SB-2

As filed with the Securities and Exchange Commission on August 26, 2003  Registration No. 333-_________

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM SB-2

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

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DIATECT INTERNATIONAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

California	2870	82-0513109
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

875 S. Industrial Parkway

Heber City, UT 84032

Tel: (435) 654-4370

Fax: (435) 657-9796

Attention: Jay W. Downs, CEO

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(Name, Address, Telephone Number and Facsimile Number of Agent For Service of Process)

Copies of all Communications to:

David L. Ficksman, Esq.

Loeb & Loeb LLP

10100 Santa Monica Boulevard, Suite 2200

Los Angeles, California 90067-4164

Tel: (310) 282-2350

Fax: (310) 282-2200

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Approximate date of commencement of proposed sale to the public:

As soon as possible after the effective date of this registration statement.

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   [   ]

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   [   ]

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   [   ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.   [   ]

CALCULATION OF REGISTRATION FEE

Title of Shares To Be Registered	Amount To Be Registered	Proposed Maximum Offering Price Per Unit(1)	Proposed Maximum Aggregate Offering Price(1)	Amount of Registration Fee
Common stock underlying the 8% Convertible Debentures due December 27, 2004	13,500,000	$0.13	$1,755,000	$143
Common Stock underlying the Warrants	2,500,000	$0.13	$325,000	$27
Common Stock	1,000,000	$0.13	$130,000	$11
Total	17,000,000	---	$2,210,000	$181

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Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(c) of the Securities Act of 1933 based upon the bid price of the Registrant’s common stock as quoted on the Over-the-Counter Bulletin Board of $.13 on August 1, 2003.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effectiveness date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.

The information contained in this preliminary prospectus is not complete and may be changed.  These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is declared effective.  This preliminary prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted.  You should rely only on the information contained in this preliminary prospectus.

PRELIMINARY PROSPECTUS

Subject to completion, dated August 26, 2003

DIATECT INTERNATIONAL CORPORATION

17,000,000 Shares of Common Stock

The 17,000,000 shares of common stock no par value being offered by La Jolla Cove Investors, Inc. as the selling shareholder listed on page 15.  The shares of our common stock covered by this prospectus include: 1,000,000 shares of common stock purchased by the selling shareholder in a private placement in November 2002, 13,500,000 shares of common stock issuable upon conversion of the 8% Convertible Debenture due December 27, 2004, and 2,500,000 shares issuable upon exercise of the Warrants, issued in a private placement on December 27, 2002.  This offering is not being underwritten.

The prices at which the selling shareholder may sell its shares will be determined by the prevailing market price for the shares or in privately negotiated transactions.  Information regarding the selling shareholder and the times and manner in which it may offer and sell the shares under this prospectus is provided under “Selling shareholder” and “Plan of Distribution” in this prospectus.  Diatect will not receive any of the proceeds from the sale of the shares under this prospectus.  

Our common stock trades on the Over-the-Counter Bulletin Board, also called the OTCBB, under the trading symbol “DTCT”.  On August 1, 2003, the closing bid for our common stock as reported on the OTCBB was $.13 per share.  As of August 1, 2003 there were 48,558,936 shares of common stock outstanding.

THIS INVESTMENT INVOLKES RISK.  SEE “RISK FACTORS” BEGINNING ON PAGE 9.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the securities or determined that this prospectus is complete or accurate.  Any representation to the contrary is a criminal offense.

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The date of this Prospectus is August __ , 2003

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TABLE OF CONTENTS

Corporate Information	2
Prospectus summary	3
Risk Factors	7
Cautionary Statement Regarding Forward-Looking Statements	13
Use of Proceeds	14
Selling Shareholder	14
Plan of Distribution	15
Business	17
Description of Property	20
Management	21
Executive Compensation	23
Security Ownership of Certain Beneficial Ownership and Management	28
Certain Relationships and Related Transaction	29
Description of Securities	30
Market For Common Equity and Related Shareholder Matters	31
Management’s Discussion and Analysis or Plan of Operations	32
Changes in and Disagreements with Accountants on accounting and Financial Disclosure	37
Legal Proceedings	37
Experts	38
Legal Matters	38
Financial Statements	F-1

CORPORATE INFORMATION

Our corporate offices are located at 875 S. Industrial Parkway, Heber City, UT 84032.  Our telephone number at that location is (435) 654-4370.  The URL for our Web site is http://www.diatect.com.

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PROSPECTUS SUMMARY

Because the following is a summary, it may not contain all of the information that is important to you. To understand this offering fully,  You should read this entire prospectus and our financial statements and related notes carefully.  Unless the context requires otherwise, “we,” “us,” “our” and similar terms refer to Diatect.

The Company

Diatect International Corp. (formerly Applied Earth Technologies, Inc.) was incorporated in California in 1979.  We produce a variety of insecticides, which utilize so called “natural-killing agents”, which we believe are non-toxic to the environment as well as humans and other warm blooded animal life. Whereas conventional chemical synthesized insecticides can be composed of highly dangerous, toxic chemicals that can seep into the water table and can be washed into rivers and lakes, contaminating water and soil for decades, our products are composed of materials that degrade after application leaving the environment unharmed.  Certain of these materials have been used separately for years as adequate alternatives to hazardous chemical insecticides.  By combining these materials together in our products, we have created a synergy that leads to more effective ins ect control than they can provide individually.

We have obtained five EPA registrations and nine retail labels necessary for the production and marketing of insect control products.  The approval by the EPA of our labels is significant since EPA approval can be a lengthy and expensive process. Due to the long time it took to obtain EPA approval for our labels, we did not actually begin commercial marketing of our products until late 2001.

Over the past decade, chemical companies have voluntarily dropped the registration of approximately 93 active ingredients and 6,100 pesticide products that were in use at the time of cancellation.  Additionally, since insecticides were first used in the 1940's, more than 600 insect species have developed resistance to many synthetic pesticides, leading the industry to constantly search for new products.

Recent Developments

Business

On August 12, 2003, we entered into a letter of intent with Diatomaceous Earth Deposits of Virginia to purchase 90% of our diatomaceous earth mining site in Malheaur County Oregon for $31.1 million.  We expect to finalize the transaction on or before September 15, 2003. Diatomaceous Earth Deposits, a Virginia corporation is co-owned by Michael P. McQuade, an outside director of the Company.  This transaction was approved by a majority of the disinterested members of our Board of Directors.  

The preliminary terms of the agreement provide that Diatect will receive annual payments for $1.9 million per year beginning in September 2005 and continuing for a period of fifteen years thereafter.  Other terms will be negotiated prior to the scheduled closing.  A Form 8-K reporting this transaction was filed with the Securities and Exchange Commission on August 18, 2003.

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Financing

In November, 2002, we entered into a Common Stock Purchase Agreement with La Jolla Cove Investors, Inc. relating to the sale of 1,000,000 shares of our common stock for a purchase price of $100,000.  The shares were issued in a private placement that was exempt from registration pursuant to an exemption provided by Section 4(2) of the Securities Act of 1933, as amended. In connection with the issuance of the foregoing shares we granted La Jolla Cove piggy back registration rights whereupon we agreed that so long as La Jolla Cove owned the shares, we would include the shares in our next registration statement.

On December 27, 2002, we entered into a Securities Purchase Agreement with La Jolla Cove Investors, Inc. relating to the sale of $150,000 in principal amount of an 8% Convertible Debenture due December 27, 2004 and Warrants.  The Debenture was amended on March 18, 2003 and increased by $100,00 in principal amount making the Debenture total $250,000. The Warrants were amended on March 27, 2003 to limit the number of shares issuable upon exercise of the Warrants to 2,500,000 shares of common stock.  The Debenture and the Warrant were each further amended on March 27, 2003 to amend certain terms of conversion and on August 6, 2003 to amend the definitions of “Conversion Price” and certain other defined terms. We have relied upon and will rely upon an exemption provided by Section 4(2) of the Securities Act of 1933, as amended with respect to the issuan ce of the Debenture, the Warrants and the shares issuable upon conversion of the Debenture and Exercise of the Warrants.  Further, the selling shareholder has represented that it is an “accredited investor” within the meaning of Rule 501 of Regulation D.  Of the 16.000,000 shares covered by this prospectus 15,000,000 are the shares issuable to La Jolla Cove upon conversion of the Debenture and exercise of the Warrants.  Set forth below are the terms of the Debenture and Warrants.

Debenture

Conversion; Conversion Price

The holder has agreed that, beginning in the first full calendar month after the Registration Statement to which the prospectus is a part, is declared effective, that it will convert at least five percent (5%), but no more than ten percent (10%) of the face value ($250,000) of the Debenture into common stock (calculated as to each such conversion to the nearest 1/100th of a share).  The number of shares of common stock into which the Debenture may be converted is equal to the principal amount of the Debenture being converted multiplied by eleven, minus the product of the Conversion Price, defined below, multiplied by ten times the principal amount of the Debenture being converted divided by the conversion price.  The conversion formula is illustrated as follows:

PA = Principal Amount; CP = Conversion Price

PA x 11 – CP x (10 x PA)

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CP

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On each date the Debenture is converted, we must pay in cash, any accrued and unpaid interest on the principal amount of the Debenture being converted not included, at the option of the holder, in the principal amount being of the Debenture being converted on that particular date of conversion, provided however, if the holder does not convert at least five percent (5%) of the face value of the Debenture, holder can not collect interest on the month in which it did not convert the minimum amount.

If the holder elects to convert a portion of the Debenture and does not elect to exercise the related warrants, we may limit the number of common stock that the holder receives upon conversion to the amount of the Debenture being converted divided by the Conversion Price.  Further, for a period of 120 days following the effective date of the Registration Statement, if the holder elects to convert a portion of the Debenture and on the day that the election is made, the Conversion Price is below $.20, we have the right to prepay at a rate of 125% of that portion of the Debenture that the holder has elected to convert, plus any accrued and unpaid interest.  If we elect to prepay, holder shall have the right to withdraw its notice of conversion.  For each month, or any part of that the holder withdraws its conversion notice, we have the right to extend the maturity date of th e Debenture by one month.

“Conversion Price” as defined in the Addendum to the Convertible Debenture, dated August 6, 2003, is equal to the lesser of (i) $1.00, or (ii) seventy five percent (75%) of the average of the three lowest Market Prices, defined below, during the one hundred and twenty (120) calendar days prior to holder’s election to convert. “Market Price is defined as the lowest price of the common stock during any trading day as reported on the Over-the-Counter Bulletin Board.

Maturity; Interest and Prepayment

The Debenture accrues interest at a rate of eight percent (8%) per annum payable monthly in arrears commencing February 15, 2003.  The Debenture may not be prepaid without the written consent of the holder.

Warrants

Exercise Price

The  maximum number of shares of common stock subject to adjustment for splits or recapitalization that may be purchased under the Warrants is therefore 2,500,000.  The holder has agreed that, beginning in the first full calendar month after the Registration Statement to which the prospectus is a part, is declared effective, that it will exercise at least five percent (5%), but no more than ten percent (10%) of the Warrant.  The Warrant may only be exercised concurrently with or subsequent to the conversion of the Debenture.  The exercise price of the Warrants is $1.00.

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Limits of the Conversion of the Debenture an Exercise of the Warrants

The selling shareholder may not convert the Debenture and/or exercise the Warrants, if and to the extent that on any date, the selling shareholder would be deemed the beneficial owner of more than five percent (5%) of the then outstanding shares of common stock.

Registration Rights

In connection with issuance of the Debentures and the Warrants, we agreed to file a Registration Statement registering the shares issuable upon conversion of the Debenture and exercise of the Warrants.  This prospectus is a part of that Registration Statement. We agreed to pay all expenses related to filing the Registration Statement and we agreed to comply with all necessary state securities laws so as to permit the sale of the common stock covered by this prospectus.  

We initially agreed to use our best efforts to file the Registration Statement and have it declared effective by the SEC by March 27, 2003, however due to certain financial constraints we were unable to file the Registration Statement by March 27, 2003.  On August 6, 2003 pursuant to the Addendum to the Convertible Debenture, the holder agreed to extend the deadline for having the Registration Statement declared effective to December 4, 2003 and agreed to waive all penalties accrued under Section 3.1(b) of the Debenture.  If the Registration Statement is not filed by December 4, 2003, other than by delay of the SEC or our counsel, we will incur the following penalties under the Debenture.

One, the Conversion Price discount multiplier of 75% is decreased by three percentage points (3%) for each month or partial month occurring after December 4, 2003 that the Registration Statement is not effective or if the Registration Statement has been declared effective but is not thereafter effective.

Two, notwithstanding the foregoing, if the reason for the delay in filing the Registration Statement is the result of delay by either the SEC or the attorneys filing the Registration Statement on behalf of the company, or, if the Registration Statement has been declared effective but is not thereafter effective, the following will also apply in addition to any damages incurred by the holder:

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The holder may demand repayment of one hundred and fifty percent (150%) of the principal amount of the Debenture, together with all accrued and unpaid interest thereon, in cash, at any time prior to the Registration Statement being declared effective by the SEC or during the period that the Registration Statement is not effective, such repayment to be made within three (3) business days of such demand.  In the event that the Debenture is so accelerated, in addition to the repayment of one hundred and fifty percent (150%) of the principal amount together with accrued interest, we must immediately issue and pay, as the case may be, to the holder 25,000 shares of common stock and $5,000 for each thirty (30) day period, or portion thereof, during which the principal amount, including interest thereon, remain s unpaid, with the monthly payment amount to increase to $10,000 for each thirty (30) day period, or portion thereof, after the first ninety (90) day period; or

•

If the holder does not elect to accelerate the Debenture, we must immediately issue or pay, as the case may be, to the holder 25,000 shares of common stock and $5,000 for each thirty (30) day period, or portion thereof, that the Registration Statement is not effective, with the monthly payment amount to increase to $10,000 for each thirty (30) day period, or portion thereof, after the first ninety (90) day period.

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RISK FACTORS

You should carefully consider the risks described below before making an investment in Diatect.  The risks and uncertainties described below are not the only ones facing Diatect, and there may be additional risks that we do not presently know of or that we consider immaterial.  All of these risks may impair our business operations.  If any of the following risks actually occurs our business, financial condition or results of operations could be materially adversely affected.  In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.  

Risks Related to the Business

We have a limited operating history.

We have a limited operating history and we are in our emerging stages.  There can be no assurance that we will continue to develop or will be able to meet our objectives, or that our products will be accepted in the market, or that we will operate at a profit.  We face a number of risks encountered by early-stage companies, including:

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the uncertainty of market acceptance of our products;

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our need to introduce reliable and robust products and services that meet the demanding needs of customers;

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our need to expand our marketing, sales and support organizations, as well as our distribution channels; and

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our ability to anticipate and respond to market competition; our need to manage expanding operations.

We have a history of operating losses and will incur losses in the future.

We may never generate sufficient revenue to achieve profitability. We have incurred operating losses in each quarter since we commenced operations. We expect to continue to devote substantial resources to our research and development and sales and marketing activities. As a result, we expect that we will continue to incur operating losses for the foreseeable future. If we do not raise additional capital our operations may be curtailed.

Because we are in a very tight working capital situation and have significant outstanding indebtedness we may not be able to raise money to fund our operations and we may not be able to continue as a going concern.

We are in very tight working capital situation.  Our cash requirements have been and will continue to be significant.  We have been forced to raise capital to fund ongoing operations through the private sales of our securities, on terms that have been highly dilutive and which have involved substantial expenses.  

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We expect that we will need to raise additional funds through private debt or equity financing in order to continue to support current operations and develop our business plan.  No assurance can be made that we will be able to raise sufficient capital to sustain operations.  If additional funds are raised through the issuance of equity securities, the percentage ownership of our shareholders at that time will be reduced, particularly in view of the dramatic decline in the value of our common stock over the past several months.  We have incurred debt with private lenders and anticipate incurring additional loan obligations to sustain current operations.  If adequate funds are not available or are not available on acceptable terms, we may not be able to:

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fund then existing operations;

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develop new or enhanced services and related products;

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continue to develop our business plan; and,

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otherwise respond to competitive pressures.  

As a result, our business, operating results and financial condition could be materially adversely affected.  In our present circumstance, therefore, there is doubt about our ability to continue as a going concern, absent a substantial increase in revenues.  Our auditors have included a statement regarding our ability to continue as a going concern in their audit report for the fiscal year ended December 31, 2002.

Cyclical and seasonal effects may adversely affect our business.

The insecticide industry in general is cyclical and demands for our products tend to be slightly seasonal. Seasonal usage follows varying agricultural seasonal patterns, weather conditions and weather related pressure from pests, and customer marketing programs and requirements. Weather patterns can have an impact on our operations. The end user of some of our products may, because of weather patterns, delay or intermittently disrupt field work during the planting season, which may result in a reduction of the use of some of our products. There can be no assurance that we will adequately address any adverse seasonal effects. Our inability to effectively address adverse seasonal effects could have a material adverse effect on our business and operating results.

The industry in which we do business is extremely competitive and our business may suffer if we are unable to compete effectively.

Generally, the treatment against pests of any kind is broad in scope, there being more than one way or one product for treatment, eradication, or suppression. We face competition from many domestic and foreign manufacturers, marketers and distributors participating in our marketplace. Competition in our marketplace is based primarily on efficacy, price, safety and ease of application.

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The principal participants in the U.S. insecticide industry are major companies such as Dow, Dupont, Monsanto, Shell Oil and Chevron.  Those companies all have more extensive resources than we do and have established product recognition.  We believe, however, that by focusing on more natural, safer, non hazardous, Eco-sensitive insecticides, we are able to acquire market niches which have not been a focus of the larger, better established companies. We believe we have an advantage in the products and market niche we have identified in that we have already obtained EPA approval of our products and labels.  Our ability to compete depends on our ability to develop additional applications for our current products, and to expand our product lines and customer base. We compete principally on the basis of the quality of our products, and the technical service and support given t o our customers. There can be no assurance that we will compete successfully with our existing competitors or with any new competitors. Our inability effectively to compete in our products or services would have a material adverse effect on our business and operating results.

