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
      1934For the quarterly
      period ended June 30, 2008[    ]
              Transition
      Report Under Section 13 or 15(d) of the Exchange ActFor the
      transition period from_____ to
_____
  Commission
File Number: 0-10147





DIATECT
INTERNATIONAL CORPORATION


(Exact
name of registrant as specified in its charter)










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








875 South Industrial
Parkway, Heber City, Utah 84032


(Address
of principal executive offices)





(435)
654-4370


(Issuer’s
telephone number)








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





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





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











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





As of
August 14, 2008 the issuer had 210,852,583 shares of common stock, no par value,
outstanding.











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










DIATECT
      INTERNATIONAL CORPORATIONCONDENSED
      BALANCE SHEETS(unaudited)June
      30,
            
            
            December
      31,2008
            
            
            2007ASSETSCurrent
      AssetsCash
            
            $
            18,959
            
            
            $
            9,864Trade
      accounts receivable, net of allowance for doubtfulaccounts of $0
      and $16,000, respectively
            
            
            129,375
            
            
            
            242,406Inventory
            
            
            94,307
            
            
            
            66,688Prepaid
      expenses and unamortized loan costs
            
            
            232,789
            
            
            
            306,206Total
      Current Assets
            
            
            475,430
            
            
            
            625,164Property and Equipment,
      net of accumulated depreciation of$143,300 and $140,673,
      respectively
            
            
            229,820
            
            
            
            258,229Intangible
      Assets - EPA Labels
            
            
            1,116,322
            
            
            
            1,116,322Total
      Assets
            
            $
            1,821,572
            
            
            $
            1,999,715LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      LiabilitiesTrade
      accounts payable
            
            $
            613,751
            
            
            $
            224,213Accrued
      liabilities
            
            
            94,406
            
            
            
            155,125Accrued
      interest payable
            
            
            536,305
            
            
            
            456,626Accrued
      settlement obligations
            
            
            47,904
            
            
            
            89,187Deferred
      gain on sale and leaseback of assets
            
            
            68,664
            
            
            
            86,806Notes
      payable, net of unamortizeddiscount of $2,598 and $135,855,
      respectively
            
            
            2,699,706
            
            
            
            2,578,265Current
      portion of capital lease obligations
            
            
            71,309
            
            
            
            60,021Total
      Current Liabilities
            
            
            4,132,045
            
            
            
            3,650,243Long-Term
      LiabilitiesCapital
      lease obligations, net of current portion
            
            
            94,194
            
            
            
            120,212Total
      Liabilities
            
            
            4,226,239
            
            
            
            3,770,455Stockholders'
      DeficitCommon
      stock, no par value; 500,000,000 shares authorized;209,852,583
      shares and 190,562,583 shares outstanding, respectively
            
            
            25,243,821
            
            
            
            24,587,396Warrants
      outstanding
            
            
            1,725,916
            
            
            
            1,561,367Accumulated
      deficit
            
            
            (29,374,404
            )
            
            
            (27,919,503
            )Total
      Stockholders' Deficit
            
            
            (2,404,667
            )
            
            
            (1,770,740
            )Total
      Liabilities and Stockholders' Deficit
            
            $
            1,821,572
            
            
            $
            1,999,715





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


1





DIATECT
      INTERNATIONAL CORPORATIONCONDENSED
      STATEMENTS OF OPERATIONS(unaudited)Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007(restated)
            
            
            
            
            
            (restated)Sales
            
            $
            633,934
            
            
            $
            418,203
            
            
            $
            1,006,898
            
            
            $
            860,341Cost
      of Goods Sold
            
            
            129,560
            
            
            
            122,309
            
            
            
            243,383
            
            
            
            238,400Gross
      Profit
            
            
            504,374
            
            
            
            295,894
            
            
            
            763,515
            
            
            
            621,941ExpensesMarketing
      and selling
            
            
            482,436
            
            
            
            256,235
            
            
            
            782,837
            
            
            
            470,303General
      and administrative
            
            
            588,101
            
            
            
            422,528
            
            
            
            1,184,289
            
            
            
            765,524Total
      Expenses
            
            
            1,070,537
            
            
            
            678,763
            
            
            
            1,967,126
            
            
            
            1,235,827Loss
      from Operations
            
            
            (566,163
            )
            
            
            (382,869
            )
            
            
            (1,203,611
            )
            
            
            (613,886
            )Other
      Income (Expense)Interest
      expense
            
            
            (138,459
            )
            
