The discount is being amortized over the term of the note as
additional interest expense.  A total of $248 of additional interest
expense was recognized during the three months ended March 31,
2009.  The value of the warrant was determined using the Black Scholes
valuation method and the following assumptions: closing market price of common
stock of $0.02, risk free interest rate of 0.84%, expected dividend yield of 0%,
expected volatility of 115% and an expected life of 2 years.  This
note payable has been extended as described in Note 9.





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





Convertible
Promissory Notes Payable–The
Company has a past due 12% unsecured convertible promissory note with a face
amount of $25,000 issued in conjunction with a private placement in 2007. The
note is convertible into units at $0.05 per unit, each unit consisting of one
share of common stock and one warrant to purchase one share of common stock at
$0.075 per share for a period of three years from the date of issuance. The note
is convertible into 500,000 shares of common stock and a warrant to purchase
500,000 shares of common stock. The Company has the option to redeem the note at
its face value plus accrued interest if the average market price of the
Company’s common stock is $0.10 per share for a period of twenty consecutive
days.





In July
2007, the Company issued a 12% convertible promissory note for $250,000 and
five-year warrants to purchase 5,000,000 shares of common stock at an exercise
price of $0.075 to Aspen Opportunity Fund LP in exchange for proceeds of
$250,000. The note is convertible at a rate of $0.05 per share for 5,000,000
shares of common stock. The investor received a beneficial conversion option
resulting in a discount which was fully amortized during 2008.


9




DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS





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





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





NOTE
6 – SETTLEMENT OBLIGATIONS AND LITIGATION CLAIMS





Accrued
Settlement Obligations – The Company has obligations due to creditors
that arose from cash loans and the receipt of goods or services. The Company is
in default in its payment of each of these obligations. The obligations are
unsecured and are currently due. Certain of the obligations are in dispute as
further described below. The obligations have not been reduced by any amounts
that may be compromised by the creditors in the future, but include all amounts
due and include default judgments obtained by the creditors.





The
accrued settlement obligations include the following:





March 31,
                        
                        
                        December 31,2009
                        
                        
                        2008Litigation
      Claim
                        
                        $
                        282,367
                        
                        
                        $
                        282,367Jack
      Stites
                        
                        
                        150,180
                        
                        
                        
                        150,180Other
                        
                        
                        22,904
                        
                        
                        
                        69,704Total
                        
                        $
                        455,451
                        
                        
                        $
                        502,251





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





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


10


DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS





NOTE
7 – COMMITMENTS AND CONTINGENCIES





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





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





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





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





On May
22, 2007 the Company entered into a Master Lease Line with Gulf Pointe Capital,
LLC.  The terms of the lease line provide a credit limit of $500,000
that can be used for various new and used tier one production, material
handling, computer, technology and fixture related equipment. Upon entering
into the lease agreement, the Company sold certain manufacturing, computer and
office furniture and equipment to Pointe for $160,000 and leased the assets back
from Pointe under the terms of a three-year lease agreement. The assets sold had
a net book value of $51,152.  The resultant gain on sale of $108,848
was deferred and is being recognized over the three-year term of the capital
lease obligation. During the three months ended March 31, 2009 and 2008, the
Company recognized $9,071 and $9,071 of this gain, respectively.





In
conjunction with the Master Lease Line, the Company issued a five-year warrant
to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per
share. All of these warrants were fully vested in 2008. The Company had recorded
deferred loan costs related to the value of the warrants which is being
amortized to interest expense over the term of the respective capital lease
obligations. A total of $30,674 and $32,974 was recorded as amortization expense
during the three months ended March 31, 2009 and 2008,
respectively.


11


DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS





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





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





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





NOTE
8 - STOCK WARRANTS





The
following summarizes the outstanding warrants as of March 31, 2009:





Weighted-AverageExercise
                                          
                                          Warrants
                                          
                                          
                                          RemainingContractual
                                          
                                          
                                          NumberPrice
                                          
                                          Outstanding
                                          
                                          
                                          Life (Years)
                                          
                                          
                                          Exercisable$0.01
                                          
                                          
                                          12,750,000
                                          
                                          
                                          0.6
                                          
                                          
                                          
                                          12,750,000$0.02
                                          
                                          
                                          833,333
                                          
                                          
                                          3.0
                                          
                                          
                                          
                                          833,333$0.025
                                          
                                          
                                          1,000,000
                                          
                                          
                                          2.9
                                          
                                          
                                          