If we are unable successfully to position ourselves in smaller niche markets, our business may be adversely affected.

We have attempted to position ourselves in smaller niche markets that have been or are being abandoned by larger chemical companies. These types of markets tend not to attract larger chemical companies due to the smaller volume demand, and larger chemical companies have been divesting themselves of products that fall into such niches. These smaller niche markets require significant and intensive management input and ongoing product research. There can be no assurance that we will be successful in these smaller niche markets or, if we are successful in one or more niche markets, that we will continue to be successful in such niche markets. Our inability to be successful in such niche markets could have a material adverse effect on our business and operating results.

Our products are subject to governmental regulations and approvals and failure to comply with such regulation could materially alter our ability to continue operations.

Our products are subject to laws administered by federal and state governments, including regulations requiring registration, approval and labeling of our products. Substantially all of our products are subject to EPA registration and re-registration requirements, and are conditionally registered in accordance with the Federal Insecticide, Fungicide and Fodenticide Act (FIFRA). Such registration requirements are based, among other things, on data demonstrating that the product will not cause unreasonable adverse effects on human health or the environment when used according to approved label directions. All states where any of our products are used also require registration before they can be marketed or used in that state. Governmental regulatory authorities have required, and may require in the future, that certain scientific data requirements be performed on our products. We, on our behalf and in joint efforts with other registrants, have and are currently furnishing certain required data relative to our products.

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Under FIFRA, the federal government requires registrants to submit a wide range of scientific data to support U.S. registrations. This requirement has significantly increased our operating expenses in such areas as testing and the production of new products. We expect such increases to continue in the future. Because scientific analyses are constantly improving, it cannot be determined with certainty whether or not regulatory authorities may require new or additional tests. While FIFRA good laboratory practice standards specify the minimum practices and procedures which must be followed in order to ensure the quality and integrity of data related to these tests submitted to the EPA, there can be no assurance the EPA will not request certain tests or studies be repeated. In addition, more stringent legislation or requirements may be imposed in the future. We can provide no assurance that any testing approvals or registrations will be granted on a timely basis, if at all, or that our resources will be adequate to meet the costs of regulatory compliance. Our inability to be successful in meeting testing and regulatory requirements could have a material adverse effect on our business and operating results.

We may be subject to environmental liabilities.

The company, its facilities and its products are subject to numerous federal and state laws and governmental regulations concerning environmental matters and employee health and safety. We continually adapt our manufacturing process to the environmental control standards of the various regulatory agencies. The EPA and other federal and state agencies have the authority to promulgate regulations that could have an impact on our operations. We expend substantial funds to minimize the discharge of materials in the environment and to comply with governmental regulations relating to protection of the environment. Federal and state authorities may seek fines and penalties for violation of the various laws and governmental regulations, and could, among other things, impose liability on us for cleaning up the damage resulting from release of pesticides and other agents into the environment. Our inability to comply with such laws and regulations or a claim for environmental liability could have a material adverse effect on our business and operating results.

Our use of hazardous materials exposes us to potential liabilities.

Our development and manufacturing of chemical products involve the controlled use of hazardous materials. While we continually adapt our manufacturing process to the environmental control standards of regulatory authorities, we cannot completely eliminate the risk of accidental contamination or injury from hazardous or regulated materials. In the event of such contamination or injury, we may be held liable for significant damages or fines. In the event that such damages or fines are assessed, it could have a material adverse effect on our business and operating results.

Our business may give rise to product liability claims not covered by insurance or indemnity agreements.

Our manufacturing, marketing, distribution and use of chemical products involve substantial risk of product liability claims. A successful product liability claim, which is not insured, may require us to pay substantial amounts of damages. In the event that such damages are paid, it could have a material adverse effect on our business and operating results.

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Securing necessary approvals for our products can be difficult, time consuming and costly, and additional obstacles may arise in the future.

The field testing, production and marketing of our products are subject to extensive regulations and numerous government approvals, which vary widely among jurisdictions. Obtaining necessary regulatory approvals can be time consuming and costly, and there can be no guarantee of the timing or granting of approvals. Regulatory authorities can block the sale or import of our products, order recalls, and prohibit planting of seeds containing our technology.  As the insecticide industry continues to evolve, new unanticipated restrictions and burdensome regulatory requirements may be imposed which could harm our results of operations.

Risks Related to our Common Stock

Future sales of our common stock registered for public sale by this registration statement could cause our stock price to plummet, adversely affecting our ability to raise funds in new stock offerings.

After this offering, there may be as many as 85,000,000 shares of common stock sold on the public market as compared to approximately 48,000,000 prior to this offering.  If demand to purchase our shares is weak, our stock price could plummet and cause a significant loss of investment.

The continuously adjustable conversion price feature of the Debenture could require us to issue a large number of shares, which will cause dilution to our existing shareholders.

 Our obligation to issue shares upon conversion of the Debenture is essentially limitless.  The following is an example of the amount shares of our common stock that are issuable, upon conversion of the entire Debenture, based on market prices 25%, 50% and 75% below the market price, as of August 1, 2003 of $.13.

% Below Market	Price Per Share	Conversion Price Discount of 25%	Number of Shares Issuable	Percentage Ownership of Outstanding Common Stock
25%	$.10	$.17	22,500,000	33%
50%	$.08	$.06	39,287,214	46%
75%	$.03	$.02	91,664,166	67%

As illustrated, the number of shares of common stock issuable upon conversion of the Debenture will increase if the market price of our stock declines, which will cause dilution to our existing shareholders and may result in a loss of control of the company.  Although the selling shareholder may not convert their securities and/or exercise their Warrants into more than 5% of our outstanding common stock, this restriction does not prevent the selling shareholder from converting and/or exercising some of its holdings and then converting the remainder of its holdings.  In this way, the selling shareholder could sell more than the 5% limit while never holding more than 5% of our outstanding common stock.

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The continuously adjustable conversion price feature of the Debenture may encourage others to make short sales of our common stock, which could have a depressive effect on the price of our common stock.  

The Debenture is convertible into shares of our common stock at a 25% discount to the trading price of the common stock.  The downward pressure on the price of the common stock as the selling shareholder converts and sells common stock could encourage short sales by others.  This could place further downward pressure on the price of the common stock.

Our Common Stock is Penny Stock as defined in the Exchange Act and an investor may find it more difficult to dispose of or obtain accurate quotations as to the price of the shares of the Common Stock.

Our Common Stock is classified as penny stock, which is traded in the over-the-counter market on the OTC Bulletin Board.  As a result, an investor may find it more difficult to dispose of or obtain accurate quotations as to the price of the shares of the common stock being registered hereby.  In addition, the "penny stock" rules adopted by the Commission under the Exchange Act subject the sale of the shares of the common stock to certain regulations which impose sales practice requirements on broker-dealers.  For example, broker-dealers selling such securities must, prior to effecting the transaction, provide their customers with a document that discloses the risks of investing in such securities.  Furthermore, if the person purchasing the securities is someone other than an accredited investor or an established customer of the broker-dealer, the broker-dea ler must also approve the potential customer's account by obtaining information concerning the customer's financial situation, investment experience and investment objectives.  The broker-dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities.  Accordingly, the Commission's rules may limit the number of potential purchasers of the shares of the common stock.

There may be resale restrictions with respect to our common stock.

Various state securities laws impose restrictions on transferring penny stocks and as a result, investors in the common stock may have their ability to sell their shares of the common stock impaired.  For example, the Utah Securities Commission prohibits brokers from soliciting buyers for penny stocks, which makes selling them more difficult.

We are obligated to issue additional securities to the selling security holder if we fail to register our common stock prior to December 4, 2003.

We agreed to use our best efforts to cause this Registration Statement to become effective by December 4, 2003.  We also agreed that, if this Registration Statement has not been declared effective by the specified date, the discount multiplier for calculating the conversion price of the Debenture will decrease by 3% per month or part thereof until the Registration Statement is declared effective.  Additionally, the holder may demand repayment of one hundred and fifty percent (150%) of the principal amount of the debenture, together with all accrued and unpaid interest thereon, in cash, at any time prior to this registration statement being declared effective or during the period that this registration statement is not effective, such repayment to be made within three (3) business days of such demand. In the event that the debenture is so accelerated, in addition to the repayme nt of one hundred and fifty percent (150%) of the principal amount together with accrued interest as aforesaid, we must immediately issue and pay, as the case may be, to the holder 25,000 shares of our common stock and $5,000 for each thirty (30) day period, or portion thereof, during which the principal amount, including interest thereon, remains unpaid, with the monthly payment amount to increase to $10,000 for each thirty (30) day period, or portion thereof, after the first ninety (90) day period. If, however, the holder does not elect to accelerate the debenture, we must issue or pay, as the case may be, to holder 25,000 shares of our common stock and $10,000 for each thirty (30) day period, or portion thereof, that the Registration Statement is not effective, with the monthly payment amount to increase to $20,000 for each thirty (30) day period, or portion thereof, after the first ninety (90) day period.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Under the Private Securities Litigation Reform Act of 1995, companies are provided with a “safe harbor” for making forward-looking statements about the potential risks and rewards of their strategies. Forward-looking statements often include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. In this prospectus supplement, forward-looking statements also include:

•

statements about our business plans;

•

statements about the potential for the development, regulatory approval and public acceptance of new products;

•

estimates of future financial performance;

•

predictions of national or international economic, political or market conditions;

•

statements regarding other factors that could affect our future operations or financial position; and

•

other statements that are not matters of historical fact.

Our ability to achieve our goals depends on many known and unknown risks and uncertainties, including changes in general economic and business conditions. These factors could cause our actual performance and results to differ materially from those described or implied in forward-looking statements. Factors that could cause or contribute to such differences include, among others:

•

the success of our research and development activities and the speed with which regulatory authorizations and product launches may be achieved;

•

our ability to continue to manage our costs;

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•

our ability to successfully market new and existing products in new and existing domestic and international markets;

•

the effect of weather conditions and commodity markets on the agriculture business;

•

our exposure to lawsuits and other liabilities and contingencies;

•

the accuracy of our estimates and projections, for example, those with respect to product returns and grower use of our products and related distribution inventory levels;

•

our ability to obtain payment for the products that we sell;

•

the effects of our accounting policies and changes in generally accepted accounting principles;

•

our ability to fund our short-term financing needs;

•

general economic and business conditions; and

•

any changes in business, political and economic conditions due to threat of future terrorist activity and related military action.

These forward-looking statements speak only as of the date of this prospectus. We believe it is in the best interest of our investors to use forward-looking statements in discussing future events. However, we are not required to, and you should not rely on us to, revise or update these statements or any factors that may affect actual results, whether as a result of new information, future events or otherwise.

USE OF PROCEEDS

We have registered these shares because of registration rights granted to the selling shareholder.  We will not receive any proceeds from the issuance of common stock to the selling shareholder, however, we received net proceeds of $250,000 from the initial sale of the Debenture and we will receive proceeds from the exercise of the Warrants when and if exercised.  The net proceeds from the sale of the Debenture and any proceeds received form the exercise o the Warrants have been and will be used for working capital.

SELLING SHAREHOLDER

The following table sets forth certain information concerning the resale of the shares of common stock by the selling shareholder.  Unless otherwise described below, to our knowledge, no selling shareholder nor any of its affiliates has held any position or office with, been employed by or otherwise has had any material relationship with us or our affiliates during the three years prior to the date of this prospectus.  The selling shareholder has confirmed to us that it is not a broker-dealer or affiliate of a broker-dealer within the meaning of Rule 405 of the Securities Act, as amended.

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The selling shareholder may offer all or some portion of the shares of the common stock or the shares of common stock issuable upon conversion of the Debenture and/or exercise of the Warrants.  Accordingly, no estimate can be given as to the amount or percentage of our common stock that will be held by the selling shareholder upon termination of sales pursuant to this prospectus.  In addition, the selling shareholder identified below may have sold, transferred or disposed of all or a portion of its shares since the date on which they provided the information regarding its holdings in transactions exempt from the registration requirements of the Securities Act. The number of shares owned and offered hereby by the Selling shareholders is calculated on an assumed conversion price of $.10 per share, which conversion price is calculated using the closing bid price of $.13 of our co mmon stock on August 1, 2003. These numbers include also 2,500,000 shares of common stock underlying the Warrants.

As of August 1, 2003, there were 48,558,936 shares of our common stock outstanding.  In compliance with the SEC rules, for purposes of calculating the percentage of common stock outstanding, any securities not outstanding which are subject to options, Warrants or conversion privileges are deemed outstanding for the purposes of computing the percentage of outstanding securities owned by the selling shareholder.  Beneficial ownership includes shares of outstanding common stock and shares of common stock that a person has the right to acquire within 60 days from August 1, 2003.  Unless otherwise indicated, the selling shareholder has the sole power to direct the voting and investment over the shares owned by them.   We will not receive any proceeds from the resale of the common stock by the selling shareholder.

	Ownership of Common Stock Prior to the Offering
Name of Selling Stockholder	Number of Shares	Percentage of Ownership (2)	Number of Shares Offered Hereby
La Jolla Cove Investors, Inc. (1) 7817 Herschel Avenue, Suite 200 La Jolla, CA 90237	1,000,000	2.0%	(3)

(1) Norman A. Lizt is the beneficial owner, as defined in Rule 13d-3 of the Exchange Act of 1934, as amended, of the shares held by La Jolla Cove Investors, Inc. as he owns all of the outstanding equity of La Jolla Cove Investors, Inc.

(2) Based upon 48,558,936 shares outstanding.

(3)  The maximum number of shares that may be offered by this prospectus is 17,000,000.  The number of shares offered by this prospectus will vary from time to time based upon several factors including the market price of our common stock and the total number of shares outstanding on the date the selling shareholder intends to convert the Debenture and exercise the Warrants.  See Prospectus Summary – Recent Financing.  Based upon the terms of the both the Debenture and the Warrants, the selling shareholder may not convert the Debenture and/or exercise the Warrants, if on any date, the selling shareholder would be deemed the beneficial owner of more than five percent (5%) of the then outstanding shares of common stock.

PLAN OF DISTRIBUTION

We are registering the shares of common stock on behalf of the selling shareholder, La Jolla Cove Investors, Inc.  The selling shareholder and any of its pledges, assignees, and successors-in-interest may, from time to time, sell any or all of its shares of common stock on any stock exchange, market, or trading facility on which the shares are traded or in private transactions.  These sales may be at fixed or negotiated prices.  There is no assurance that the selling shareholder will sell any or all of the common stock in this offering.  The selling shareholder may use any one or more of the following methods when selling shares:

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Ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; Block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; Purchases by a broker-dealer as principal and resale by the broker-dealer for its own account; an exchange distribution following the rules of the applicable exchange; Privately negotiated transactions; short sales or sales of shares not previously owned by the seller; Broker-dealers may agree with the selling shareholder to sell a specified number of such shares at a stipulated price per share; A combination of any such methods of sale; or any other lawful method.

Broker-dealers engaged by the selling shareholder might arrange for other brokers-dealers to participate in sales.  Broker-dealers may receive commissions or discounts from selling shareholder in amounts to be negotiated.  If any broker-dealer acts as agent for the purchaser of shares, the broker-dealer may receive commission from the purchaser in amounts to be negotiated.  The selling shareholder does not expect these commissions and discounts to exceed what is customary in the types of transactions involved.  

The Securities and Exchange Commission has rules that regulate broker-dealer practices in connection with transactions in “penny stocks”. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in that security is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensati on of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. As a result of these rules, the selling security holder may find it difficult to sell its shares of common stock.

Underwriter Status

The selling shareholder and any broker-dealers or agents that are involved in selling the shares may be considered to be “underwriters” within the meaning of the Securities Act for such sales.  An underwriter is a person who has purchased shares from an issuer with a view towards distributing the shares to the public.  In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be considered to be underwriting commissions or discounts under the Securities Act.  

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Because the selling shareholder may be deemed to be an “underwriter” within the meaning of Section 2(11) of the Act of 1933, the selling shareholder will be subject to the prospectus delivery requirements of the Securities Act. We have informed the selling shareholder that the anti-manipulative provisions of Regulation M promulgated under the Securities Exchange Act of 1934 may apply to its sales in the market.

We are required to pay all fees and expenses incident to the registration of the shares in this offering.  However, we will not pay any commissions or any other fees in connection with the resale of the common stock in this offering.

When the selling shareholder notifies us that a material arrangement has been entered into with a broker-dealer for the sale of shares through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act of 1933, disclosing:

•

the name of the selling shareholder and of the participating broker-dealers,

•

the number of shares involved,

•

the price at which the shares were sold,

•

the commissions paid or discounts or concessions allowed to the broker-dealers, where applicable,

•

that the broker-dealers did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and

•

other facts material to the transaction

The selling shareholder will be indemnified by us against certain claims, damages and liabilities, including liabilities under the Securities Act in connection with the resale of the shares, or will be entitled to contribution in connection therewith. We will be indemnified by the selling shareholder to a limited extent, against certain losses, claims, damages and liabilities, including liabilities under the Securities Act in connection with the resale of the shares, or will be entitled to contribution in connection therewith.

In order to comply with the securities laws of certain states, if applicable, the shares may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the shares may not be sold unless they have been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

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BUSINESS

General

Diatect International Corporation was incorporated in California in May 19, 1979. We produce a variety of insecticides, which utilize so-called “natural-killing agents”, that are non-toxic to the environment as well as humans and other warm-blooded animal life. Whereas conventional chemical synthesized insecticides can be composed of highly dangerous, toxic chemicals that can seep into the water table and can be washed into rivers and lakes, contaminating water and soil for decades, our products are composed of materials that degrade after application leaving the environment unharmed.  Certain of these materials have been used separately for years as adequate alternatives to hazardous chemical insecticides.  By combining these materials together in our products, we have created a synergy that leads to more effective insect control than they can provide individually.< /P>

We have attempted to position ourselves in smaller niche markets that have been or are being abandoned by larger chemical companies. Our market focus in on national, safer, non-hazardous, Eco-sensitive insecticides. Historically, these types of markets tend not to attract larger chemical companies due to the smaller volume demand, and larger chemical companies have been divesting themselves of products that fall into such niches. These smaller niche markets require significant and intensive management input and ongoing product research, which because of our smaller size we are readily able to address. Further, we have obtained five EPA registrations and nine retail labels necessary for the production and marketing of insect control products.  The approval by the EPA of our labels is significant since EPA approval can be a lengthy and expensive process. Due to the long time it took to obtain EPA approval for our labels, we did not actually begin commercial marketing of our products until late 2001.