            
            (163,882
            )
            
            
            (255,573
            )
            
            
            (288,040
            )Gain
      from termination of debt
            
            
            -
            
            
            
            163,720
            
            
            
            4,283
            
            
            
            163,720Net
      Other Income (Expense)
            
            
            (138,459
            )
            
            
            (162
            )
            
            
            (251,290
            )
            
            
            (124,320
            )Net
      Loss
            
            
            (704,622
            )
            
            
            (383,031
            )
            
            
            (1,454,901
            )
            
            
            (738,206
            )Basic
      and Diluted Loss Per Share
            
            $
            (0.00
            )
            
            $
            (0.00
            )
            
            $
            (0.01
            )
            
            $
            (0.00
            )Weighted-Average
      Common Shares Outstanding
            
            
            208,309,726
            
            
            
            156,282,952
            
            
            
            205,603,078
            
            
            
            154,090,857








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


2





DIATECT
      INTERNATIONAL CORPORATIONCONDENSED
      STATEMENTS OF CASH FLOWS(unaudited)For
      the Six Months EndedJune
      30,2008
            
            
            2007(restated)Cash
      Flows from Operating ActivitiesNet
      loss
            
            $
            (1,454,901
            )
            
            $
            (738,206
            )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
            
            
            46,310
            
            
            
            20,626Amortization
      of discount on notes payable
            
            
            133,257
            
            
            
            141,902Amortization
      of loan costs
            
            
            94,446
            
            
            
            31,232Gain
      from debt termination
            
            
            (4,283
            )
            
            
            (163,720
            )Net
      gain on disposal of property and equipment
            
            
            (18,141
            )
            
            
            (3,901
            )Issuance
      of stock for services
            
            
            163,200
            
            
            
            27,500Issuance
      of warrants for services
            
            
            87,000
            
            
            
            177,023Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            113,031
            
            
            
            (53,842
            )Inventory
            
            
            (27,619
            )
            
            
            58,634Prepaid
      expenses and other current assets
            
            
            (12,757
            )
            
            
            366Accounts
      payable
            
            
            389,538
            
            
            
            (17,465
            )Accrued
      liabilities
            
            
            (60,718
            )
            
            
            (30,267
            )Accrued
      interest payable
            
            
            79,678
            
            
            
            134,406Net
      Cash Used in Operating Activities
            
            
            (471,959
            )
            
            
            (415,712
            )Cash
      Flows from Investing ActivitiesPayments
      for purchases of property and equipment
            
            
            (2,834
            )
            
            
            (30,045
            )Proceeds
      from sale of property and equipment
            
            
            -
            
            
            
            160,000Net
      Cash Used in Investing Activities
            
            
            (2,834
            )
            
            
            129,955Cash
      Flow from Financing ActivitiesProceeds
      from borrowings under notes payable
            
            
            -
            
            
            
            358,500Proceeds
      from exercise of warrants
            
            
            72,500
            
            
            
            75,000Proceeds
      from issuance of common stock and warrants
            
            
            490,000
            
            
            
            -Principal
      payments on notes payable
            
            
            (11,815
            )
            
            
            (111,968
            )Principal
      payments on lease obligation
            
            
            (29,797
            )
            
            
            (3,203
            )Payments
      on accrued settlement obligations
            
            
            (37,000
            )
            
            
            (68,000
            )Net
      Cash Provided by Financing Activities
            
            
            483,888
            
            
            
            250,329Net
      Increase (Decrease) in Cash
            
            
            9,095
            
            
            
            (35,428
            )Cash
      at Beginning of Period
            
            
            9,864
            
            
            
            61,743Cash
      at End of Period
            
            $
            18,959
            
            
            $
            26,315








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


3





DIATECT
      INTERNATIONAL CORPORATIONSTATEMENTS
      OF CASH FLOWS (continued)(unaudited)For
      the Six Months EndedJune
      30,2008
            
            
            2007Supplemental
      Disclosure of Cash Flow InformationCash
      paid for interest
            
            $
            15,001
            
            
            $
            6,644Supplemental
      Schedule of Noncash Investing andFinancing
      ActivitiesPurchase
      of equipment under capital lease obligations
            
            
            15,067
            
            
            
            -









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


4




NOTE
1 – BUSINESS AND ORGANIZATION, BASIS OF PRESENTATION





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




Basis of
Presentation –
The unaudited financial statements included in this Form 10-Q have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, these
financial statements do not include all of the disclosures required by U.S.
generally accepted accounting principles for complete financial
statements.  These unaudited interim financial statements should be
read in conjunction with the audited financial statements for the fiscal year
ended December 31, 2007 in the Company’s annual report on Form
10-KSB.  The financial information furnished herein reflects all
adjustments consisting of normal, recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the Company's financial
position, the results of operations and cash flows for the periods
presented.  Operating results for the period ended June 30, 2008 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2008.