                                          1,000,000$0.05
                                          
                                          
                                          15,075,000
                                          
                                          
                                          3.0
                                          
                                          
                                          
                                          15,075,000$0.07
                                          
                                          
                                          12,500,000
                                          
                                          
                                          2.5
                                          
                                          
                                          
                                          6,500,000$0.075
                                          
                                          
                                          51,904,975
                                          
                                          
                                          1.6
                                          
                                          
                                          
                                          51,904,975$0.10
                                          
                                          
                                          1,000,000
                                          
                                          
                                          2.7
                                          
                                          
                                          
                                          1,000,000$0.13
                                          
                                          
                                          1,153,845
                                          
                                          
                                          1.3
                                          
                                          
                                          
                                          1,153,84596,217,153
                                          
                                          
                                          1.4
                                          
                                          
                                          
                                          90,217,153





NOTE
9 – SUBSEQUENT EVENTS





On April
30, 2009, the Company entered into a promissory note agreement in the
amount of $100,000 that satisfied and replaced the March 30 2008 note as
discussed in Note 5.  This second note bears interest at the rate of
20% per annum and is due and payable on May 31, 2009.  Pursuant
to this note, the Company entered into a common stock purchase warrant agreement
granting the noteholder the right to purchase a total of 1,250,000 shares
of the Company’s common stock at a price of $0.02 per share for two years from
the date of the agreement. The estimated fair value of the warrant of
$15,000 was recorded as additional interest expense over the remaining term of
the note. The value of the warrant was determined using the Black Scholes
valuation method and the following assumptions: closing market price of common
stock of $0.019, risk free interest rate of 0.91%, expected dividend yield of
0%, expected volatility of 131% and an expected life of 2
years.


12


DIATECT
INTERNATIONAL CORPORATION


UNAUDITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS





On May 7,
2009, the Company entered into a promissory note agreement in the amount of
$500,000.  The note bears interest at the rate of 18% per annum and
is due and payable on July 31, 2009.  Pursuant to this note, the
Company entered into a common stock purchase warrant agreement granting the
noteholder the right to purchase a total of 3,000,000 shares of the
Company’s common stock at a price of $0.025 per share for two years from the
date of the agreement.





On May 7,
2009, the Company entered into a common stock purchase warrant agreement with
the co-guarantor of the $500,000 note and granted the right to purchase a total
of 3,000,000 shares of the Company’s common stock at a price of $0.025 per share
for two years from the date of the agreement.  Also on May 7, 2009,
the Company entered into a common stock purchase warrant agreement with the
guarantor of the April 30, 2009 note and the co-guarantor of the $500,000 note
and granted the right to purchase a total of 4,000,000 shares of the Company’s
common stock at a price of $0.025 per share for two years from the date of the
agreement.


13


ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.




Forward
Looking Statements




We are
including the following cautionary statement in this Quarterly Report on Form
10-Q to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements. All statements other than statements of historical fact, including
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions, future results of operations or
financial position, made in this Quarterly Report on Form 10-Q are forward
looking. In particular, the words “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “may,” “will,” variations of such words, and similar expressions
identify forward-looking statements, but are not the exclusive means of
identifying such statements and their absence does not mean that the statement
is not forward-looking.




The
forward-looking statements contained herein involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. Our expectations, beliefs and
projections are expressed in good faith and are believed by management to have a
reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in our records and other data
available from third parties, but there can be no assurance that management's
expectation, beliefs or projections will result or be achieved or
accomplished.





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





Overview





Diatect
International Corporation (the “Company”) is a developer and marketer of
non-toxic pesticide products, selling its products to wholesale distributors and
retail customers in the United States.  We also sell directly to the
consumer via our website at www.diatect.com.  The
Company was incorporated under the laws of the State of California in 1979 as
San Diego Bancorp., and we changed our name to Diatect International Corporation
in 1998.  During 2002, we consolidated our operations in Utah, moving
our administrative offices from Idaho and our manufacturing facilities from
Kansas.





We have
nine different insecticide products that utilize so called "natural-killing
agents" which are non-toxic to the environment as well as humans and other
warm-blooded animals. The ingredients in our products have been used separately
for years as adequate alternatives to hazardous chemical insecticides and
therefore represent an alternative to synthetic products that often utilize
hazardous chemical compounds. We rely on five registrations that we obtained
from the Environmental Protection Agency (EPA) that allowed us to formulate
eight labels for retail sales. These registrations are required for the
production and marketing of our insect control products. Obtaining EPA
registrations and approval of our labels represents an essential asset of the
Company and is the result of lengthy and costly effort.