Over the past decade, chemical companies have voluntarily dropped the registration of approximately 93 active ingredients and 6,100 pesticide products that were in use at the time of cancellation.  Additionally, since insecticides were first used in the 1940's, more than 600 insect species have developed resistance to many synthetic pesticides, leading the industry to constantly search for new products.

Products

We recognize the future demands for environmentally acceptable insecticide products in all agriculture-related industries worldwide.  Our business plan calls for formulations which are natural in composition, components which, as stand-alone insecticides, are efficient, non-toxic, user and environmentally friendly, yet cost-effective.

The active ingredients used in our products are diatomaceous earth (“DE”), pyrethrin and piperonyl butoxide (“PBO”).  We combine DE, pyrethrin and PBO by using surfactants to ensure a good mix and greatly increase effectiveness and persistence.  The combination of these active ingredients results in a compound much more effective than each ingredient individually.  When using the ingredients together, DE breaks down the chitin, allowing the pyrethrin to act on an insect’s nerve cells directly.  The pyrethrin does not evaporate as quickly and is released for hours rather than minutes.  PBO increases the effectiveness of the pyrethrin by as much as ten times.

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Our products consist of five fully registered EPA Labels and nine retail labels:

EPA Labels

•

42850-1

•

42850-2  

•

42850-3  

•

42850-4

•

42850-5

Retail Labels

•

Diatect II - Sold in the agriculture market, the largest end-user market for insecticides markets as “Diatect II Multi-Purpose Insect control.”  Diatect II is used in a wide variety of areas, e.g., edible growing crops, animal quarters, livestock, ornamentals, etc.

•

Diatect III - Distributed and sold in the commercial; industrial; and government markets as “Diatect III Insect Control.”  This insecticide is approved by the EPA for use in a wide variety of areas, e.g., schools, parks, rest stops, roadways, childcare facilities, rest homes, eating establishments, all public places, etc.

•

Diatect V - A product that was designed and formulated to meet the needs of the organic food industry which requires insecticides with no synthetic ingredients.  Diatect V is sold and distributed to the commercial grower, homeowner, and gardener.

•

Results Ant & Insect - A domestic homeowner product which controls ants, aphids, caterpillars, leafhoppers, lice, mites, mosquitoes, ticks, and other insects.

•

Results Fireant – When applied directly to fire ant mounds and provides quick, effective control in eliminating these aggressive, dangerous pests.  Each year approximately 65,000 Americans seek hospital treatment for venomous fire ant stings and two of those people die.  Unlike bees, fire ants can sting repeatedly and they have very aggressive behavior.

•

Results Indoor - Controls roaches, fleas, ants, silverfish, crickets, bedbugs, box elder bugs, and other insects.  It is designed for use under sinks, behind furniture, in air vents, under tile, and in stairwells and basements.

•

Results Tomato & Garden - Protects garden plants from many varieties of worms, beetles, leafhoppers, stink bugs, squash vine borers, and other insects.

•

Results Rose & Floral - Protects azaleas, begonias, African violets, chrysanthemums, dogwood, elm, roses, tulips, and many other plants.  It also destroys insects such as mealybugs, fruit flies, white flies, and caterpillars that ruin the beauty of garden flowers and plants.

•

Results Pet Powder - A stand-alone product for use on pet pests for homeowners, kennels, boarding facilities, veterinary clinics and other animal facilities.

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Regulatory Approval

In general all insecticides, purchased in stores today must have EPA approved labels that disclose various required information about the product.  These insecticide labels provide an extensive amount of information and indicate that the insecticide has been tested, evaluated and regulated by the EPA.  In fact, no insecticides can be legally registered, much less sold, without going through these procedures.

As previously stated, all new insecticides must be "registered" with the EPA, which specifies the conditions of its use as part of its mandate under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA").  An insecticide user or manufacturer who fails to comply with FIFRA restrictions risks enforcement actions from both the EPA and state authorities.  Our products comply with FIFRA restrictions and are registered with the EPA.

The cost of developing a new chemical for registration has risen drastically in recent years, partially because of expensive tests required showing that the chemical poses low environmental and human health risks.  The typical pesticide is put through more than 6000 tests and approval can take more than eight to ten years, and can cost up to 25 million dollars.   Once approved, labeling instructions must be followed for proper use, handling, storage and disposal. Obtaining necessary regulatory approval is time consuming and costly, and there can be no guarantee of the timing or success in obtaining approvals.

Suppliers and Customers

Two of the main ingredients in our products diatomaceous earth (“DE”) and Pyrethrin.  Our supplier of DE is Cellite Corporation and Valent BioScience Corp supplies Pyrethrin to us.  Management has good relationships with its suppliers and believes that these suppliers are stable and does not anticipate any disruption in a steady supply of materials.  A disruption to our supply of materials could have an adverse impact on our operating results.

We do not sale directly to the end user of our products.  Our three largest customers are Ace Hardware, Handy Hardware and Weber Ellis.

Marketing and Sales

Our sales and marketing strategies revolve principally around developing a reputable brand identity and ongoing customer relationships, in addition to continuously innovating and improving the quality of our products.   

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Competition in the Insecticide Industry

The principal participants in the U.S. insecticide industry are major companies such as Dow, DuPont, Monsanto, Shell Oil and Chevron.  Those companies all have more extensive resources than we do and have established product recognition.  We believe, however, that by focusing on more natural, safer, non-hazardous, Eco-sensitive insecticides, we are able to acquire market niches which have not been a focus of the larger, better established companies. We believe we have an advantage in the products and market niche we have identified in that we have already obtained EPA approval of our products and labels.

DESCRIPTION OF PROPERTY

Diatect International Corporation, 875 South Industrial Parkway, Heber City, Utah 84032.  This facility is a 20,254 square foot class C masonry office/warehouse building on 1.928 acres in the Heber City, Utah Industrial Park.  On January 17, 2003, we completed negotiations of the terms for the purchase of our new facilities at a cost of approximately $875,500 (including closing costs).  Under terms of our financing agreement, we will pay approximately $9,200 a month in interest only payments at an annual interest rate of 13%.  We will be seeking alternative financing if we can secure a better interest rate.  We have returned the funds we obtained as an escrow deposit.  We paid the down payment of $28,500 during the fourth quarter of the year ended December 31, 2001.  During the same period, we also secured cash in the amount of $400,000 (listed in the financial statements at December 31, 2002 as $400,000 restricted cash), which was needed for an escrow deposit.  These funds have been returned to the lender.

During September 2001, the Company acquired title to unpatented mining claims on a section of land in Malheaur County, Oregon.  This property, with proven and probable reserves of diatomaceous earth, is recorded at cost on the Company's balance sheet.

Lease Commitments

In August 2000, the Company entered into a lease agreement for new office facilities in Boise.  The agreement called a three-year lease with monthly payments of $820 during the first year, $838 during the second year and $857 during the third year.  The Company occupied these facilities from May 1, 2000 through October 1, 2001.  The Company negotiated a settlement on the remaining lease in the amount of $2,089, which was paid.

The Company leased operating facilities in Smith Center, Kansas from an individual through July 2001.  The lease was a month-to-month handshake agreement, with monthly payments of $273.

MANAGEMENT

The following table and text set forth the names and ages of all directors and executive officers of the Company as of August 1, 2003. The Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. There are no family relationships among directors and executive officers. Also provided herein are brief description of the business experience of each director and executive officer during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws.

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Name	Age	Position(s)
Jay W. Downs	56	President and Chairman of the Board
John L. Runft	65	Director and Legal Council
Margie Humphries	53	Secretary
M. Stewart Hyndman	46	Director
David H. Andrus	39	Director and Vice-President
John H. Zenger	67	Director
Robert E. Crouch	38	Director
Frank Priestley	47	Director
Michael P. McQuade	49	Director

Biographies of Directors and Executive Officers:

JAY W. DOWNS joined the Board of Directors in 1999 and assumed the post of President and Board Chairman in September 2001 when Herb Henderson retired. Jay has over 30 years experience in Sales and Market planning. Jay spent 10 years in the institutional fund sale and supply business and then operated his own insurance brokerage which developed and marketed complete employee benefit packages throughout the U.S. with over 700 field representatives serving 40 states. In 1992, at the request of the company, Jay and his family spent six months in Kenya learning the pyrethrum business in detail and establishing relationships with the Kenya Pyrethrum Board. He spent three years consulting and formulating a market plan for the company. He then established and operated a successful full line mortgage banking business serving Utah, Idaho, Wyoming, and Colorado which he gave up in 2000, whe n he was appointed Senior Vice President of Diatect International.

JOHN L. RUNFT has been practicing law since 1965, emphasizing business organizations and litigation.  He received his BA from Albertson's College of Idaho in 1962 and his J.D. from the University of Chicago School of Law in 1965.  John is a member of the Idaho Bar and has appeared as lead counsel in litigation or appeals before the United States Court of Appeals for the Federal Circuit, and the United States Supreme Court.  He is a member of the Board of Litigation of the Mountain States Legal Foundation, is a member of the Idaho Law Foundation, served as a Director of the Idaho Community Foundation (1989-1996), and has served as Civilian Aide to the Secretary of the Army of the United States for the State of Idaho (1988-1996).

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M. STEWART HYNDMAN is the President of Magic Miles Ltd.; Inc., Meridan, Idaho, an export trading company established in 1995 specializing in the export of agricultural commodities and industrial products.  Following his graduation from the University of Idaho, Stewart has continued to play an active role in industry, agriculture, marketing and business development.

DAVID H. ANDRUS began an affiliation with Diatect in 1992.  Dave served in the U.S. Marine Corps for 10 years in the logistics and intelligence field, and was medically retired in 1991.  He formed Venture Creations, which performed contract research and development for EnviroGuard (now Diatect).  As R&D project manager, Dave supervised extensive field trials of the Diatect Insect Control within the poultry industry and for Fireant concerns in that region.  In 1998, Dave became manager of National Diatect, a distributor of Diatect insecticides (later acquired by us).  As technical manager for Diatect, Dave was responsible for all field studies of our product, and was instrumental in our transition from research and development to commercialization.  Since September 2001, Dave has served as Vice-president of Operations and was appointed a director.

JOHN H. (JACK) ZENGER B.S. Psychology, BYU 1953, MBA, UCLA 1959, PHD Business Administration, USC 1974. Jack has extensive experience as a management consultant and in personnel administration, having been V.P. Human Resources at Syntex Corp for 11 years and a VP of Times Mirror and in charge of their Training Company for 5 years. He has been actively engaged in community affairs in Palo Alto, California and here in Midway, Utah.

FRANK S. PRIESTLEY joined the Board of Directors on October 18, 2002.  He has been in the farming business in Idaho since 1970.  He currently serves as President of the Idaho Farm Bureau Federation, Farm Bureau Finance Co., Agricultural and Educational Research Foundation and the Farm Bureau Insurance Companies of Idaho.  He also serves on the Board of Directors for the American Farm Bureau Federation, with an appointment to the executive committee.  He comes to Diatect International with lots of experience in agriculture growing alfalfa, barley, corn and pasture for the family dairy operation.  

MARGIE HUMPHRIES was appointed Corporate Secretary in October of 2002.  She relocated to Heber, Utah, in September of 2002.  She comes with 25 years of professional work experience.  Starting in December 1991 until July 1998, she worked for Wasatch Medical Center.  Her responsibilities included the billing and collection process for five physicians and monitoring accounts receivable.  From July 1998 until March 2002, when she joined Diatect International, she worked full-time as a medical transcriber for Utah Valley Regional Medical Center, where she had been appointed a team leader.

ROBERT E. CROUCH also joined the Board of Directors on October 18, 2002.  He graduated in 1987, with a Bachelor of Science in Accounting, from Utah State University, in Logan, Utah.  He has extensive experience in corporate finance, accounting and as an administrative executive.  He presently works for Wells Fargo Business Credit, Inc., as a collateral examiner, where he conducts financial and operational audits on customers and potential borrowers.

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DR. MICHAEL P. MCQUADE has had a private dental practice since 1987, living in Richmond, Virginia.  He graduated from Virginia Polytechnic Institution & State University with a B.S. in Biology.  He then graduated from the Virginia Commonwealth University as a Doctor of Dental Surgery.  For the last five years Dr. McQuade has worked extensively in the poultry industry particularly in the Northeast as well as the Southeast region of the United States and research universities with respect to our product.

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EXECUTIVE COMPENSATION

The following tables set forth certain summary information concerning the compensation paid or accrued for each of our last three completed fiscal years to our chief executive officer and each of our other executive officers that received compensation in excess of $100,000 during the fiscal year ended December 31, 2002:

					Long Term Compensation
	Annual Compensation					Awards		Payouts
Name and Principal Position	Year	Salary	Bonus ($)	Other Annual Compensation			Restricted Stock Awards	Options/ SARs	LTIP Payout	All Other Compensation
Jay W. Downs	2002	$120,000	$6,739	-			-	-	-	-
C.E.O. (1)	2001	$120,000	$5,709	-			$60,000	-	-	-
George H. Henderson	2002	n/a	-	-			-	-	-	-
C.E.O. (2)	2001	$90,000	-	-			$40,000	-	-	$50,000
	2000	$         -	-	-			-	-	-	$19,000
David Andrus	2002	$90,000	$6,739	-			-	-	-	-
Vice President	2001	$90,000	$5,709	-			$40,000	-	-	-

__________________________

(1) Jay Downs was appointed as President and C.E.O. in September 2001.  On his appointment, he received a bonus of 750,000 shares of our restricted common stock valued at $0.08 per share.  In 2002, he was granted options for the purchase of 1,250,000 shares of our common stock at an exercise price of $.17 per share which vest in increments of one-third only upon the achievement by the Company of gross sales revenues in a fiscal year of $5 million, $10 million, and $15 million.  In January 2003, he also received the listed bonus payments for 2001 and 2002, which had been accrued.

(2) George Henderson resigned as President and C.E.O. in September 2001.  Upon his resignation, he received a settlement and severance package consisting of $50,000 cash and 500,000 shares of our restricted common stock valued at $0.08 per share.

(3) Dave Andrus was appointed vice-president in September 2001.  Pursuant to his employment agreement, he received a bonus of 500,000 shares of our restricted common stock valued at $0.08 per share.  In 2002, he was granted options for the purchase of 750,000 shares of our common stock at an exercise price of $.17 per share which vest in increments of one-third only upon the achievement by the Company of gross sales revenues in a fiscal year of $5 million, $10 million, and $15 million.  In January 2003, he also received the listed bonus payments for 2001 and 2002, which had been accrued.

Board of Directors

Members of the board of directors are compensated for service at a rate of 1,000 shares of stock per month of service.  In 2002, we issued a total of 82,000 shares to the current directors pursuant to this compensation arrangement as follows:

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____________________________________________________________________________________________________________

Jay Downs	15,000 shares
Dave Andrus	15,000 shares
John Runft	6,000 shares
Stewart Hyndman	15,000 shares
John H. Zenger	15,000 shares
Michael McQuade	12,000 shares
Frank Priestley	2,000 shares
Robert E. Crouch	2,000 shares

Two former directors, Robert B. Crouch and Nelson Carter, received 4,000 shares and 6,000 shares, respectively, for their service.

Employment Agreements

Jay Downs signed an employment agreement effective January 2001 for a term of three years at an annual salary of $120,000 per year, with a signing bonus of 350,000 options for the purchase of our common stock at $0.10 per share.  At the filing date of this report, all 350,000 options have been exercised.  The agreement includes provisions for bonus pay based on 1% of gross sales receipts as determined on a quarterly basis.  Accrued bonuses for 2001 and 2002 pursuant to his agreement were paid in January 2003.

David Andrus signed an employment agreement effective July 1, 2001 for a term of three years at an annual salary of $90,000 per year, with a signing bonus of 500,000 shares of our restricted common stock.  The agreement includes provisions for a reasonable automobile allowance and pay based on 1% of gross sales receipts as determined on a quarterly basis.  Accrued bonuses for 2001 and 2002 pursuant to his agreement were paid in January 2003.

On August 25, 2000, we executed a retainer agreement with John L. Runft to act as our legal counsel.  Mr. Runft received a signing bonus of an option to acquire 500,000 shares of our common stock at $0.06 per share.  The options were originally to vest over a three-year period.  At December 31, 2001, the vesting provisions were modified to permit immediate exercise of the remaining unvested options.  At the filing date of this report, all the remaining options have been exercised.

George Henderson, our former president, resigned in September 2001.  His employment agreement was terminated pursuant to a settlement of the balance of our obligations under the agreement.  The settlement consisted of $50,000 cash and 500,000 shares of our restricted common stock.

Stock Option Plans

In November 2002, we adopted the Diatect International Corporation 2002 Stock Option and Award Plan (the "Plan") under which 3,000,000 shares of Common Stock are available for issuance with respect to awards granted to officers, directors, management and other employees of the Company and/or its subsidiaries.  As of December 31, 2002, we had issued options for 2,000,000 shares of Common Stock to officers of the company.  None of these options have become vested and therefore are unexercisable at December 31, 2002.

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This Plan superceded the 1995 Stock Option Plan, which was initiated in order to aid the company in maintaining and developing a management team, and also attracting qualified officers and employees.  A total of 3,000,000 shares of stock were subject to, or issued pursuant to the terms of the plan.  