Restatement
and reclassification




During
the second quarter of 2008 the Company realized that the June 30, 2007 financial
statements needed to be revised to correct an overstatement of inventory as of
June 30, 2007 and an understatement of cost of goods sold for the three and six
months ended June 30, 2007. As a result, the Company corrected the financial
statements for June 30, 2007 and for the three and six months then ended. The
corrected statements of operations and statement of cash flows are included in
these financial statements.  There is no effect of these adjustments
on the financial statements as of December 31, 2007. In addition, the Company
has reclassified freight costs from cost of goods sold to marketing and selling
expense in the amount of $44,292 and 77,526 for the three and six months ended
June 30, 2007 to conform to the current year presentation. The effects of the
restatements and the reclassifications were as follows:




As
      Reported
              
              
              Restatement
      and reclassification
              
              
              As
      RestatedCondensed
      Balance Sheet as of June 30, 2007Inventory
              
              $
              313,114
              
              
              $
              (135,859
              )
              
              $
              177,255Total
      Current Assets
              
              
              485,728
              
              
              
              (135,859
              )
              
              
              349,869TOTAL
      ASSETS
              
              $
              1,810,324
              
              
              $
              (135,859
              )
              
              $
              1,674,465Accumulated
      deficit
              
              $
              (27,357,911
              )
              
              $
              (135,859
              )
              
              $
              (27,493,770
              )Total
      Stockholders' Deficit
              
              
              (3,386,400
              )
              
              
              (135,859
              )
              
              
              (3,522,259
              )Total
      Liabilities and Stockholders' Deficit
              
              $
              1,810,324
              
              
              $
              (135,859
              )
              
              $
              1,674,465Condensed
      Statement of OperationsFor
      the three months ended June 30, 2007Cost
      of Goods Sold
              
              $
              100,561
              
              
              $
              21,748
              
              
              $
              122,309Gross
      profit
              
              
              317,642
              
              
              
              (21,748
              )
              
              
              295,894Marketing
      and selling
              
              
              211,943
              
              
              
              44,292
              
              
              
              256,235Loss
      from Operations
              
              
              (316,829
              )
              
              
              (66,040
              )
              
              
              (382,869
              )Net
      Loss
              
              
              (316,991
              )
              
              
              (66,040
              )
              
              
              (383,031
              )Basic
      and Diluted Loss Per Share
              
              $
              -
              
              
              $
              -
              
              
              $
              -


5




Condensed
      Statement of OperationsFor
      the six months ended June 30, 2007Cost
      of Goods Sold
              
              $
              180,067
              
              
              $
              58,333
              
              
              $
              238,400Gross
      profit
              
              
              680,274
              
              
              
              (58,333
              )
              
              
              621,941Marketing
      and selling
              
              
              392,777
              
              
              
              77,526
              
              
              
              470,303Loss
      from Operations
              
              
              (478,027
              )
              
              
              (135,859
              )
              
              
              (613,886
              )Net
      Loss
              
              
              (602,347
              )
              
              
              (135,859
              )
              
              
              (738,206
              )Basic
      and Diluted Loss Per Share
              
              $
              -
              
              
              $
              -
              
              
              $
              -Statement
      of Cash FlowsFor
      the six months ended June 30, 2007Net
      loss
              
              $
              (602,347
              )
              
              $
              (58,333
              )
              
              $
              (660,680
              )Change
      in inventory
              
              
              (77,225
              )
              
              
              58,333
              
              
              
              (18,892
              )Net
      Cash used in Operating Activities
              
              
              (415,712
              )
              
              
              -
              
              
              
              (415,712
              )


NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





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





Business
Condition–
The Company generated sales of $1,006,898 and incurred a net loss of $1,459,901
during the six months ended June 30, 2008. At June 30, 2008 the Company had a
total stockholders’ deficit of $2,404,667 and its current liabilities exceeded
current assets by $3,656,615.