Our
independent registered accountants, Hansen Barnett and Maxwell, P.C. expressed
substantial doubt about the Company’s ability to continue as a going concern in
their audit opinion on our financial statements for the year ended December 31,
2008.





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


14


Results
of Operations





Comparison
results for the three months ended March 31, 2009 and 2008





Revenues
for the three months ended March 31, 2009 were $188,427 as compared to $372,964
for the three months ended March 31, 2008, a decrease of $184,537. The decrease
is primarily due to a decrease in internet based sales.





Cost of
goods sold for the three months ended March 31, 2009 were $118,407 as compared
to $153,673 for the three months ended March 31, 2008, a decrease of $35,266.
The decrease is primarily due to decreases in sales volumes and decreased
product costs associated with internet based sales.





Marketing
and selling expenses for the three months ended March 31, 2009 were $120,687 as
compared to $260,551 for the three months ended March 31, 2008, a decrease of
$139,864. The decrease is primarily due to decreases in internet marketing in
the three months ended March 31, 2009 when compared to the prior year
period.





General
and administrative expenses for the three months ended March 31, 2009 were
$354,262 as compared to $596,188 for the three months ended March 31, 2008, a
decrease of $241,926. The decrease is primarily due to decreases in professional
fees, consulting fees and amortization of loan costs.





Other
income and expense is comprised of interest expense and gain from termination of
debt. Interest expense was $72,782 for the three months ended March 31, 2009 as
compared to $117,114 for the three months ended March 31, 2008, a decrease of
$44,332.  Included in interest expense is the amortization of discount
related to the convertible promissory notes in the amount of $2,705 and $54,971
for the three months ended March 31, 2009 and 2008,
respectively.  Gain from termination of debt for the three months
ended March 31, 2008 was $4,283 and pertains primarily to the settlement of
certain liabilities at less than the recorded value.  There was no
comparable amount for the three months ended March 31, 2009.





Liquidity
and Capital Resources





Our cash
and cash equivalents of $32,438 as of March 31, 2009 are not sufficient to
support our current levels of operations for the next 12
months.  Accordingly, we are actively seeking additional financing
through debt and/or equity offerings.





On May 7,
2009 we issued a Note Payable in the amount of $500,000 and an aggregate of
10,000,000 warrants to purchase common stock at an exercise price of $0.025 per
share for total proceeds of $500,000.





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


15


Off-Balance
Sheet Arrangements




We have
no off-balance sheet arrangements.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
required information for the Company as a smaller reporting
company.





ITEM
4T. CONTROLS AND PROCEDURES





As
required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal
period covered by this report, we have carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures.  This evaluation was carried out under the supervision and
with the participation of management, including our chief executive officer and
chief financial officer.  Based upon that evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective at March 31, 2009.





There
have been no changes in our internal controls over financial reporting in
connection with this evaluation that occurred during the first quarter of fiscal
2009 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act (a) is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and (b) is accumulated and communicated to
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.


16


PART
II - OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS.





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




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





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





ITEM
1A. RISK FACTORS





Not
Applicable





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





The
following provides information regarding sales of equity securities by us during
the three months ended March 31, 2009 which were not registered under the
Securities Act.  All issuances pertained to the Company’s no par
common stock. The
Company relied upon the exemption from registration of the issuance of the
securities discussed below provided by Section 4(2) of the Securities Act of
1933 (the “Securities Act”), in view of the close relationships that each
of the purchasers acquiring such securities had with the Company and the access
to all material information about the Company provided to all such
purchasers.


17


On March
1, 2009 we issued two year warrants to purchase 1,000,000 shares of common stock
at an exercise price of $0.025 per share.





On March
30, 2009 we issued two year warrants to purchase 833,333 shares of common stock
at an exercise price of $0.03 per share.





ITEM
5. OTHER INFORMATION.





Not
Applicable





ITEM 6. EXHIBITS




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




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




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


18


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:
      May 20, 2009By:
              /s/ Patrick CarrPatrick
      CarrPrincipal
      Executive OfficerBy:
              /s/ Robert RudmanRobert
      RudmanPrincipal
      Accounting Officer


19