We estimate the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used during the year ended December 31, 2001: dividend yield of zero percent; expected volatility of thirty percent; risk-free interest rate of six percent.  The weighted average fair value at date of grant for options granted to employees and shareholders in the years ended December 31, 2002 and 2001 was $0.13 and $0.08 per option, respectively.  The following assumptions were used during the year during the year ended December 31, 2002: dividend yield of zero percent: expected volatility of 98.37%; risk-free interest rate of five percent.  Compensation cost charged to operations was $17,279 and $18,890 during the years ended December 31, 2002 and 2001, respectively.  

Finance fees charged to other expenses was $66,010 and legal fees charged to operations was $3,985 during the year ended December 31, 2001.

Following is a summary of the status of these performance-based options during the years ended December 31, 2002 and 2001:

	Number of Shares			Weighted Average
	2002 Plan	1995 Plan	Total	Per Share
Outstanding at
December 31, 2000	-	499,304	499,304	$ 0.06
Granted	-	1,100,000	1,100,000	0.13
Exercised	-	(499,304)	(499,304)	0.06
Expired/forfeited	-	-	-	-
Outstanding at
December 31, 2001	-	1,100,000	1,000,000	$ 0.13
Options Exercisable at
December 31, 2001	-	1,100,000	1,100,000	$ 0.13
Weighted average fair value of
options granted during 2001	-	0.08	0.08
Outstanding at
December 31, 2001	-	1,100,000	1,100,000	$ 0.13
Granted	2,000,000	-	2,000,000	0.13
Exercised	-	(600,000)	(600,000)	0.13
Expired/forfeited	-	-	-	-
Outstanding at
December 31, 2002	2,000,000	500,000	2,500,000	$ 0.14
Options Exercisable at
December 31, 2002	-	500,000	500,000	$ 0.13
Weighted average fair value of
options granted during 2002	$ 0.13	$   -	$ 0.13	$ 0.13

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	Number of Shares			Weighted Average
	2002 Plan	1995 Plan	Total	Per Share
Exercise Date
On or before December 31, 2004	-	500,000	500,000	$ 0.10
On or before December 31, 2007 and after the Company attaining $5,000,000 in gross annual sales	666,667	-	666,667	0.17
On or before December 31, 2007 and after the Company attaining $10,000,000 in gross annual sales	666,667	-	666,667	0.17
On or before December 31, 2007 and after the Company attaining $17,000,000 in gross annual sales	666,666	-	666,666	$ 0.17
Totals	2,000,000	500,000	2,500,000

The following table gives information about the Company's common stock that may be issued upon the exercise of options under all of the Company's existing stock option plans as of December 31, 2002.

Exercise Price	Number of Options	Weighted Average Exercise Price	Contractual Life (in years)	Number Exercisable	Weighted Average Exercise Price
$   0.10	500,000	$   0.10	2.00	500,000	$   0.10
0.17	666,667	0.17	2.15	-	0.17
0.17	666,667	0.17	3.20	-	0.17
0.17	666,666	0.17	4.42	-	0.17
	2,500,000	$   0.15	3.01	500,000	$   0.10

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Issuance of Non-Plan Stock Options, Warrants and Common Stock to Officers

During the year ended December 31, 2001, we issued 188,000 shares of its common stock valued at $47,000 to a former officer for back wages, 1,300,000 shares of its common stock valued at $97,500 for services to officers and others and 500,000 shares of its common stock valued at $37,500 as a severance bonus to our former president.  The shares were valued at their fair market value on the date of issuance.  An officer to whom options with a FMV of $55,534 had been previously issued, exercised the options and purchased 499,998 shares of common stock .  The exercise price of the stock of $30,000 was exchanged for accrued legal fees.  

During the year ended December 31, 2002, we issued 2,032,880 shares of its common stock valued at $288,029 in payment of services.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose of or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable.

As of August 1, 2003, the Company had a total of 48,558,936 shares of common stock issued and outstanding, which is the only issued and outstanding voting equity security of the Company.

The following table sets forth, as of August 1, 2003: (a) the names and addresses of each beneficial owner of more than five percent (5%) of the Company's common stock known to the Company, the number of shares of common stock beneficially owned by each such person, and the percent of the Company's common stock so owned; and (b) the names and addresses of each director and executive officer, the number of shares of common stock beneficially owned, and the percentage of the Company's common stock so owned, by each such person, and by all directors and executive officers of the Company as a group. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.

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Title of Class	Name and Position of Officer and Director	Amount and Nature of Beneficial Ownership	Percent of Class
Common	Jay W. Downs, Director/President,	2,161,389	4.45
	Chairman of Board
Common	John L. Runft, Director	2,139,290	4.41
Common	David Andrus, Director, Vice-president	595,000	1.23
Common	Robert Crouch, Director	1,110,864	2.29
Common	M. Stewart Hyndman, Director	271,800	0.56
Common	John H. Zenger, Director	46,000	0.09
Common	Frank Priestley, Director	8,000	-
Common	Michael P. McQuade, Director	654,334	1.35
Common	Margie Humphries, Secretary	78,500	0.16
	All Officers/Directors as a Group (9 persons)	7,065,177	14.54

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except as indicated below, and for the periods indicted, there were no material transactions, or series of similar transactions, since the beginning of our last fiscal year, or any currently proposed transactions, or series of similar transactions, to which we are a party, in which the amount involved exceeds $60,000, and in which any director or executive officer, or any shareholder who is known by us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, has an interest.

We have notes payable to 29 shareholders totaling $1,968,681 and $1,633,851 as of December 31, 2002 and 2001, respectively.

John L. Runft performs services as our main legal counsel.  Legal services performed by this officer totaled $19,312 and $17,067 for the years ended December 31, 2002 and 2001, respectively, of which $7,377 are included in accounts payable - related party at December 31, 2002.

We have employment contracts to pay our president and vice-president of operations annual compensation in the amounts of $120,000 and $90,000 respectively.  During January 2001, our president received as a signing bonus to acquire 350,000 shares of common stock at an exercise price of $0.10 per share.  Upon his appointment to the position of C.E.O., he received an additional bonus of 750,000 shares of our restricted common stock, valued at $0.08 per share, for additional compensation of $60,000.

Our vice-president also received a signing bonus on his employment agreement of 500,000 shares of our restricted common stock, valued at $0.08 per share, for additional compensation of $40,000.  

We also had an employment contract to pay our former president annual compensation of $120,000, which was terminated in September 2001.  As settlement and severance, he received $50,000 cash and 500,000 shares of our restricted common stock, valued at $.08 per share, for additional compensation of $40,000.  

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In the fiscal year 2001, our president contributed office furniture and equipment valued at $30,320 in exchange for a non-interest bearing convertible note payable.  The note was subsequently converted to 86,629 shares of our common stock valued at $0.35 per share.

Members of our board of directors receive compensation in the form of 1,000 shares of our common stock per month of service.  In 2002, board members were issued shares totaling 82,000 shares for board service.  Two former directors were issued 10,000 shares.  

DESCRIPTION OF SECURITIES

General

As of the date of this prospectus, our authorized capital stock consists of 100,000,000 shares no par value, per share of common stock of which 48,558,936 shares are issued and outstanding.

The following is a description of our securities taken from provisions of our Articles of Incorporation and by-laws, each as amended.  The following description is a summary and is qualified in its entirety by the above referenced provisions of the Articles of Incorporation and by-laws as currently in effect.  

Common Stock

All shares of common stock have one vote and vote together as a single class.  Voting rights are not cumulative, and, therefore, the holders of more than 50% of the common stock could, if they chose to do so, elect all of the Directors.  Upon liquidation, dissolution or winding up, our assets, after the payment of our liabilities, will be distributed pro rata to the holders of the common stock.

Holders of common stock are entitled to share equally in dividends when, as and if declared by our board of directors, out of funds legally available for the payment of dividends.  We have not paid any cash dividends on the common stock, and it is unlikely that any dividends will be declared in the foreseeable future.  

Limitation On Liability And Indemnification Matters

Our Articles of Incorporation limit the liability of directors to the maximum extent permitted by California law.  In addition, our bylaws require us to indemnify our directors and officers, and allow us to indemnify our other employees and agents to the fullest extent permitted by law.  At present, there is no pending litigation or proceeding involving any director, officer, employee or agent where indemnification will be required or permitted.  We are not aware of any threatened litigation or proceeding that might result in a claim for indemnification.  If we permit indemnification for liabilities arising under the Securities Act to directors, officers or controlling persons under these provisions, we have been informed that, in the opinion of the Securities and Exchange Commission, this indemnification is against public policy as expressed in the Securities Act an d is unenforceable.

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MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information

The following table sets forth, for the respective periods indicated, the prices for our common stock in the over-the-counter market as reported by a weekly reporting service and according to the NASD’s OTC Bulletin Board.  The bid prices represent inter-dealer quotations, without adjustments for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.  At August 1, 2003, our common stock was quoted under the symbol “DTCT” and had a high of $0.19 and a low of $0.13.  All bid prices below have been rounded to the nearest whole cent.

	Bid Prices
	High	Low
Fiscal Year Ended December 31, 2003
Second Quarter	$   0.20	$   0.12
First Quarter	$   0.17	$   0.12
Fiscal Year Ended December 31, 2002
Fourth Quarter	$   0.20	$   0.10
Third Quarter	$   0.34	$   0.16
Second Quarter	$   0.39	$   0.15
First Quarter	$   0.52	$   0.29
Fiscal Year Ended December 31, 2001
Fourth Quarter	$   0.52	$   0.09
Third Quarter	$   0.14	$   0.07

Sales of Unregistered Securities

During the quarter ended December 31, 2002, we issued 206,000 shares of our common stock valued at $19,770 in payment of services provided by the board and for employee year-end bonuses, 615,000 shares of our common stock valued at $84,500 in payment of consulting services, 462,880 shares of our common stock valued at $53,139 for debt settlement, 1,000,000 shares of our common stock for cash of $100,000, and 180,500 shares of our common stock valued at $20,800 as loan incentives.  500,000 of the above shares issued in payment consulting services valued at $50,000 were issued pursuant to a Registration Statement on Form S-8.  All of the remaining above securities have been issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

In November, 2002, we entered into a Common Stock Purchase Agreement with La Jolla Cove Investors, Inc. relating to the sale of 1,000,000 shares of our common stock for a purchase price of $100,000.  The shares were issued in a private placement that was exempt from registration pursuant to an exemption provided by Section 4(2) of the Securities Act of 1933, as amended. In connection with the issuance of the foregoing shares we granted La Jolla Cove piggy back registration rights whereupon we agreed that so long as La Jolla Cove owned the shares, we would include the shares in our next registration statement.

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On December 27, 2002, we entered into a Securities Purchase Agreement with La Jolla Cove Investors, Inc. relating to the sale of $150,000 in principal amount of an 8% Convertible Debenture due December 27, 2004 and Warrants.  The Debenture was amended on March 18, 2003 and increased by $100,00 in principal amount making the Debenture total $250,000. The Warrants were amended on March 27, 2003 to limit the number of shares issuable upon exercise of the Warrants to 2,500,000 shares of common stock.  The Debenture and the Warrant were each further amended on March 27, 2003 to amend certain terms of conversion and on August 6, 2003 to amend the definitions of “Conversion Price” and certain other defined terms. We have relied upon and will rely upon an exemption provided by Section 4(2) of the Securities Act of 1933, as amended with respect to the issuance of the Debentur e, the Warrants and the shares issuable upon conversion of the Debenture and Exercise of the Warrants.  Further, the selling shareholder has represented that it is an “accredited investor” within the meaning of Rule 501 of Regulation D.  Of the 16.000,000 shares covered by this prospectus 15,000,000 are the shares issuable to La Jolla Cove upon conversion of the Debenture and exercise of the Warrants.  Set forth below are the terms of the Debenture and Warrants.

Holders

At August 1, 2003, we had approximately 1,170 shareholders of record based on information provided by our transfer agent.

Dividends

Holders of common stock are entitled to receive dividends if, as and when declared by the Board of Directors out of funds legally available for distribution, subject to the dividend and liquidation rights of any preferred stock that may be issued and outstanding. We have not paid any dividends on our Common Stock, and we do not anticipate that we will pay dividends in the foreseeable future.  The future payment of dividends, if any, on the common stock is within the discretion of the Board of Directors and will depend on our earnings, if any, our capital requirements and financial condition, and other relevant factors.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

General

Our founders envisioned establishing a business venture built upon the creation, development, production and marketing of a quality line of natural, environmentally-friendly insecticide products.  We have lacked the financial resources to compete head-to-head with the international corporations that dominate the industry, but regulatory pressures and public concern for the environment have provided opportunities for us to gain a foothold in niche markets. We have researched the markets and acquired product formulations and EPA Labels for them.

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In 2001, we reorganized management, relocated administration and production in Heber City, Utah, expanded production capability and hired a marketing team. In 2002, we focused our marketing efforts on sales of our FireAnt product to retail outlets. To date, we have increased our customer base and market awareness of our products, and increased sales and support staff in preparation for major marketing efforts in 2003.

Results of Operations

Year ended December 31, 2002 compared to year ended December 31, 2001

Revenues.  We had revenues of $769,600 and cost of sales of $346,301 with a gross profit of $423,299 for the year ended December 31, 2002, compared to revenues of $570,904 and cost of sales of $249,782 with a gross profit of $321,122 for the prior year period.  The increase in revenues and compared to prior year reflects the success of our increased marketing efforts.  We believe the increase in sales is indicative of a positive trend, which we expect to continue through the next fiscal year.  We anticipate that our cost of sales as a percentage of revenues will decrease as our sales volume rises.  However, we believe we will not be able to accurately project our cost of sales as a percentage of revenues until we have established a consistent revenue stream over extended and comparable periods of time.

Operating Expenses.  For our fiscal year ended December 31, 2002, we had total operating expenses of $2,196,077 compared to $1,427,578 for prior year, an overall increase of $768,499.  The overall increase in operating expenses is primarily attributable to increases of other operating expenses of $228,569, royalty expense of $113,623, advertising and promotion expense of $139,939, consulting expense of $85,285, bad debt expense of $110,916, and salaries, wages and benefits of $596,151.  These increases were offset by decreases of $99,369 in executive compensation, depreciation and amortization expenses of $226,443, and distribution expense of $190,918.  The decrease in executive compensation is a result of the restructuring that occurred from 2001 to 2002.  The increase in salaries, wages and benefits expenses is due to a decision to restruc ture the business strategy for the sales force and maintaining certain administrative duties in-house.  The royalty expense is a fee from the purchase of the “Results and Diatect” product lines from National Diatect in 2000.  The increase in other operating expenses is related to increased sales and production staffing requirements to meet certain marketing demands for our product line.  The increase in consulting fees is due to certain fees spent on our transfer agent and outside help in obtaining investors.  We anticipate that our overall operating expenses may increase in the next twelve months as our sales increase due to additional production and distribution expenses. However, we believe such increases in production and distribution expenses will be offset for corresponding increased sales revenue.

Other Income and Expenses.  Other expenses for the year ended December 31, 2002 totaled $203,319 consisting primarily of interest expense of $406,512 donations of $23,414 and an impairment loss of $27,050, offset by $253,657 in gain from termination of debt. Other Income for the year ended December 31, 2001 totaled $231,210, consisting of $611,252 in gain from termination of debt, offset by interest and finance fees of $355,676, litigation settlement expense of $20,000, and miscellaneous expense of $4,366.  

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During 2002, we obtained releases of certain contingent liabilities in the amount of $253,657, recorded as gain from termination of debt.  During 2001, a former supplier of ours agreed to write off a balance owed them in the amount of $8,100, and we declared a note payable and the interest accrued thereon as invalid and void, recorded as the $611,252 as gain from termination of debt.

Because we still have a number of claims against us, we expect to continue to incur interest and finance fees and litigation settlement expenses during the upcoming fiscal year. We cannot at this time accurately project what these expenses will be.

We experienced a net loss of $1,976,097 for the year ended December 31, 2002, compared to $1,051,422 for the year ended December 31, 2001.   In 2001 we  experienced product returns due to changes we made in our distribution system which resulted in a loss of $176,176 as an extraordinary item.  The basic loss per share for the year ended December 31, 2002 was $0.05, based on the weighted average number of shares outstanding of 40,673,014 shares. The basic loss per share before extraordinary items in 2001 was $0.03 per share based on the weighted average of 30,824,930 shares outstanding.  We cannot predict at this time whether or not we will experience any gains or losses due to settlement of debt or other matters in the 2003 fiscal year.

Liquidity and Capital Resources

During the year ended December 31, 2002, our liquidity was substantially derived from the issuance of notes payable and the issuance of common stock for cash.  Although revenues increased, cash used in operations far exceeded revenues.  We hope that the next twelve months will prove the effectiveness of our marketing and distribution efforts and anticipate increases in production and sales will bring us closer to profitability.

At December 31, 2002, we had current assets of $2,182,018 consisting of cash of $4,509 cash, cash in escrow of $400,000 restricted for the purchase of our new facility in Heber City, Utah, accounts receivable of $352,643, an employee receivable of $1,270, prepaid interest of $108,048, prepaid expenses of $56,399, and inventories of $1,259,149, and current liabilities of $4,735,981 for a working capital deficit of $2,553,963. At December 31, 2002, we had property, plant and equipment assets totaling $324,637, net of depreciation, and other assets of $1,764,822, consisting primarily of our investment in EPA labels, net of amortization of $1,736,322, plus deposits of $28,500.

Cash used in our operations for the year ended December 31, 2002 was $1,407,399 compared to $934,394 for the prior year.  In 2002 and 2001, our operations were funded primarily by loans, issuance of common stock and sales of our products.

Our cash flow used by investing activities during the year ended December 31, 2002, was $220,746 and paid for the purchase of property, plant and equipment.  In the prior year, cash flows used by investing activities was $134,705, consisting of a deposit of $28,500 on our new facility in Heber City, and $106,205 paid for the purchase of property, plant and equipment.