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




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





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





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




Prepaid expenses and unamortized loan costs
-Prepaid expenses and unamortized loan costs are comprised of
prepaid insurance and the unamortized portion of loan costs associated with the
Accounts Receivable Line of Credit as described in Note 5 and the Master
Lease Line as described in Note 7.


6





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





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





Long-Lived
Assets – Long-lived assets are reviewed for impairment when events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount that the carrying amount
of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.  No impairment was recognized during 2008 or 2007.





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





Revenue
Recognition – The Company manufactures and sells pesticides to retailers,
agricultural concerns and directly to the public through a Company and an
affiliate websites. 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 June 30, 2008 and 2007 were $79,970 and
$44,292, respectively.  Total shipping and handling costs included in
marketing expenses for the six months ended June 30, 2008 and 2007 were $127,212
and $77,526, 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.




7


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 June 30, 2008 and 2007, there were
potentially dilutive common shares outstanding as presented in the following
table that were not included in the computation of diluted loss per share as
their effect would have been anti-dilutive.




June
      30,
              
              
              June
      30,2008
              
              
              2007Outstanding
      warrants
              
              
              78,460,444
              
              
              
              25,000,000Convertible
      promissory notes convertible into:Common
      stock
              
              
              6,500,000
              
              
              
              20,920,000Warrants
              
              
              1,500,000
              
              
              
              20,920,000Total
      potentially dilutive common shares
              
              
              86,460,444
              
              
              
              66,840,000






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





Recently Enacted
Accounting Standards - In September 2006, the Financial Accounting
Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
extended the effective date for certain nonfinancial assets and nonfinancial
liabilities to fiscal years beginning after November 15, 2008.  The
adoption of the portions of SFAS No. 157 that were not postponed by (FSP FIN)
No. 157-2 did not have a material impact on our consolidated financial
statements. The Company does not expect the adoption of the postponed portions
of SFAS No. 157 to have a material impact on our consolidated financial
statements.





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


8


Effective
January 1, 2008, the Company adopted SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities – Including an
amendment of FASB Statement No. 115,” which permits entities to elect to
measure eligible items at fair value at specified dates. The
Company did not elect the fair value option for any eligible
items.
  In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities", an amendment of SFAS No. 133. SFAS 161 applies to all
derivative instruments and non-derivative instruments that are designated and
qualify as hedging instruments pursuant to paragraphs 37 and 42 of SFAS 133 and
related hedged items accounted for under SFAS 133. SFAS 161 requires entities to
provide greater transparency through additional disclosures about how and why an
entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS 133 and its related interpretations,
and how derivative instruments and related hedged items affect an entity's
financial position, results of operations, and cash flows. SFAS 161 is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2008. The Company does not expect SFAS 161 to have a material impact on its
results of operations or financial position.





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





NOTE 3
– INVENTORY





Inventory
is comprised of the following:





June
      30,
              
              
              December
      31,2008
              
              
              2007Raw
      materials
              
              $
              52,642
              
              
              $
              32,836Finished
      goods
              
              
              41,665
              
              
              
              33,852Total
      Inventory
              
              $
              94,307
              
              
              $
              66,688
  9


NOTE 4
– PROPERTY AND EQUIPMENT





The
components of property and equipment are as follows:




EstimatedUseful
      Life
              
              
              June
      30,
              
              
              December
      31,in
      Years
              
              
              2008
              
              
              2007Computer
      equipment
              
              3
      to 5
              
              
              $
              80,613
              
              
              $
              89,774Office
      furniture and equipment
              
              
              5
              
              
              
              45,724
              
              
              
              48,024Manufacturing
      equipment
              
              3
      to 10
              
              
              
              241,848
              
              
              
              256,169Leasehold
      improvements
              
              
              15
              
              
              
              4,935
              
              
              
              4,935Total
      Property and Equipment
              
              
              
              
              
              
              373,120
              
              
              
              398,902Less:
      Accumulated depreciation
              
              
              
              
              
              
              (143,300
              )
              
              
              (140,673
              )Net
      Property and Equipment
              
              
              
              
              
              $
              229,820
              
              
              $
              258,229


Depreciation
expense for the six months ended June 30, 2008 and 2007 was $46,310 and $20,626,
respectively.





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





NOTE 5
– NOTES PAYABLE





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




June
      30,
              
              
              December
      31,2008
              
              
              2007Revolving
      line of credit with financial institution
              
              $
              49,991
              
              
              $
              49,807Accounts
      receivable line of credit
              
              
              185,000
              
              
              
              185,000Unsecured
      10% notes payable to investors, in default
              
              
              292,250
              
              
              
              292,250Unsecured
      12% notes payable to investors, in default
              
              
              40,000
              
              
              
              40,000Unsecured
      15% notes payable to investors, in default
              
              
              34,500
              
              
              
              36,500Unsecured
      12% convertible promissory notes payable, netof unamortized
      discount of $2,598 and $135,855, respectively, in default
              
              
              322,402
              
              
              
              189,145Unsecured
      5% notes payable to shareholders, due in 2008. in default
              
              
              1,210,937
              
              
              
              1,220,937Unsecured
      5% notes payable to vendors, due in 2008, in default
              
              
              564,626
              
              
              
              564,626Total
      Notes Payable
              
              $
              2,699,706
              
              
              $
              2,578,265


Revolving Lines
of Credit – The Company currently has unsecured, revolving credit
notes with a financial institution totaling $49,991. The line of credit bears
interest at 7.0% per annum, is due on demand and requires monthly interest only
payments. The line is unsecured and is personally guaranteed by a former
director of the Company.





Accounts
Receivable Line of Credit – On September 20, 2007 the Company
entered into an accounts receivable loan agreement with Aspen Opportunity Fund,
L.P. for advances up to $500,000 in $5,000 increments, subject to maintaining a
borrowing base of 80% of eligible accounts receivable as defined in the
agreement. The Note bears interest at a rate of 12.0%, is secured by eligible
accounts receivable as defined in the agreement, requires monthly interest
payments and is due on September 30, 2009.  Mandatory prepayments of
principal are required in the event that the eligible borrowing base falls below
amounts advanced under the agreement.  In conjunction with the loan
agreement, the Company issued a five year warrant to purchase 4,000,000 shares
of the Company’s common stock at an exercise price of $0.075 per share. The
warrant was valued at $169,294 and was recorded as prepaid expenses, unamortized
loan costs and other assets and is being amortized over the life of the
loan.  A total of $41,580 was amortized for the six months ended June
30, 2008.  This agreement has been amended as discussed in Note
10.


10





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% payable
at different times and are in default at June 30, 2008.





Convertible
Promissory Notes Payable–The
Company has convertible promissory notes with a face amount of $75,000 which
were issued in conjunction with a private placement in 2007 and bear interest at
12% per annum, are unsecured and are due one year from the date of issuance. One
of these notes for $50,000 is in default. The effective interest rates of the
notes issued range from 24% to 27%. The notes are convertible into units at
$0.05 per unit, each unit consisting of one share of common stock and one
warrant to purchase one share of common stock at $0.075 per share for a period
of three years from the date of issuance. Thus, the notes are convertible into
an aggregate of 1,500,000 shares of common stock and warrants to purchase an
additional 1,500,000 shares of common stock. The Company has the option to
redeem the notes at their face value plus accrued interest if the average market
price of the Company’s common stock is $0.10 per share for a period of twenty
consecutive days. Based upon the market price of the Company’s common stock on
the dates the notes were issued, the investors received a beneficial conversion
option. The beneficial conversion option was computed as the difference between
the fair value and the allocated proceeds of the common stock issuable upon
conversion of the promissory notes. The recognition of the beneficial conversion
option resulted in a discount to the notes payable that is being amortized over
the term of the convertible notes using the effective interest
method.  The remaining discount at June 30, 2008 was $148. A total of
$3,375 and $141,902 was recognized as interest expense during the six months
ended June 30, 2008 and 2007 for the notes issued pursuant to the private
placement.





In July
2007, the Company issued a 12% convertible promissory note for $250,000 and
five-year warrants to purchase 5,000,000 shares of common stock at an exercise
price of $0.075 to Aspen Opportunity Fund LP in exchange for proceeds of
$250,000. The note is convertible at a rate of $0.05 per share for 5,000,000
shares of common stock. The investor received a beneficial conversion option
resulting in a discount of which $2,450 remains as of June 30,
2008.  A total of $129,882 of the discount was recognized as interest
expense for the six months ended June 30, 2008.





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





Notes Payable to
Vendors – In 2004, vendors agreed to extend the terms of outstanding
accounts payables by converting them into promissory notes that are due in 2008
and accrue interest at 5% per annum.  These notes are presently in
default.





NOTE 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.