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Our cash flows from financing activities during the year ended December 31, 2002 was $1,631,766, consisting of $254,048 from a line of credit, $722,065 from the sale of common stock, $50,000 payment of a stock subscription and $693,943 from the issuance of notes payable, offset by $2,000 in settlement payments, $7,759 in payments on a lease payable and $78,531 in payments on existing notes. Our cash flows from financing activities during the year ended December 31, 2001 was $1,066,603, consisting of $144,000 from the sale of our common stock and $1,074,000 from the issuance of notes payable, offset by $20,730 in settlement payments and $130,667 in payments on existing notes.

On January 15, 2003, we borrowed $750,000 from George Ann Pope Charitable Trust through a short term note due on July 15, 2003.  The note is secured by an inventory security agreement whereby $0.25 of each dollar of gross proceeds from the sale of inventory is allocated and set aside in a special account for continuing security until the note is paid and bears interest at the rate of 10% per annum.  We issued 375,000 shares of our common stock as additional consideration for the loan.

We believe that in 2003, we will increase revenues from operations as we continue to move from the development stage of our products to a full marketing and sales program.  With our products in the marketplace, we anticipate revenues to offset ongoing expenses.  We are uncertain, however, as to whether there will be sufficient revenue to cover past obligations, therefore, we will continue to attempt to make offers in settlement and compromise on such obligations in an effort to reduce our contingent and other liabilities.

We lack working capital and that affects our ability to effectively market our products.  We believe two of the largest and most important markets for our products are the agricultural and home and garden markets.  When we obtain sufficient working capital, we plan to conduct affordable advertising and maintain a sales force that can effectively reach these markets.  Accordingly, although we anticipate more revenue from the sale of our products than we have received in the past, we will not be as profitable without additional cash to fund our advertising and marketing campaign.

Six Months ended June 30, 2003 compared to June 30, 2002

Revenues. During the six months ended June 30, 2003 and 2002, our revenues were $342,727 and $162,683, respectively, with costs of sales of $156,604 and $66,385 with gross profits of $186,123 and $96,298.  The increase in our revenues in the six months ended June 30, 2003 compared to 2002 can be attributable to market awareness and increased sales staff.  Brand awareness has been very promising for future growth of Diatect’s Results Brands.

 We feel the 211 percent increase in revenues for the six months period ended June 30, 2003 compared to the same periods in the proceeding year is indicative of our future prospects for the balance of the fiscal year.

Operating Expenses.  For the six months ended June 30, 2003 and 2002, total operating expenses were $1,430,035 and $1,130,841, respectively, for total operating losses of $1,243,912 and $1,034,543.  

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The operating expenses for the six months ended June 30, 2003 were slightly higher than the prior year period for a number of reasons.  We continue to market and advertise our products heavily in the southern region and in doing so, we had a large increase in salaries, wages and benefits of $318,754, which is attributed to increased sales and administrative staffing needed to meet current demands.  The majority of this increase is related to the increased frequency of shipping, promotions and advertising (especially due to increased marketing efforts), as well as additional consulting and travel expenses related to those marketing efforts.  The company has also taken a conservative stance to account for related bad debts.

Other Income and Expenses.  Other income/expenses showed a loss of $1,732,703 and $1,186,524, respectively, for the six months ended June 30, 2003 and 2002.  Interest expense was the primary component of other expenses for the respective periods and was higher in 2003 due to increased borrowing and debt service.

In the second quarter of 2003, we requested the return of product from a class of customers, (Future Farmers of America chapters in the State of Texas) therefore we had some concerns regarding inappropriate product storage conditions by customers and the related expected impact on product efficiency.  Therefore, upon receipt of this product, the Company recorded a loss on distribution and product returns of $141,172.

For the six months ended June 30, 2003 and 2002, we had net losses of $1,732,703 and $1,186,524 and loss per share was $0.04 and $0.03, respectively.  

Liquidity and Capital Resources

In the six months ended June 30, 2003, our liquidity was substantially derived from the issuance of notes payable and the issuance of common stock for cash.  Cash used in operations far exceeded revenues.  We hope that the remainder of the fiscal year will demonstrate the effectiveness of our marketing and distribution efforts and we continue to anticipate increases in market development and sales, which will bring us closer to profitability.

At June 30, 2003, we had current assets of $1,348,110, consisting primarily of accounts receivable of $137,288, prepaid interest of $18,532, and $1,149,565 in inventory.  We had current liabilities of $4,943,020, consisting primarily of accounts payable of $1,148,340, a line of credit of $114,299, interest payable of $433,402, and current notes payable of $2,613,020, plus other accrued liabilities of $233,192, and other long term debt of $847,000, consisting of the mortgage note payable for the purchase of our facilities.  Accordingly, we have a working capital deficit of $3,594,910.  At June 30, 2003, we had property, plant and equipment totaling $1,168,501, net of depreciation, and other assets of $1,736,322, consisting primarily of our investment in EPA labels.

Cash used in operations for the quarter ended June 30, 2003 was $478,029.  In 2003, our operations have been funded primarily by proceeds from notes payable.

Cash used by investing activities for the quarter ended June 30, 2003 totaled $43,984 for the purchase of property plant, and equipment.

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Cash flows from financing activities for the quarter ended June 30, 2003 totaled $519,726, consisting of cash received from the sale of common stock, proceeds from newly issued notes payable, offset by payments on previously issued notes payable and line of credit.  Non-cash financing activities included the issuance of common stock for notes payable, interest, issuance of debt for accounts payable and securing a mortgage for our facilities totaling $1,709,507, and issuance of common stock for services totaling $89,550.

As a result of our past production increase and delays in scheduled shipments, we currently have over 677,556 finished product units with a potential wholesale value of over $3.9 million. We are continuing to market our products into the wholesale; retail and commercial outlets which is expected to continue to absorb the excess inventory.  

During the balance of fiscal year 2003, we may seek working capital from several sources, including the equity markets and private investors.  

We believe that in the remainder of fiscal 2003, we will increase revenues from operations as we continue to move from the development stage of our products to a full marketing and sales program.  We have initiated an aggressive marketing campaign to the thousands of small retail stores within Southern region.  With our current inventory and our ability to manufacture 60,000 plus units per day, we believe we can rapidly meet the potential demand for large quantities of our products.

We believe two of the largest and most important markets for our products are the agricultural and home and garden markets.  When we obtain sufficient working capital, we plan to conduct affordable advertising and maintain a sales force that can effectively reach these markets.  Accordingly, although we anticipate more revenue from the sale of our products than we have received in the past, we will not be as profitable without additional cash to fund our advertising and marketing campaign.

Impact of Inflation

We do not anticipate that inflation will have a material impact on our current or proposed operations.

Seasonality

We have not experienced significant variations in sales of products attributable to seasonal factors.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

We have had no disagreements with our certified public accountants with respect to accounting practices or procedures or financial disclosure.

-39-

LEGAL PROCEEDINGS

Pending Litigation

Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC

In November 1999, the Company's former legal counsel was awarded a default judgment against the Company in the amount of $42,166 plus post-judgment interest.  This judgment remains outstanding and unpaid and is included as a liability on the Company's balance sheet in settlements payable at December 31, 2002 and 2001 in the amount of $40,166.  

Ogilvy, Adams & Rinehart

Ogilvy, Adams & Rinehart (Ogilvy) obtained a judgment against Diatect on November 1, 1995 in the sum of $24,346.  The entire judgment amount plus attorney's fees and interest thereon is approximately $36,000 and has been included on the Company's balance sheet in settlements payable at December 31, 2002 and 2001.  Since mid-1996, there has been no communication with the plaintiff or its attorneys, nor has the plaintiff made any attempt to satisfy or settle this case.  The Company plans to negotiate a settlement of this obligation during 2003.

L. Craig Hunt

L. Craig Hunt brought action on January 14, 1998 against Diatect for damages and breach of contract on a promissory note for the sum of $42,750 plus interest, penalties and attorney's fees.  Judgment against Diatect International Corp. was rendered on February 1, 1999 in the sum of $61,543.  This judgment is presently outstanding and unpaid.  At December 31, 2002 and 2001, $60,543 is included in settlements payable in these financial statements.  To date, plaintiffs have made no attempt to collect on this judgment.

Iver J. Longeteig

Mr. Longeteig is pursuing a claim outside of the Future Title/White Mountain Group.  Mr. Longeteig claims an outstanding note for $23,887 plus interest accrued thereon.  Mr. Longeteig filed a notice of intent to apply for a default judgment, in Boise, Idaho.  The Company did not answer the complaint and as a result a potential default judgment is possible.  At the current time, Mr. Longeteig has been paid $14,488, and is forbearing until such time as Diatect resolves the issue of the original claim.

EXPERTS

The financial statements included in the Prospectus have been audited by Williams & Webster, P.S., independent certified public accountants to the extent and for the periods set forth in their report appearing elsewhere herein and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting.

-40-

LEGAL MATTERS

Loeb & Loeb, LLP, Los Angeles has passed upon the validity of the securities being offered hereby.

-41-

DIATECT INTERNATIONAL CORPORATION

FINANCIAL STATEMENTS

December 31, 2002 and June 30, 2003 (unaudited)

	Page
INDEPENDENT AUDITOR’S REPORT	F-2
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Shareholders’ Deficit	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7
CONSOLIDATED INTERIM FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002
Consolidated Balance Sheets	F-23
Consolidated Statements of Operations	F-24
Consolidated Statements of Cash Flows	F-25
Notes to Consolidates Interim Financial Statements	F-26

F-1

DIATECT INTERNATIONAL CORPORATION

AUDITED ANNUAL FINANCIAL STATEMENTS

December 31, 2002

Board of Directors

Diatect International Corp.

Heber City, UT

Independent Auditor’s Report

We have audited the accompanying consolidated balance sheets of Diatect International Corp. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Diatect International Corp. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2, the Company has significant operating losses, negative equity, unsatisfied collection judgments and delinquencies in repaying its debt obligations.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans regarding those matters also are described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/S/ Williams & Webster, P.S.

Williams & Webster, P.S.

Certified Public Accountants

Spokane, Washington

March 28, 2003

F-2

DIATECT INTERNATIONAL CORP.

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

	2002	2001
ASSETS
CURRENT ASSETS
Cash	$               4,509	$                888
Cash in escrow	400,000	400,000
Accounts receivable	352,643	202,660
Employee receivable	1,270	-
Prepaid interest	108,048	154,019
Prepaid expenses	56,399	26,804
Inventories	1,259,149	109,332
Total Current Assets	$        2,182,018	$         893,703
PROPERTY, PLANT AND EQUIPMENT
Mining property	940	540
Building	-	23,501
Furniture & equipment	420,839	185,180
Less accumulated depreciation	(97,142)	(38,338)
Total Property, Plant and Equipment	324,637	170,883
OTHER ASSETS
Deposits	28,500	28,500
Goodwill	-	27,050
Investment in EPA labels, net of amortization	1,736,322	1,736,322
Total Other Assets	1,764,822	1,791,872
TOTAL ASSETS	4,271,477	2,856,458
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable	$         1,400,610	$         259,459
Accounts payable – related parties	37,710	-
Bank overdraft	-	22,268
Lease payable – current	18,067	-
Lines of credit	351,048	97,000
Interest payable	310,434	288,928
Other accrued liabilities	304,574	16,051
Settlements payable	181,357	214,693
Notes payable	2,132,181	1,703,914
Total Current Liabilities	4,735,981	2,602,313
LONG-TERM DEBT
Lease payable – net of current portion	3,392	-
COMMITMENTS AND CONTIGENCIES	134,739	461,605
STOCKHOLDERS’ DEFICIT
Common stock, no par value; 100,000,000 shares authorized;
45,013,414 and 36,928,161 shares issued and outstanding respectively	14,971,327	13,391,574
Common stock subscribed	(20,000)	(70,000)
Stock options	36,070	84,901
Accumulated deficit	(15,590,032)	(13,613,935)
Total Stockholders’ Deficit	(602,635)	(207,460)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$         4,271,477	$       2,856,458

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

F-3

DIATECT INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2002 and 2001

	2002	2001
REVENUES	$          769,600	$          570,904
COST OF SALES	346,301	249,782
GROSS PROFIT	423,299	321,122
OPERATING EXPENSES
Salaries, wages and benefits	668,306	72,155
Executive compensation	310,568	409,937
Consulting	170,431	85,146
Depreciation and amortization	69,534	295,977
Legal and professional fees	167,215	156,469
Distributor expenses	-	190,918
Advertising and promotion	139,939	-
Royalties	113,623	-
Bad debts	110,916	-
Other operating expense	445,545	216,976
Total Operating Expenses	2,196,077	1,427,578
OPERATING LOSS	$    (1,772,778)	$     (1,106,456)
OTHER INCOME (EXPENSES)
Gain from termination of debt	253,657	611,252
Interest and finance fees	(406,512)	(355,676)
Litigation settlement	-	(20,000)
Donations	(23,414)	-
Impairment loss	(27,050)	-
Miscellaneous	-	(4,366)
Total Other Income (Expenses)	(203,319)	231,210
LOSS BEFORE EXTRAORDINARY ITEMS	(1,976,097)	(875,246)
EXTRAORDINARY ITEMS
Product returns, distribution system changes	-	(176,176)
Total Extraordinary Items	-	(176,176)
LOSS BEFORE INCOME TAXES	(1,976,097)	(1,051,422)
INCOME TAXES	-	-
NET LOSS	$     (1,976,097)	$     (1,051,422)
NET LOSS PER COMMON SHARE, BASIC AND DILUTED
Net loss before extraordinary items	$              (0.05)	$              (0.03)
Net loss from extraordinary items	-	-
NET LOSS PER COMMON SHARE	$              (0.05)	$              (0.03)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING,
BASIC AND DILUTED	40,673,014	30,824,930

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

F-4

DIATECT INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Shares	Amount	Stock Options	Common Stock Subscribed	Accumulated Deficit	Total
Balances as of December 31, 2000	28,716,073	$    12,260,630	$          51,370	$                    -	$ (12,562,513)	$   (250,513)
Issuance of shares for debt at $0.15 to $0.25 per share	1,408,343	266,619	-	-	-	266,619
Issuance of shares for guarantee of debt and line of credit at $0.07 to $0.50 per share	2,107,500	196,550	-	-	-	196,550
Issuance of shares for cash at $0.10 to $0.12 per share	400,000	44,000	-	-	-	44,000
Issuance of shares in settlement of salary claim at $0.25 per share	188,000	47,000	-	-	-	47,000
Issuance of shares for consulting at $0.08 per share	50,000	3,750	-	-	-	3,750
Issuance of shares to officers for services at $0.08 per share	1,250,000	93,750	-	-	-	93,750
Issuance of shares for settlement of distributor agreement and severance agreement at $0.08 per share	1,000,000	75,000	-	-	-	75,000
Issuance of shares for cash and receivable at $0.10 to $0.25 per share	800,000	170,000	-	(70,000)	-	100,000
Issuance of shares for payment of accounts payable at $0.21 per share	200,000	41,035	-	-	-	41,035
Issuance of shares for payment of legal fees and exercise of options at $0.06 per share	499,998	85,354	(55,354)	-	-	30,000
Issuance of shares to officers for payment of accrued legal fees and debt at $0.35 per share	308,247	107,886	-	-	-	107,886
Issuance of shares to officer as bonus for contract	-	-	18,890	-	-	18,890
Options granted to stockholder for financing and extension of options to officer	-	-	69,995	-	-	69,995
Net loss for the year ended, December 31, 2001	-	-	-	-	(1,051,422)	(1,051,422)
Balances as of December 31, 2001	36,928,161	$      13,391,574	$          84,901	$       (70,000)	$ (13,613,935)	$   (207,460)
Issuance of stock for cash at $0.20 to $0.30 per share	2,945,260	572,065	-	-	-	572,065
Issuance of shares for cash at $0.25 per share and exercise of options	600,000	216,110	(66,110)	-	-	150,000
Issuance of stock for debt and interest at $0.10 to $0.35 per share	2,507,113	503,549	-	-	-	503,549
Issuance of stock to officers, directors, employees, consultants and others for services at $0.10 to $0.35 per share	2,032,880	288,029	-	-	-	288,029
Payment of stock subscription	-	-	-	50,000	-	50,000
Options granted to officers as contract bonus	-	-	17,279	-	-	17,279
Net loss for the year ended December 31, 2002	-	-	-	-	(1,976,097)	(1,976,097)
Balance as of December 31, 2002	45,013,414	$      14,971,327	$          36,070	$        (20,000)	$ (15,590,032)	$   (602,635)

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

F-5

DIATECT INTERNATIONAL CORP.