11


The
accrued settlement obligations include the following:




June
      30,
              
              
              December
      31,2008
              
              
              2007Litho-Flexo
      Grafics, Inc.
              
              $
              25,000
              
              
              $
              63,283Other
              
              
              22,904
              
              
              
              25,904Total
              
              $
              47,904
              
              
              $
              89,187





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








NOTE 7
– COMMITMENTS AND CONTINGENCIES





Administrative
Proceeding – U.S. Securities and Exchange Commission





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





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





12


U.S. Securities
and Exchange Commission ,  The U.S. Securities and Exchange
Commission in the U.S. District Court, District of Utah, Central Division having
Case No.: 2:07cv00709.  The caption on the Complaint is Securities and Exchange Commission
v. Diatect International Corporation et al. The four
defendants are the 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 intends to vigorously defend the allegations of
the Complaint.





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





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








On May
22, 2007 the Company entered into a Master Lease Line with Gulf Pointe Capital,
LLC.  The terms of the lease line provide a credit limit of $500,000
that can be used for various new and used tier one production, material
handling, computer, technology and fixture related equipment. Upon entering
into the lease agreement, the Company sold certain manufacturing, computer and
office furniture and equipment to Pointe for $160,000 and leased the assets back
from Pointe under the terms of a three-year lease agreement. The assets sold had
a net book value of $51,152.  The resultant gain on sale of $108,848
was deferred and is being recognized over the three-year term of the capital
lease obligation. During the six months ended June 30, 2008, the Company
recognized $18,141 of this gain.





In
conjunction with the Master Lease Line, the Company issued a five-year warrant
to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per
share.  A total of 2,500,000 of these warrants vested upon the
execution of the Master Lease Line.  The remaining 7,500,000 warrants
vest pro-rata upon the funding of the credit limit of $500,000.  Based
upon the estimated total funding that will take place under the Master Lease
Line, the Company has estimated that it is probable that 5,809,984 of the
warrants will vest and have been valued at $212,994. That amount has been
recorded as deferred loan costs and is being amortized to interest expense over
the term of the respective capital lease obligations. A total of $58,362 was
recorded as amortization expense during the six months ended June 30,
2008.  This agreement has been amended as discussed in Note
9.


13





During
the second quarter of 2008, the Company terminated an agreement with a vendor
which included the potential issuance of three year warrants to purchase 750,000
shares of common stock at an exercise price of $0.05 per share.  The
Company continues to have agreements with two vendors to issue three year
warrants to purchase of an aggregate of 3,750,000 shares of common stock at a
price of $0.05 per share upon the achievement of certain performance milestones
as defined in the respective agreements.  None of the contractually
defined milestones has been achieved and no warrants have been issued pursuant
to these agreements.





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





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





NOTE 8
- COMMON STOCK




For the
six months ended June 30, 2008, the Company issued1,600,000 shares valued at $115,200 or
$0.072 per share, as compensation to a vendor and 640,000 shares valued at
$48,000 or $0.075 per share, as compensation to employees and a vendor. The
values represent the market price of the Company’s common stock on the dates of
issuance.
 
 The
Company also issued 7,250,000 shares of common stock upon the exercise of
warrants for proceeds of $72,500.
 
 The
Company also issued 9,800,000 shares of common stock and two year warrants to
purchase 2,000,000 shares of common stock at an exercise price of $0.075 per
share for gross proceeds of $490,000.  The proceeds were allocated
based on the relative fair values of the common stock and the warrants on the
dates of issuance.  The allocated fair value of the warrants was
$190,282 and the balance of the proceeds of $299,718 was allocated to the common
stock. The fair value of the warrants, determined using the Black-Scholes Option
Pricing Model, was calculated using the following weighted average assumptions:
risk free interest rate of 1.80% - 2.48%, expected dividend yield of 0%,
expected volatility of 117% - 131% and an expected life of 2
years.





NOTE 9
- STOCK WARRANTS





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




14


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




Weighted-AverageExercise
              
              
              Warrants
              
              
              Remaining
      Contractual
              
              
              NumberPrice
              
              
              Outstanding
              
              
              Life
      (Years)
              
              
              Exercisable$
              0.01
              
              
              
              12,750,000
              
              
              
              1.4
              
              
              
              12,750,000$
              0.05
              
              
              
              15,500,000
              
              
              
              3.9
              
              
              
              11,309,984$
              0.075
              
              
              
              49,210,444
              
              
              
              2.4
              
              
              
              49,210,444$
              0.10
              
              
              
              1,000,000
              
              
              
              3.4
              
              
              
              1,000,00078,460,444
              
              
              
              
              
              
              
              74,270,428







NOTE 10
– SUBSEQUENT EVENTS





Subsequent
to June 30, 2008 the Company issued 1,000,000 shares of common stock to a vendor
for services.  The value of the common stock of $75,000 based on the
closing market price as of the date of issuance will be recorded during the
third quarter of 2008.