CONSOLIDATED CASH FLOW STATEMENTS

Years Ended December 31, 2002 and 2001

	2002	2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$        (1,976,097)	$      (1,051,422)
Adjustments to reconcile net loss to net cash used by operating activities:
Gain from debt termination	(253,657)	(611,252)
Depreciation and amortization	69,534	295,977
Impairment loss	27,050	-
Donation of building	23,284	-
Issuance of stock for services	288,029	182,000
Issuance of stock options for services	17,279	18,890
Issuance of stock options for financing	-	66,010
Extension of options to officer for services	-	3,984
Issuance of stock for finance charges and interest	95,242	76,175
Issuance of stock for distributor expense	-	37,500
Issuance of note payable for distributor expense	-	50,000
Litigation settlement	-	20,000
Distributor expenses paid from deposits	-	150,000
Notes and settlement gains charged to operations	-	763,591
Changes in assets and liabilities:
Cash in escrow	-	(400,000)
Accounts receivable	(149,983)	(144,646)
Employee receivable	(1,270)	-
Prepaid interest	67,221	8,906
Prepaid expenses	(29,595)	10,696
Inventories	(1,149,817)	14,643
Accounts payable	1,168,611	24,588
Accounts payable – related parties	37,710	(30,795)
Bank overdraft	(22,268)	22,268
Deposit payable	-	(20,000)
Interest payable	92,805	(436,537)
Other accrued liabilities	288,523	15,030
NET CASH FLOWS USED BY OPERATING ACTIVITIES	(1,407,399)	(934,394)
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits paid	-	(28,500)
Purchase of property, plant and equipment	(220,746)	(106,205)
NET CASH FLOWS USED BY INVESTING ACTIVITIES	(220,746)	(134,705)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit	$             254,048	$                      -
Issuance of common stock for cash	722,065	144,000
Payment of stock subscription	50,000	-
Payments on settlements	(2,000)	(20,730)
Payments on lease payable	(7,759)	-
Net payment of notes payable	(78,531)	(130,667)
Net proceeds from notes payable	693,943	1,074,000
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES	1,631,766	1,066,603
NET INCREASE (DECREASE) IN CASH	3,621	(2,496)
CASH AT BEGINNING OF YEAR	888	3,384
CASH AT END OF YEAR	$                 4,509	$                  888
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest expense paid	$                 3,248	$            32,177
	$                        -	$                      -
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for prepaid finance charges	$              21,250	$          120,375
Issuance of common stock for services	$            288,029	$          182,000
Issuance of common stock for forbearance of notes payable finance charges and interest	$              51,700	$            76,175
Issuance of stock options for services	$              17,279	$            18,890
Issuance of common stock for debt and interest	$            430,594	$          445,540
Issuance of common stock for settlement of distributor agreement	$                        -	$            37,500
Issuance of note payable for distributor expense	$                        -	$            50,000
Issuance of stock options for financing	$                        -	$            66,010
Issuance of note payable for prepaid expenses	$              50,000	$                      -
Issuance of note payable for furniture and equipment	$                        -	$            30,320
Extension of stock options for services	$                        -	$              3,984
Donation of building	$              23,284	$                      -
Equipment financed with lease	$              25,826	$                      -

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

F-6

DIATECT INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Diatect International Corp. (formerly Applied Earth Technologies, Inc.) (formerly San Diego Bancorp) was incorporated in California in 1979 as a bank holding corporation.  During 1986, the Company liquidated its subsidiaries and became a dormant "shell" corporation.

On August 22, 1996, the Company changed its name from San Diego Bancorp to Applied Earth Technologies, Inc. to better reflect the Company's principal business activities, which primarily consist of developing and marketing pesticide products.  The Company later became informed that another corporation already had been authorized to use the name Applied Earth Technologies, Inc. and approval of this name had been granted in error.  In response to this information, the Company changed its name to Diatect International Corp. ("Diatect" or "the Company") on June 5, 1998.

The Company's wholly owned subsidiaries consist of Enviro_Guard Corporation, Diatect International, Inc. and D.S.D., Inc.  The Company's subsidiaries are inactive.

Magic International, Inc.

On May 24, 1999, the Company entered into an agreement to purchase Magic International, Inc. ("Magic") in exchange for $3,000 cash, effective payment of an outstanding obligation in the amount of $4,050 and 200,000 shares of Diatect International Corporation's common stock.  This transaction was valued at $27,050.  At the time of the transaction, the authorized level of the Company's capitalization did not permit an issuance of 200,000 shares of stock. The Company increased its authorized capital, issued the aforementioned stock and finalized the acquisition in March 2000, at which time Magic became a wholly owned subsidiary.  During 2002, the Company recognized an impairment write_off of $27,050 since Magic had become dormant.  Magic was subsequently transferred to IXG.  See Note 14.

National Diatect, Inc.

In July 2000, the Company signed a letter of intent to purchase the inventory of National Diatect, Inc. in a transaction which requires the issuance of 400,000 shares of the Company's common stock, payment of future royalties in the amount of $120,000 payable at the rate of $0.10 per pound of certain products and assumption of a note payable in the amount of $110,000 (bearing interest at 12% and collateralized by inventory and equipment).  The Company has issued 400,000 shares and the agreement has been ratified by the board of directors to a mutually agreed upon reduced note payable balance of $70,419.  The balance owing on this note is $43,306 as of December 31, 2002.  See Note 13.

F-7

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Diatect International Corp. is presented to assist in understanding the Company's financial statements.  The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity.  These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Accounting Method

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, after elimination of the intercompany accounts and transactions.  Wholly owned subsidiaries of the Company are listed in Note 1.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid investment (or short_term debt) purchased with original maturity of three months or less to be cash equivalents.

Accounts Receivable

The Company carries its accounts receivable at cost less an allowance for doubtful accounts.  On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, bases on a history of past write_offs and collections and current credit conditions.

The Company reserves the right to accrue interest on trade receivables 30 days after invoice date.  A receivable is considered past due if payments have not been received by the Company for 30 days.  At that time, the Company will contact the account representative with a payment reminder.  A second contact with warning of collection procedures will follow if payment has not been received by the Company for 60 days.  If payments still have not been received by the Company for 90 days, a third contact will be made with a response required within two weeks from the contact date.  If no response is received pursuant to the third contact, the account will be turned over for collection.  

Inventories

Inventories consist primarily of packaging materials, raw materials and finished product and are valued at the lower of cost (first in, first out) or market.

Property and Equipment

Property, plant and equipment are stated at cost including the allocable purchase price applicable to the respective assets of purchased subsidiaries.  All expenditures for improvements, replacements and additions are added to the asset accounts at cost. Expenditures for normal repairs and maintenance are charged against earnings as incurred.  The cost and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in the statements of operations when depreciable assets are retired or otherwise disposed.  Depreciation is provided for by the use of straight_line and accelerated methods over the estimated useful lives of the assets.  Depreciation expense for the years ended December 31, 2002 and 2001 was $69,534 and $12,765, respectively.  Depletion is computed using the unit_of_production method, for any mining pro perty placed in production.  At December 31, 2002, the Company has no mining properties in production.

F-8

Goodwill

Goodwill represents the excess of the purchase price and related direct costs over the fair value of net assets acquired as of the date of the acquisition.  The Company periodically reviews its goodwill to assess recoverability based on projected undiscounted cash flows from operations.  Impairments are recognized in operating results when a permanent diminution in value occurs.  Goodwill was fully impaired during 2002.

Intangible Assets

Prior to 2002 most intangible assets are amortized over the remaining useful life on a straight_line basis, which range from 15 to 17 years.  EPA labels were amortized on a straight_line basis over a 15_year life, commencing with the beginning of product sales.  Amortization expense for the year ending December 31, 2001 was $283,212. On January 1, 2002, the Company adopted SFAS No. 142. Application of the nonamortization provision of SFAS No. 142 resulted in an increase in net income of approximately $280,000 during the year ended December 31, 2002.

Basic and Diluted Loss Per Share

Loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the year.  The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time they were outstanding. Outstanding options were not included in the computation of net loss per share because they would be antidilutive.

Income Taxes

Income taxes are provided based upon the liability method of accounting pursuant to SFAS No. 109 "Accounting for Income Taxes."  Under this approach, deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year_end.  A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the "more likely than not" standard imposed by SFAS No. 109 to allow recognition of such an asset.

At December 31, 2002, the Company had net deferred tax assets of approximately $5,224,470, principally arising from net operating loss carryforwards for income tax purposes based on an average tax rate of 34%.  SFAS No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.  At December 31, 2002, a valuation allowance for $2,320,825 of the net deferred tax asset was recorded because of uncertainties as to the amount of taxable income that will be generated in future years.  In 2002, management determined that it was more likely than not that future taxable income would be sufficient to enable the Company to realize a portion of its deferred tax assets attributable to the issuance of stock options for services.     

At December 31, 2002, the Company has net operating loss carryforwards of approximately $15,000,000, which expire in the years 2011 through 2022.  

Shipping and Handling Fees and Costs

The Emerging Issues Task Force ("EITF") issued EITF No. 00_10, "Accounting for Shipping and Handling Fees and Costs", which was adopted during fiscal 2001.  The impact of adopting EITF No. 00_10 was to increase revenues and cost of sales by approximately $90,496 and $25,543 in the years ended December 31, 2002 and 2001 respectively.  All amounts in the accompanying consolidated statements of operations have been reclassified for the year ended December 31, 2001 to reflect this adoption.

Revenue Recognition Policy

Revenues from sales of product are recognized when the product is shipped.  The customer may return the product at any time and receive credit for the full amount, however, the customer must pay the shipping fees to return the product.

Product Warranties

The Company sold the majority of its products to distributors along with replacement warranties.  Warranty expense is included in cost of sales.

Compensated Absences

Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. Due to the existence of a relatively high employee turnover rate, it is impractical to estimate the amount of compensation for future absences.  Accordingly, no liability has been recorded in the accompanying financial statements.  The Company's policy is to recognize the costs of compensated absences when actually paid to employees.

F-9

Estimates

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses.  Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements.  Accordingly, upon settlement, actual results may differ from estimated amounts.

Fair Value of Financial Instruments

The Company's financial instruments as defined by SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," include cash, advances to affiliate, trade accounts receivable, investment in securities available_for_sale, restricted cash, accounts payable and accrued expenses and short_term borrowings.  All instruments other than the investment in securities available_for_sale are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at December 31, 2002.  The Company has no investment in securities available_for_sale at December 31, 2002.

Derivative Instruments

The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities _ Deferral of the Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which is effective for the Company as of January 1, 2001.  These standards establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.  They require that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value.

If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.

Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes.

At December 31, 2002, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities.

Segment Information

The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," during 2001. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available, evaluated regularly by the chief operating decision makers, or a decision making group, in deciding how to allocate resources and in assessing performance.

Going Concern

As shown in the financial statements, the Company incurred a net loss of $1,976,097 for the year ended December 31, 2002 and has an accumulated deficit of $15,590,032 at December 31, 2002.  (This equates to a potential NOL tax carryforward of approximately $15,000,000.)  

F-10

The Company recently received a purchase order from a major new customer and ramped up production to meet the demand.  Because the customer has asked for a delay in shipment, this has given Diatect excess inventory.  Upon shipment, the Company expects to improve working capital, increase its profitability and stockholders' equity and commence repayment of its debt obligations.

Without greatly increased sales, the Company may be unable to continue in existence.  The financial statements do not include any adjustments related to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue existence.

Management's plans for ensuring the Company's continued viability are based on an aggressive, direct and indirect marketing program to all of the major independent U.S. hardware chains (Ace, TrueValue, DoItBest, Handy Hardware) in addition to increased emphasis on big box accounts and niche markets.

Management's plans include increased product placement and sales, and the sale of new common stock issuances, which are expected to raise the capital needed to satisfy collection judgments and repay debt obligations.  

Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146").  SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities.  SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one_time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred_compensation contract.  SFAS No. 146 was issued in June 2002 and is not yet effective.  The impa ct on the Company's financial position or results or operations from adopting SFAS No. 146 has not been determined.

In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 44, 4 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (hereinafter "SFAS No. 145"), which updates, clarifies and simplifies existing accounting pronouncements.  FASB No. 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related tax effect was rescinded.  As a result, FASB No. 64, which amended FASB No. 4, was rescinded, as it was no longer necessary.  FASB No. 44, Accounting for intangible Assets of Motor Carriers, established the accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980.  Since the transition has been completed, FAS B No. 44 is no longer necessary and has been rescinded.  SFAS No. 145 amended FASB No. 13 to eliminate an inconsistency between the required accounting for sale_leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale_leaseback transactions.  The Company adopted SFAS No. 145 and does not believe that the adoption will have a material effect on the financial statements of the Company at December 31, 2002.

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long_Lived Assets" ("SFAS No. 144").  SFAS 144 replaces SFAS 121, "Accounting for the Impairment of Long_Lived Assets and for Long_Lived Assets to Be Disposed Of."  This new standard establishes a single accounting model for long_lived assets to be disposed of by sale, including discontinued operations.  Statement 144 requires that these long_lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations.  This statement is effective beginning for fiscal years after December 15, 2001, with earlier application encouraged.  The Company adopted SFAS 144 and the adoption did not imp act the financial statements of the Company at December 31, 2002.

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143").  SFAS No. 143 establishes guidelines related to the retirement of tangible long_lived assets of the Company and the associated retirement costs.  This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs are capitalized as part of the carrying amount of the long_lived assets.  This statement is effective for financial statements issued for the fiscal years beginning after June 15, 2002 and with earlier application encouraged.  The Company adopted SFAS No. 143 which does not impact the fina ncial statements of the Company at December 31, 2002.

F-11

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 provides for the elimination of the pooling_of_interests method of accounting for business combinations with an acquisition date of July 1, 2001 or later. SFAS No. 142 prohibits the amortization of goodwill and other intangible assets with indefinite lives and requires periodic reassessment of the underlying value of such assets for impairment. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. An early adoption provision exists for companies with fiscal years beginning after March 15, 2001. On January 1, 2002, the Company adopted SFAS No. 142. Application of the nonamortization provision of SFAS No. 142 resulted in an increase in net income of approximately $280,000 in fis cal 2002. The Company is currently evaluating the impact of the transitional provisions of the statement.

In September 2000, the Financial Accounting Standards Board issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."  This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities and also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.  SFAS No. 140 is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000, and is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001.  The adoption of this standard did not have a material effect on the Company 's results of operations or financial position.

New Accounting Pronouncements

In December 2002, the "FASB" Financial Accounting Standards Board, issued "SFAS" Statement of Financial Accounting Standards, No. 148, Accounting for Stock_Based Compensation _ Transition and Disclosure".  SFAS 148 amends SFAS 123, Accounting for Stock_Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock_based employee compensation.  In addition, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock_based employee compensation and the effect of the method used on reported results.  The provisions of the statement are effective for financial statements for fiscal years ending after December 15, 2002.  As the Company accounts for stock_based compensation using the intrinsic value method prescribed in APB No. 25, "Accounting for Stock Issued to Employee's", the adoption of SFAS 148 has no impact on the Company's financial condition or results of operations.

NOTE 3 - INVENTORIES

Inventories at December 31, 2002 and 2001 consist of the following:

	2002	2001
Raw Materials	$             78,169	$           32,813
Packing Material	12,874	-
Finished Goods	1,168,106	76,519
Total	$        1,259,149	$         109,332

F-12

NOTE 4 _ INVESTMENT IN EPA LABELS

The Company has acquired five product registrations ("labels") approved by the U.S. Environmental Protection Agency granting federal clearance to manufacture, market and sell specified insecticide products.  Included are: No. 42850_1 for use against flies, roaches, ants, etc., in and around homes and commercial buildings; No. 42850_2 for use in grain storage; No. 42850_3 for use against fleas, ticks and lice on pets; No. 42850_4 for use against over 60 insects on over 130 edible crops and plants; and No. 42850_5 (approved November 23, 1999) for use in the organic market to control all major pest problems.

NOTE 5 _ NOTES PAYABLE

All of the Company's notes payable are considered short_term.  At December 31, 2002 and 2001, notes payable consisted of the following:

Creditor and Conditions

	2002	2001
Jeffrey Linabery, unsecured, interest at 14%, due on demand	$             7,500	$            7,500
David Russell, (a shareholder of the Company), unsecured, interest at 10%, due on demand	-	15,000
David Russell, (a shareholder of the Company), unsecured, interest at 8%, due on demand	-	25,000
David J. Black, (a shareholder of the Company), unsecured, interest at 10%, dated August 5, 1997, due on demand	20,000	20,000
Greg Cloward, (a shareholder of the Company), unsecured, interest at 15%, dated January 6, 1997, due on demand	251,000	251,000
David N. Sim, (a shareholder of the Company), unsecured, interest at 15%, dated October 1, 1999, due on December 31, 1999, delinquent	6,500	6,500
Shining Star Investment, Inc., a Nevada corporation, (a shareholder of the Company), unsecured, interest at 14%, dated July 14, 1995, due December 31, 1995, delinquent	5,239	5,239
Hopper Asset Management Company, conditionally secured by 50,000 shares Diatect International Corporation common stock, interest at 15%, dated May 22, 1998 due May 5, 1999	-	10,000
Jack S. Stites, (a shareholder of the Company), unsecured, interest at 15%, dated September 1, 1999, due on December 31, 1999, delinquent	8,800	8,800
Hopper Asset Management Company, unsecured, interest at 15%, dated June 19, 1999, due on December 31, 1999	-	50,000
D.N. Sim, (a shareholder of the Company), unsecured, interest at 10%, dated January 4, 2000, due on May 4, 2000, delinquent	2,500	2,500
Robert L. Drake and Sandra K Drake, (shareholders of the Company), secured by sale of inventory, interest at 12%, dated July 12, 2000, due on July 12, 2001, delinquent	43,306	62,445
George H. Henderson, (a shareholder of the Company), unsecured, interest at 10%, dated April 14, 2000, due on December 31, 2000, amended on September 20, 2001, payable in principal installments of $5,000 per month commencing January 15, 2002, delinquent	40,000	40,000
Johnny and Jack Stites, (shareholders of the Company), unsecured, interest at 10%, dated February 25, 2000, due on May 1, 2000, delinquent	20,000	20,000
K & R “Stuff” LC, unsecured, interest at 12%, dated August 22, 2000, due on August 22, 2001, renewed on November 22, 2001, convertible to 232,000 shares of the Company’s common stock on demand, due August 22, 2002	-	58,000
Joseph E. Pigg, Jr., unsecured, interest at 10%, dated September 25, 2000, due on September 25,  2001, delinquent	10,000	10,000
Robert B. Crouch, (officer and shareholder of the Company), unsecured, interest at 12%, dated November 16, 2000, due on demand	-	2,610
Jack Stites, (a shareholder of the Company), unsecured, interest at 12%, dated December 22, 2000, due on demand	3,000	3,000
Venture Creations, Inc., (shareholders of the Company), unsecured, interest at 10%, dated September 20, 2001, due on October 1, 2003	50,000	50,000
Gary Hansen, (shareholder of the Company), unsecured, interest at 12%, dated July 24, 2001 due on October 24, 2001	-	20,000
RCK, LLC, (a shareholder of the Company), unsecured, interest at 12%, dated September 28, 2001, due on demand	600,000	600,000
Ed L. Shannon, Jr. and Bruce L. Shannon, (shareholders of the Company), unsecured, interest at 12%, dated August 1, 2002, delinquent	200,000	200,000
Robinson Faily, LLC, (shareholders of the Company), unsecured, interest at 12%, dated April 1, 2001, due on April 1, 2002, delinquent	106,000	106,000
Ronald Davis, (a shareholder of the Company), unsecured, interest at 12%, dated December 28, 2001, due on June 28, 2002, delinquent	-	25,000
Kyle Baird, (a shareholder of the Company), unsecured, interest at 12%, dated November 26, 2001, due on March 26, 2002	-	25,000
Max Burdick, (a shareholder of the Company), unsecured, interest at 12%, dated November 26, 2001, due on March 1, 2002	-	30,000
Richard Humphries, (a shareholder of the Company), unsecured, interest at 12%, dated October 1, 2001, due on April 1, 2002	-	10,000
Jay Downs, (an officer and shareholder of the Company), unsecured, interest at 12%, dated October 1, 2001, due on April 1, 2002	-	30,320
Kyle Baird, (a shareholder of the Company), unsecured, interest at 10%, dated July 5, 2002, due September 30, 2002, delinquent	74,000	-
Ronald Davis, (a shareholder of the Company), unsecured, interest at 10%, dated July 10, 2002, due on December 31, 2002, delinquent	79,250	-
Amanda Wright, unsecured, interest at 10%, dated January 11, 2002, due on July 11, 2002, delinquent	10,000	-
Marelko L.C., (a shareholder of the Company), unsecured, interest at 12%, dated April 3, 2002, due on July 3, 2002, deliquent	40,000	-
Jack Stites, (a shareholder of the Company), secured by collateral assignment to collectible accounts receivables, interest at 12%, dated June 19, 2002, due on August 18, 2002, delinquent	40,000	-
Jeffrey Matthews, (a shareholder of the Company), unsecured, interest at 8%, dated April 24, 2002, due on July 20, 2002, delinquent	10,403	-
Hyrum L. & Helen Mae Andrus, (shareholders of the Company), interest at 8%, dated April 24, 2002, due on June 24, 2002, delinquent	36,002	-
Brent J. Larsen, (a shareholder of the Company), unsecured, interest at 10%, convertible to common stock at any time after July 18, 2002, dated July 17, 2002, due on October 17, 2002, delinquent	50,000	-
Scot & Jan Lythgoe, (shareholders of the Company), unsecured, interest at 10%, convertible to common stock at any time after August 22, 2002, dated August 21, 2002, due on November 21, 2002, delinquent	30,000	-
Keven Jensen, (a shareholder of the Company), unsecured, interst at 10%, convertible to common stock from October 1, 2002 through April 30, 2003, dated September 30, 2002, due on April 30, 2003	12,500	-
David L. or Eileen S. Russell, (shareholders of the Company), unsecured, interest at 10%, convertible to common stock from October 2, 2002 through April 2, 2003, dated October 1, 2002, due on demand	25,000	-
Orion B & Sue Bishop, (shareholders of the Company), unsecured, interest at 10%, convertible to common stock from October 16, 2002 through April 15, 2003, due on April 15, 2003	12,500	-
Jerry Sink, (a shareholder of the Company), unsecured, interest at 10%, convertible to common stock from October 5, 2002 through April 4, 2003, dated October 4, 2002, due on April 4, 2003	25,000	-
Jerry Sink, (a shareholder of the Company), unsecured, interest at 10%, convertible to common stock from October 23, 2002 through April 22, 2003, dated October 22, 2002, due on April 22, 2003	12,500	-
Brian S. and Roxanne R. Clark, (shareholders of the Company), unsecured, interest at 10%, convertible to common stock from October 31, 2002 through April 30, 2003, dated October 30, 2002, due on April 30, 2003	8,111	-
John H. and Holly Zenger, (shareholders of the Company), unsecured, interest at 10%, convertible to common stock from November 16, 2003 through March 15, 2002, due on March 15, 2003	25,000	-
La Lolla Cove Investors. Inc., (a shareholder of the Company), unsecured, interest at 8%, convertible to common stock, dated December 27, 2002, due on demand	150,000	-
David J. Stecher, (a shareholder of the Company), unsecured, interest at 15%, dated December 18, 2002, due on March 19, 2003	18,070	-
Total	$        2,132,181	$      1,703,914

F-13

NOTE 6 _ LINES OF CREDIT

At December 31, 2002 and 2001, the Company had $97,000 borrowed on an outstanding line of credit.  The line of credit was extended to the Company by a shareholder utilizing his personal line of credit.  This credit facility is unsecured, has no stated maturity, and bears interest at 12%.

At December 31, 2002, the Company had $3,821 borrowed on an automatic line of credit with America First Credit Union.  This credit facility is unsecured, has no stated maturity and bears interest at 9.75%.

At July 19, 2002, the Company secured a $250,000 line of credit with Zion Bank.  As of December 31, 2002, the Company has borrowed $250,000.  This line of credit was secured by Company assets and carries a stated interest rate of 6.75%, and is due in full on January 19, 2003.

NOTE 7 _ LEASE PAYABLE

At March 2002, the Company secured a line of credit with HP/Compaq Financial Services in the amount of $37,606.  The Company used $25,826 of this credit to lease computer related equipment for a 36_month period with a $1 buy out option at the end of the lease.  The computer related equipment is deemed to be fully depreciated at the end of this lease.

NOTE 8 _ LITIGATION

Resolved Litigation

Terrance Dunne

Terrance Dunne, the Company's former auditor, initiated action against the Company for payment of unpaid fees.  In response to the allegations, the Company countersued for reimbursement of fees paid for work not performed.  In November 2002, the matter was fully settled and resolved with mutual releases being executed by both parties.

Mid_America Venture Capital Fund, Inc.

Mid_America Venture Capital Funds, Inc. brought action on July 23, 1997 against the Company for failure to pay loans on two promissory notes totaling $35,000.  Judgment was awarded on August 4, 1997 for a total of $39,336 including principal, interest, and attorney's fees and costs.  The balance owing at December 31, 2001 was included in settlements payable in these financial statements at December 31, 2001 and was fully paid as of December 31, 2002.  

Mike Glazer

A consultant rendered services to a Company subsidiary during 1996 in the amount of $17,230 and has brought action for this amount.  The Company has chosen not to contest this case.  Settlement efforts are expected to be undertaken after entry of judgment and demonstration that the assets of the subsidiary, Diatect International, Inc., are fully encumbered.  This amount was paid in full during the year ended December 31, 2001.

F-14

Danny Wirken

During June 2001, the Company declared a note payable to Danny Wirkin (one of the brokers involved in the selling of Diatect stock, which gave rise to certain litigation for stock manipulation) in the amount of $386,581 and the interest accrued thereon as invalid and void.  Legal counsel for the Company further asserted that the obligation has passed the statute of limitations for collection thereon.  This resulted in a gain from termination of debt, which was reflected in the financial statements at December 31, 2001.  This amount has been reclassified to other income in accordance with FAS 145. (See Note 5.). The Company was considering litigation however, at this time, all consideration of litigation against Danny Wirken has been discontinued.

Current Litigation

Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC

In November 1999, the Company's former legal counsel was awarded a default judgment against the Company in the amount of $42,166 plus post_judgment interest.  This judgment remains outstanding and unpaid and is included as a liability on the Company's balance sheet in settlements payable at December 31, 2002 and 2001 in the amount of $40,166.  

Ogilvy, Adams & Rinehart

Ogilvy, Adams & Rinehart (Ogilvy) obtained a judgment against Diatect on November 1, 1995 in the sum of $24,346.  The entire judgment amount plus attorney's fees and interest thereon is approximately $36,000 and has been included on the Company's balance sheet in settlements payable at December 31, 2002 and 2001.  Since mid_1996, there has been no communication with the plaintiff or its attorneys, nor has the plaintiff made any attempt to satisfy or settle this case.  The Company plans to negotiate a settlement of this obligation during 2003.

L. Craig Hunt

L. Craig Hunt brought action on January 14, 1998 against Diatect for damages and breach of contract on a promissory note for the sum of $42,750 plus interest, penalties and attorney's fees.  Judgment against Diatect International Corp. was rendered on February 1, 1999 in the sum of $61,543.  This judgment is presently outstanding and unpaid.  At December 31, 2002 and 2001, $60,543 is included in settlements payable in these financial statements.  To date, plaintiffs have made no attempt to collect on this judgment.

George Brink

During December 2000, George Brink was awarded a default judgment in the total amount of $44,648, including interest and legal fees, for the balance due on a promissory note.  At this time, active collection on the judgment has not been pursued.  The outstanding and unpaid amount is included as a liability on the Company's balance sheet in settlements payable at December 31, 2002 and 2001.  

Iver J. Longtieg

Mr. Longtieg is pursuing a claim outside of the Future Title/White Mountain Group.  Mr. Longtieg claims an outstanding note for $23,887 plus interest accrued theron.  Mr. Longtieg filed a notice of intent to apply for a default judgment, in Boise, Idaho.  The Company did not answer the complaint and as a result a potential default judgment is possible.  At the current time, Mr. Longtieg has been paid $14,488, and is forbearing until such time as Diatect resolves the issue of the original claim.

Former Officers and Consultant

In September 2000, the Company received notice from two former officers and a former consultant that they intend to bring action for nonpayment of back wages.  During May 2001, the Company issued 188,000 shares of its common stock valued at $47,000 ($0.25 per share) to one former officer in full settlement.  During August 2001, the Company paid $5,000 to another former officer for settlement with mutual release of his claim for nonpayment of back wages in the amount of $38,500.  

Threatened Litigation

On November 15, 2002, the Company received a letter from attorneys representing the Scotts Company and its affiliate, OMS Investments, Inc., claiming ownership of the character and trademark “Freddy the Fire Ant” and demanding that the Company withdraw its application with the U.S. Trademark office to register “Freddy the Fire Ant” as the Company’s trademark.  The claim alleges trademark infringement and unfair competition.  The outcome of this claim is uncertain and no amounts are accrued in the financial statements.

Other Matters

The Company is not aware of any other threatened litigation against it or its subsidiaries.  However, there remains a possibility of litigation against Diatect and/or its subsidiaries by creditors.

F-15

NOTE 9 _ COMMON STOCK

During the year ended December 31, 2001, the Company issued 2,107,500 shares of its common stock valued at $196,550 in consideration for a note payable, 1,716,590 shares of its common stock valued at $374,505 for debt, 188,000 shares of its common stock valued at $47,000 to a former officer for back wages (Note 7), 1,300,000 shares of its common stock valued at $97,500 for services to officers and others, 500,000 shares of its common stock valued at $37,500 in settlement of a distributor agreement, 500,000 shares of its common stock valued at $37,500 as a severance bonus to the Company's former president and 200,000 shares of its common stock valued at $41,035 in payment of a vendor account.  The shares were valued at their fair market value on the date of issuance.  The Company also sold 1,200,000 shares of its common stock at prices ranging from $0.10 to $0.25 per share for c ash and a receivable.  An officer, to whom options with a FMV of $55,534 had been previously issued, exercised the options and purchased 499,998 shares of common stock.  The exercise price of the stock of $30,000 was exchanged for accrued legal fees.

In November 2002, the Company increased its authorized capital to 1000,000,000 shares of common stock.  During the year ended December 31, 2002, the Company issued 2,032,880 shares of its common stock valued at $288,029 in payment of services, 2,507,113 shares of its common stock valued at $503,549 in payment of notes payable and accrued interest and sold 2,945,260 shares of its common stock for $572,065.  The Company also sold 600,000 shares of its common stock for $150,000 and exercise of options.  See Note 10.

NOTE 10 _ COMMON STOCK SUBSCRIBED

During the year ended December 31, 2001, the Company sold stock valued at $170,000 and received $100,000.  During the year ended December 31, 2002, the Company received $50,000 in payment of the stock subscription.  The remaining $20,000 is reflected in the attached financial statements as stock subscription receivable.  See Note 8.

NOTE 11 _ STOCK OPTIONS

In November 2002, the Company adopted the Diatect International Corporation 2002 Stock Option and Award Plan (the "Plan") under which 3,000,000 shares of Common Stock are available for issuance with respect to awards granted to officers, directors, management and other employees of the Company and/or its subsidiaries.  As of December 31, 2002, the Company had issued options for 2,000,000 shares of Common Stock to officers of the Company.  None of these options have become vested and therefore are unexercisable at December 31, 2002.

This Plan superceded the 1995 Stock Option Plan, which was initiated in order to aid the Company in maintaining and developing a management team, attracting qualified officers and employees.  A total of 3,000,000 shares of stock were subject to, or issued pursuant to the terms of the plan.  

F-16

The Company estimates the fair value of each stock option at the grant date by using the Black_Scholes option_pricing model with the following weighted_average assumptions used during the year ended December 31, 2001: dividend yield of zero percent; expected volatility of thirty percent; risk_free interest rate of six percent.  The weighted average fair value at date of grant for options granted to employees and stockholders in the years ended December 31, 2002 and 2001 was $0.08 per option, respectively.  The following assumptions were used during the year during the year ended December 31, 2002:  dividend yield of zero percent: expected volatility of 98.37%; risk_free interest rate of five percent.  Compensation cost charged to operations was $17,279 and $18,890 during the years ended December 31, 2002 and 2001, respectively.  

Finance fees charged to other expenses was $66,010 and legal fees charged to operations was $3,985 during the year ended December 31, 2001.

Following is a summary of the status of these performance_based options during the years ended December 31, 2002 and 2001:

	Number of Shares
	2002 Plan	1995 Plan	Total	Weighted Average per Share
Outstanding at
December 31, 2000	-	499,304	499,304	$           0.06
Granted	-	1,100,000	1,100,000	0.18
Exercised	-	(499,304)	(499,304)	0.06
Expired/forfeited	-	-	-	-
Outstanding at
December 31, 2001	-	1,100,000	1,000,000	$           0.18
Options exercisable at December 31, 2001	-	1,100,000	1,100,000	$           0.18
Weighted average fair value of options granted during 2001	-	0.08	0.08
Outstanding at
December 31, 2001	-	1,100,000	1,100,000	$          0.18
Granted	2,000,000	-	2,000,000	0.13
Exercised	-	(600,000)	(600,000	0.18
Expired/forfeited	-	-	-	-
Outstanding at December 31, 2002	2,000,000	500,000	2,500,000	$        0.14
Options exercisable at December 31, 2002	-	500,000	500,000	$        0.18
Weighted average fair value of options granted during 2002	$              0.13	$                  -	$           0.13

	Number of Shares
	2002 Plan	1995 Plan	Total	Weighted Average per Share
Exercise Date
On or before December 31, 2004	-	500,000	500,000	$           0.10
On or before December 31, 2007 and after the Company attaining $5,000,000 in gross annual sales	666,667	-	666,667	0.17
On or before December 31, 2007 and after the Company attaining$10,000,000 in gross annual sales	666,667	-	666,667	0.17
On or before December 31, 2007 and after the Company attaining $15,000,000 in gross annual sales	666,666	-	666,666	$          0.17
Totals	2,000,000	500,000	2,500,000

F-17

The following table gives information about the Company's common stock that may be issued upon the exercise of options under all of the Company's existing stock option plans as of December 31, 2002.

Exercise Prices	Number of Options	Weighted Average Exercise Price	Contractual Life (in years)	Number Exercisable	Weighted Average Exercise Price
$     0.10	500,000	$       0.10	2.00	500,000	$       0.10
0.17	666,667	0.17	2.15	-	0.17
0.17	666,667	0.17	3.20	-	0.17
0.17	666,666	0.17	4.42	-	0.17
	2,500,000	$       0.15	3.01	500,000	$       0.10

NOTE 12 _ CONCENTRATION OF RISK

Credit

The Company is a wholesale supplier of products and grants credit to its customers, a substantial portion of which are retailers of agricultural products throughout the country.

NOTE 13 _ SETTLEMENTS PAYABLE

The Company is obligated to pay certain notes and settlements under judgments awarded to outside parties.  These amounts, included in settlements payable at December 31, 2002 and 2001, are as follows:

	2002	2001
L Craig Hunt	$               60,543	$           60,543
Mid America Venture Capital Fund, Inc.	-	33,336
Sloan, Listrom, Eisenbarth, Sloan & Glssman, LLC	40,166	40,166
Ogilvy, Adams & Rinehart	36,000	36,000
George Brink	44,648	44,648
	$            181,357	$        214,693

NOTE 14 _ COMMITMENTS AND CONTINGENCIES

Futura Title Corporation

During the year ended December 31, 2001, the Company reclassified a note payable to Alliance Title & Escrow acting on the behalf of various individuals.  The reclassified amount also included interest accrued thereon to commitments and contingencies for a total amount of $461,605.  During the year ended December 31, 2002, the Company obtained releases of liability from several individuals.  This resulted in a gain from termination of debt, which is reflected in the financial statements at December 31, 2002.  A remaining balance in the amount of $106,620 is included in commitments and contingencies at December 31, 2002.  The Company is currently negotiating a settlement agreement on this liability.  Although the outcome is uncertain, the Company expects to settle for considerably less.

Lease Commitments

In April 2000, the Company entered into a lease agreement for new office facilities in Boise.  The agreement called a three_year lease with monthly payments of $820 during the first year, $838 during the second year and $857 during the third year.  The Company occupied these facilities from May 1, 2000 through October 1, 2001.  The Company negotiated a settlement on the remaining lease in the amount of $2,089, which was paid.

The Company leased operating facilities in Smith Center, Kansas from an individual through July 2001.  The lease was a month_to_month handshake agreement, with monthly payments of $273.

Other Contingencies

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

F-18

IX Group, Inc.

On November 14, 2001, Diatect entered into an agreement with IX Group, Inc. (hereinafter "IXG") whereby Diatect would sell to IXG all of the common stock of a subsidiary, Magic International, Inc. (hereinafter "Magic"), in exchange for approximately 5% of the common stock of Magic after IXG's merger with and into Magic and the post_merger payment of cash.  Although Magic was transferred to IXG, IXG subsequently ceased operations and Diatect never received any consideration for the transfer.