In
August, 2008 the Company executed an amendment to its Accounts Receivable Line
of Credit with Aspen Opportunity Fund L.P. as discussed Note 4.  The
amendment increases the currently available amount of credit under the line to
the greater of $185,000 or 80% of eligible accounts receivable as defined in the
agreement until January 1, 2009.  The amendment also reduced the total
available amount from $500,000 to $250,000, subject to eligible accounts
receivable requirements.  In addition, Aspen Opportunity Fund L.P.
agreed to exercise 1,147,260 warrants to purchase common stock at an exercise
price of $0.05 per share in exchange for past due payments totaling $9,306 and
cash of $48,057.





In
August, 2008 the Company executed an amendment to its Master Lease Line with
Gulf Pointe Capital, LLC, who agreed to exercise 852,747 warrants to purchase
common stock at an exercise price of $0.05 per share in exchange for past due
payments totaling $42,637.  In addition, the Company agreed to vest
the remaining 4,190,016 of the warrants to purchase common stock at an exercise
price of $0.05 per share issued in conjunction with the Master Lease
Line.







15


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




Forward
Looking Statements




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




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





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





Overview





Diatect
International Corporation (the “Company”) is a California corporation operating
in Utah as a developer and marketer of pesticide products. The Company sells its
products to both wholesale distributors and retail customers in the United
States.  We have established an internet presence as well to sell
directly to the consumer via our website.





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.





Results
of Operations





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





Revenues
for the three months ended June 30, 2008 were $633,934 as compared to $418,203
for the three months ended June 30, 2007, an increase of $215,731. The increase
is due to an increase in internet-based sales somewhat offset by a decrease in
sales to the agriculture supply market.





Cost of
revenues for the three months ended June 30, 2008 were $129,560 as compared to
$122,309 for the three months ended June 30, 2007, an increase of $7,251. The
increase is due to higher sales volumes partially offset by decreased product
costs associated with internet based sales.





16


Marketing
and selling expenses were $482,436 for the three months ended June 30, 2008 as
compared to $256,235 for the three months ended June 30, 2007, an increase of
$226,201. The increase is primarily due to increases in internet marketing,
increases in freight and commissions expenses due to increased sales and
increases in media content related expenses in the three months ended June 30,
2008 when compared to the prior year period.





General
and administrative expenses were $588,101 for the three months ended June 30,
2008 as compared to $422,528 for the three months ended June 30, 2007, an
increase of $165,573.  The increase is primarily due to increases in
investor relations fees, increases in amortization of loan costs somewhat offset
by decreases in professional fees.  Included in general and
administrative expenses for the three months ended June 30, 2008 and 2007 are
the non-cash costs of shares and warrants to purchase common stock valued at
$191,893 and $127,657, respectively issued for professional service fees. In
addition, the three months ended June 30, 2008 and 2007 include non-cash costs
for the amortization of loan costs in the amount of $40,682 and $15,550,
respectively.





Other
income and expense is comprised of interest expense and gain from termination of
debt. Interest expense was $138,459 for the three months ended June 30, 2008 as
compared to $163,882 for the three months ended June 30, 2007, a decrease of
$25,423.  Included in interest expense is the amortization of discount
related to the convertible promissory notes in the amount of $78,286 and $83,584
for the three months ended June 30, 2008 and 2007, respectively.  The
remaining decrease is due to lower levels of debt during the three months ended
June 30, 2008.  Gain from termination of debt for the three months
ended June 30, 2007 was $163,720 pertains primarily to the settlement of certain
liabilities at less than the recorded value.  There was no comparable
amount for the three months ended June 30, 2008.





Comparison
results for the six months ended June 30, 2008 and 2007





Revenues
for the six months ended June 30, 2008 were $1,006,898 as compared to $860,341
for the six months ended June 30, 2007, an increase of $146,557. The increase is
due to an increase in sales to the agriculture supply market and increases in
internet based sales.





Cost of
revenues for the six months ended June 30, 2008 were $243,383 as compared to
$238,400 for the six months ended June 30, 2007, an increase of $4,983. The
increase is due to higher sales volumes partially offset by decreased product
costs associated with internet based sales.





Marketing
and selling expenses were $782,837 for the six months ended June 30, 2008 as
compared to $470,303 for the six months ended June 30, 2007, an increase of
$312,534. The increase is primarily due to increases in internet marketing,
increases in freight and commissions expenses due to increased sales and
increases in media content related expenses in the six months ended June 30,
2008 when compared to the prior year period.





General
and administrative expenses were $1,184,289 for the six months ended June 30,
2008 as compared to $765,524 for the six months ended June 30, 2007, an increase
of $418,765.  The increase is primarily due to increases in investor
relations fees, increases in amortization of loan costs somewhat offset by
decreases in professional fees.  Included in general and
administrative expenses for the six months ended June 30, 2008 and 2007 are the
non-cash costs of shares and warrants to purchase common stock valued at
$202,200 and $158,743, respectively issued for professional
services.  In addition, the six months ended June 30, 2008 and 2007
include non-cash costs for the amortization of loan costs in the amount of
$94,446 and $31,232, respectively.





Other
income and expense is comprised of interest expense and gain from termination of
debt. Interest expense was $255,573 for the six months ended June 30, 2008 as
compared to $288,040 for the six months ended June 30, 2007, a decrease of
$32,468.  Included in interest expense is the amortization of discount
related to the convertible promissory notes in the amount of $133,257 and
$141,902 for the six months ended June 30, 2008 and 2007,
respectively.  The remaining decrease is due to lower levels of debt
during the six months ended June 30, 2008.  Gain from termination of
debt for the six months ended June 30, 2008 and 2007 was $4,286 and $163,720,
respectively and pertains primarily to the settlement of certain liabilities at
less than the recorded value.




17





Liquidity
and Capital Resources





Our cash
and cash equivalents of $18,959 as of June 30, 2008 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 August
7, 2008 we received cash of $48,057 upon the exercise of warrants to purchase
961,140 shares of common stock at an exercise price of $0.05 per share from
Aspen Opportunity Fund L.P.





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








Off-Balance
Sheet Arrangements




We have
no off-balance sheet arrangements.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
Applicable











ITEM
4T. CONTROLS AND PROCEDURES





As
required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal
period covered by this report, we have carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures.  This evaluation was carried out under the supervision and
with the participation of management, including our chief executive officer and
chief financial officer.  Based upon that evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective at June 30, 2008.





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 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





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


18


PART
II - OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS.








Administrative
Proceeding – U.S. Securities and Exchange Commission





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





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





U.S. Securities
and Exchange Commission ,  The U.S. Securities and Exchange
Commission in the U.S. District Court, District of Utah, Central Division having
Case No.: 2:07cv00709.  The caption on the Complaint is Securities and Exchange Commission
v. Diatect International Corporation et al. The four
defendants are the 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 intends to vigorously defend the allegations of
the Complaint.




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


19





ITEM
1A. RISK FACTORS





Not
Applicable





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





We issued
1,600,000 shares valued at $115,200 or $0.072 per share and warrants to purchase
1,000,000 shares of common stock at an exercise price of $0.10 per share
expiring November 30, 2011, as compensation to a vendor. The value represents
the market price of our common stock on the dates of issuance.





We issued
2,000,000 shares of common stock and two year warrants to purchase 2,000,000
shares of common stock at an exercise price of $0.075 per share for gross
proceeds of $100,000 in a private placement.





We issued
a three-year warrant to purchase 500,000 shares of common stock at an exercise
price of $0.05 per share to a vendor for services.




ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




During
the quarter ended June 30, 2008 a proposal was made by a shareholder to amend
our articles of incorporation to change the number of our authorized shares of
common stock from 300,000,000 shares to 500,000,000 shares. This proposal was
approved by holders of a majority of our outstanding common stock acting by
written consent and we did not hold a formal stockholders’ meeting.  A
summary of the votes cast follows.




For
              99,847,233Against
              -Abstain
              -




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 David Andrus, 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


20


SIGNATURES





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











Diatect
      International Corporation(Registrant)Dated:
      August 14, 2008By:
            /s/ Patrick
    CarrPatrick
      CarrPrincipal
      Executive OfficerBy:
            /s/ Robert
    RudmanRobert
      RudmanPrincipal
      Accounting Officer






21