The transaction is considered a related party event because IXG's president and principal shareholder is also a shareholder of Diatect.  Prior to its transfer to IXG, Magic had no assets or liabilities.  

Purchase of Facilities

During October 2001, the Company relocated both its office and operating facilities to Heber City, Utah.  During January 2003 and subsequent to the date of these financial statements, the Company completed negotiations for the purchase of its new facilities at a total cost of $875,500.  Terms of the financing agreement call for approximately $9,200 in interest only payments at 13% annual interest rate. Under terms of the original agreement, the Company occupied the facilities with no charge until closing. Other terms of the agreement called for a down payment of $28,500, escrow deposit in the amount of $384,000 and a letter of credit in the amount of $412,500.  The Company paid the down payment of $28,500 during the fourth quarter of the year ended December 31, 2001 and this amount is reflected in the attached financial statements as deposits.  During the same period, the Company also secured cash in the amount of $400,000, which is considered restricted for an escrow deposit.  These funds were returned to the lender in 2003.  The Company occupied the facilities on October 10, 2001.

NOTE 15 _ RELATED PARTY TRANSACTIONS

Diatect International Corp. has notes payable to shareholders totaling $1,964,681 and $1,633,851 as of December 31, 2002 and 2001, respectively.  See Note 5.

The Company's assistant secretary performs services as the Company's main legal counsel.  Legal services performed by this officer totaled $19,312 and $17,067 for the years ended December 31, 2002 and 2001, respectively, of which $7,570 are included in accounts payable _ related party at December 31, 2002.

The Company has employment contracts to pay the Company's president and vice_president of operations annual compensation in the amounts of $120,000 and $90,000 respectively.  During the year ended December 31, 2002, the Company's president and vice_president of operations received options to purchase 2,000,000 shares of the Company's common stock at $0.17 per share.  These options vest when the Company attains various targeted gross annual sales levels.  (See Note 11.)  During January 2001, the Company's president received a signing bonus of 350,000 options for the purchase of shares of common stock.  During the year ended December 31, 2001, the Company also had an employment contract to pay the Company's former president annual compensation of $120,000.  See Note 11.  Executive compensation totaled $310,568 and $409,937 for the years ended December 31, 2002 and 2001, respectively.  

F-19

NOTE 16 _ MINING PROPERTY

During September 2001, the Company acquired title to unpatented mining claims on a section of land in Malheaur County, Oregon.  This property, with proven and probable reserves of diatomaceous earth, is recorded at cost on the Company's balance sheet.

NOTE 17 _ BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA

The Company's operations were classified into two principal reporting segments based upon geographical location during the year ended December 31, 2001.  All operations were relocated to Utah during the fourth quarter of fiscal 2001, therefore, no reportable segments are deemed to exist for the year ended December 31, 2002.  Separate accounting for each segment for the year ended December 31, 2001 is required due to varying strategies used by the Company in each location.

The table below presents information about the Company's reportable segments during the prior year:

	Year Ended December 31, 2001
	Kansas	Idaho/Utah	Eliminations	Consolidated
External revenue	$                    -	$           570,904	$                     -	$        570,904
Operating income (loss)	$        (20,005)	$     (1,086,451)	$                     -	$  (1,106,456)
Corporate expenses				-
Total operating income (loss)				$   (1,106,465)
Depreciation and Amortization	$               456	$          295,521	$                    -	$        295,977
Interest expense and finance charges	$                    -	$          278,501	$                    -	$        278,501
Identifiable assets	$        160,618	$       2,850,764	$      (154,924)	$     2,856,458
General corporate assets				-
Total assets				$    2,856,458

Kansas operations, the first reportable segment, performed services including mixing and distribution of pesticide products during early 2001. Idaho operations, the second reportable segment, manufactures product and generates sales revenues.

NOTE 18 _ OTHER LIABILITIES

At December 31, 2002, the Company had a $157,767 liability for unpaid federal and state withholding taxes, social security tax, medicare tax and federal and state unemployment taxes.  This amount may be subject to penalties and interest.  

F-20

NOTE 19 _ ROYALTIES

During the year ended December 31, 2001, the Company agreed to pay a former distributor royalties equal to $0.10 per pound of product produced.  During the year ended December 31, 2002, the Company accrued $113,623 for royalties pursuant to this agreement.

NOTE 20 _ SUBSEQUENT EVENTS

Purchase of Facilities

During January 2003 and subsequent to the date of these financial statements, the Company completed negotiations for the purchase of its new facilities at a total price of $875,500.  Under the terms of the financing agreement, the Company began making interest only monthly payments in the amount of $9,200. The Company also returned $400,000 of cash restricted for the escrow deposit to the lender. See Note 14.

Note Payable

On January 15, 2003, the Company borrowed $750,000 from George Ann Pope Charitable Trust.  The note is secured by an inventory security agreement whereby $0.25 of each dollar of gross proceeds from the sale of inventory is allocated and set aside in a special account for continuing security until the note is paid and bears interest at the rate of 10% per annum.  The Company issued 375,000 shares of its common stock as additional consideration for the loan.  The note is due on July 15, 2003.

F-22

DIATECT INTERNATIONAL CORPORATION

INTERIM FINANCIAL STATEMENTS

June 30, 2003

Diatect International Corp.

Consolidated Balance Sheets

	June 30, 2003 (Unaudited)	December 31, 2002
ASSETS
CURRENT ASSETS
Cash	$              2,222	$           4,509
Cash in escrow	-	400,000
Net accounts receivable	137,288	352,643
Employee receivable	2,055	1,270
Prepaid interest	18,532	108,048
Prepaid expenses	38,448	56,399
Inventories	1,149,565	1,259,149
Total Current Assets	1,348,110	2,182,018
PROPERTY, PLANT AND EQUIPMENT
Mining property	940	940
Land	150,000	-
Building	725,500	-
Equipment	436,323	420,839
Less accumulated depreciation	(144,262)	(97,142)
Total Property, Plant and Equipment	1,168,501	324,637
OTHER ASSETS
Deposits	-	28,500
Investment in EPA labels	1,736,322	1,736,322
Total Other Assets	1,736,322	1,764,822
TOTAL ASSETS	$        4,252,933	$     4,271,477
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable	$        1,148,340	$     1,400,610
Accounts payable – related party	31,892	37,710
Line of credit	114,299	351,048
Lease payable	12,026	18,067
Bank overdraft	105,681	-
Interest payable	433,402	310,434
Settlements payable	136,709	181,357
Other accrued liabilities	233,192	190,951
Royalty payable	113,623	113,623
Notes payable	2,613,020	2,132,181
Total Current Liabilities	4,943,020	4,735,981
LONG-TERM DEBT
Mortgage note payable	847,000	-
Lease payable-net of current portion	-	3,392
	847,000	3,392
COMMITMENTS AND CONTIGENCIES	130,395	134,739
STOCKHOLDERS’ EQUITY (DEFICIT)
Common stock, no par value; 100,000,000 shares authorized;
48,558,936 and 45,013,414 shares issued and outstanding	15,639,130	14,971,327
Common stock subscribed	(20,000)	(20,000)
Stock options	36,070	36,070
Accumulated deficit	(17,322,735)	(15,590,032)
Total Stockholders’ Equity (Deficit)	(1,667,535)	(602,635)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$        4,252,933	$     4,271,477

See condensed notes to interim consolidated financial statements.

F-23

Diatect International Corp.

Consolidated Statements of Operations

	Three Months Ended June 30,		Six Months Ended June 30,
	2003 (Unaudited)	2002 (Audited)	2003 (Unaudited)	2002 (Audited)
REVENUES	$          212,274	$          116,423	$        342,727	$         162,683
COST OF SALES	88,965	45,568	156,604	66,385
GROSS PROFIT	123,309	70,855	186,123	96,298
OPERATING EXPENSES
Salaries, wages and benefits	343,510	136,339	555,061	236,307
Executive compensation	34,422	95,138	113,550	143,600
Registration fees	7,880	-	17,844	11,025
Depreciation and amortization	23,015	19,168	47,120	30,138
Legal and professional fees	17,389	31,496	115,922	78,345
Contract labour	74,151	42,679	54,259	66,361
Advertising and promotion	159,014	66,157	226,584	84,629
Consulting	5,000	56,300	12,500	77,806
Travel and promotion	27,458	14,913	67,620	27,749
Supplies	11,439	70,395	28,844	86,350
Bad debts	24,900	90,136	69,900	107,586
Other operating expense	72,604	122,121	120,831	180,945
Total Operating Expenses	800,782	744,842	1,430,035	1,130,841
OPERATING LOSS	(677,473)	(673,987)	(1,243,912)	(1,034,543)
OTHER INCOME (EXPENSES)
Interest expense	(152,092)	(87,850)	(347,775)	(151,534)
Loss on distribution returns	(141,172)	-	(141,172)	-
Miscellaneous	-	(522)	156	(447)
Total Other Income (Expenses)	(293,264)	(88,372)	(488,792)	(151,981)
LOSS BEFORE INCOME TAXES	(970,737)	(762,356)	(1,732,703)	(1,186,524)
INCOME TAXES	-	-	-	-
NET LOSS	$       (970,737)	$       (762,356)	$   (1,732,703)	$   (1,186,524)
BASIC AND DILUTED NET LOSS PER SHARE	$             (0.02)	$             (0.02)	$           (0.04)	$            (0.03)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED	47,570,921	40,628,418	46,882,812	38,931,790

See condensed notes to interim consolidated financial statements.

F-24

Diatect International Corp.

Consolidated Cash Flow Statements

	Six Months Ended June 30,
	2003 (Unaudited)	2002 (Audited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$       (1,732,703)	$     (1,186,524)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	47,120	30,138
Issuance of stock for services	89,550	127,500
Issuance of stock for finance charges	54,190	31,875
Bad debts	69,900	-
Prepaid finance charges paid by issuance of stock	-	21,250
Stock issued for payment of accrued expenses	-	50,103
Changes in assets and liabilities:
Cash in escrow	400,000	-
Accounts receivable	145,455	103,958
Employee receivable	(785)	-
Prepaid interest	89,516	(25,996)
Prepaid royalties	-	5,073
Prepaid expenses	17,951	-
Inventories	109,584	(1,229,186)
Deposits	28,500	-
Accounts payable	20,084	1,289,583
Accounts payable – related parties	5,818	8,282
Interest payable	147,186	37,414
Other accrued liabilities	42,241	72,619
NET CASH FLOWS USED BY OPERATING ACTIVITIES	(478,029)	(663,911)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment	(43,984)	(203,521)
NET CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock subscriptions	-	50,000
Payment of settlements	-	(4,000)
Proceeds from lines of credit	-	4,982
Net payment of bank overdraft	105,681	(18,349)
Proceeds from sale of stock	58,000	622,065
Payment of commitments and contingencies	(4,344)	-
Payment of lease payable	(9,433)	-
Payments of line of credit	(236,749)	-
Payments of notes payable	(400,516)	(30,500)
Proceeds from notes payable	1,007,087	242,500
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES	519,726	866,698
NET INCREASE (DECREASE) IN CASH	(2,287)	(734)
CASH AT BEGINNING OF YEAR	4,509	888
CASH AT END OF PERIOD	$               2,222	$                154
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid	$               6,484	$                    -
Income taxes paid	$                       -	$                    -
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for notes payable and interest	$           409,266	$        287,059
Issuance of common stock for services	$             89,550	$        127,500
Issuance of common stock for prepaid finance charges	$                       -	$          21,250
Issuance of common stock for settlement and interest	$             56,797	$                    -
Issuance of debt for account payable	$           272,354	$                    -
Issuance of common stock for finance charges	$             54,190	$          21,875
Property acquired by mortgage	$           847,000	$                    -
Accounts receivable allowance for bad debt	$             69,900	$                    -

See condensed notes to interim consolidated financial statements.

F-25

Diatect International Corp.

Notes to Condensed Interim Financial Statements

June 30, 2003

NOTE 1 – BASIS AND PRESENTATION

The foregoing unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B as promulgated by the Securities and Exchange Commission.  Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles.  The unaudited interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2002.  In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.

The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period.  Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions that could have a material effect on the reported amounts of the Company's financial position and results of operations.

Operating results for the six-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

GOING CONCERN UNCERTAINTY

These financial statements have been prepared on a going concern basis, which contemplated the realization of assets and the satisfaction of liabilities in the normal course of business.  For the six months ended June 30, 2003, the Company sustained a net loss of $1,732,703.  As of June 30, 2003 the Company’s accumulated deficit was $17,322,735.  These factors, among others indicate that the Company may be unable to continue as a going concern for a reasonable period of time.  These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.  The Company’s continuation as a going concern is contingent upon its ability to obtain additional financing, and to generate revenue and cash flow to meet its obligations on a timely basis.

NOTE 2 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Diatect International Corp was incorporated in the state of California in 1979 as a bank holding corporation.  During 1986, the Company liquidated its subsidiaries and became a dormant “shell” corporation.

On August 22, 1996, the Company changed its name from San Diego Bancorp to Applied Earth Technologies, Inc. to better reflect the Company’s principal business activities, which primarily consist of developing and marketing pesticide products.  The Company later became informed that another corporation already had been authorized to use the name Applied Earth Technologies, Inc. and approval of this name had been granted in error.  In response to this information, the Company changed its name to Diatect International Corp., on June 5, 1998.

The Company’s wholly owned subsidiaries consist of Enviro-Guard Corporation, Diatect International, Inc. and D.S.D., Inc.  Apart from Diatect International, Inc. the Company’s other subsidiaries are inactive.

NOTE 3 – INVENTORIES

Inventories at June 30, 2003 and December 31, 2002 consist of the following:

	June 30, 2003	December 31, 2002
Raw Materials	$             57,960	$           78,169
Packaging Materials	15,212	12,874
Finished Goods	1,076,393	1,168,106
Total	$        1,149,565	$      1,259,149

Finished goods consist of different forms of application of pesticide products.

F-26

NOTE 4 – NOTES PAYABLE

All of the Company’s notes payable are considered short-term.  At June 30, 2003 notes payable consisted of the following:

Creditor and Conditions	June 30, 2003
Balance, December 31, 2002	$       2,132,181
RCK, LLC, (a shareholder of the Company) unsecured, interest at 12%, dated September 28, 2001, due on demand, paid by return of funds and issuance of stock.	(600,000)
Kyle Baird, (a shareholder of the Company), unsecured, interest at 10%, dated July 10, 2002, due on September 30, 2002, paid by issuance of stock.	(74,000)
Ronald Davis, (a shareholder of the Company), unsecured, interest at 10%, dated July 10, 2002, due on December 31, 2002, paid by issuance of stock.	(79,250)
Hyrum L. & Helen Mae Andrus, (shareholders of the Company), interest at 8%, dated April 24, 2002, due on June 24, 2002, delinquent, partial payment issuance of stock.	(516)
George Ann Pope Charitable Trust, (a shareholder of the Company), secured by inventory security agreement whereby $0.25 of each dollar of gross proceeds from the sale of inventory is allocated and set aside until the note is paid, interest at 10%, dated January 15, 2003, due on July 15, 2003.	750,000
Stonefield, Inc., secured by deed of trust, interest at 13% with monthly payments of interest only commencing February 17, 2003, dated January 15, 2003, due on January 17, 2005.	847,000
LaJolla Cove Investors, Inc., (a shareholder of the Company), unsecured, 8% convertible debenture to common stock, dated March 18, 2003, due on demand.	100,000
Dave Russell, (a shareholder of the Company), unsecured, interest at 10$, dated May 20, 2003, due November 20, 2003.	100,000
Keven Jensen (a shareholder of the Company), unsecured, interest at 10% dated April 25, 2003 due July 24, 2003.	25,000
Orion & Sue Bishop, (a shareholder of the Company), unsecured, interest at 10%, dated September 30, 2002, due on April 15, 2003, paid by issuance of stock.	(12,500)
Orion & Sue Bishop, (a shareholder of the Company), unsecured, interest at 10%, dated September 30, 2002, due on April 15, 2003, paid by issuance of stock.	(12,500)
Compax/Flexpak a vendor of the Company, has converted the account payable to a note with interest at 12% per annum, until paid.	272,354
Brian & Roxanne Clarke, (shareholders of the Company), unsecured, interest at 10%, dated June 25, 2003, due on demand.	1,555
Jay Downs, (a shareholder of the Company), interest at 10%, dated June 5, 2003, due on demand.	5,000
Total	3,460,856
Less current portion	1,616,856
Total long term notes payable	$         847,000

NOTE 5 – LINES OF CREDIT

At July 19, 2002 the Company secured a $250,000 line of credit with Zion Bank.  As of December 31, 2002, the Company had borrowed $250,000.  This line of credit was secured by Company assets and carried a stated interest rate of 6.75%, and was paid in full during January 2003.

F-27

NOTE 6 – LITIGATION

From time to time the Company is subject to various legal proceedings that arise in the ordinary course of business.  Although the Company cannot predict the outcome of these proceedings with certainty, the Company does not believe that the disposition of these matters will have a material adverse affect on its financial position, results of operations or cash flows.

The status of legal proceedings against the Company is detailed in Part II Item 1, Legal Proceedings, later in the report.

NOTE 7 – COMMON STOCK

During the six months ended June 30, 2003, the Company issued 3,545,522 shares of its common stock.  For debt and interest valued at $520,253, the company issued 2,352,445 shares.  The Company also issued 55,000 shares of its common stock to directors for services valued at $8,550.  There were 673,077 shares issued to employees, consultants and others for services valued at $81,000.  The stock was valued at it fair market value on the date of issuance.  The Company also sold 465,000 shares of its common stock for $58,000 during the same fiscal period.

NOTE 8 – STOCK OPTIONS

There were no options exercised or issued during the six months ended June 30, 2003.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Purchase of Facilities

During October 2001, the Company relocated both its office and operating facilities to Heber City, Utah.  During January 2003, the Company completed negotiations for the purchase of its new facilities at a total cost of $875,500.  Terms of the financing agreement call for approximately $9,200 in interest only payments at 13% annual interest rate.  (See Note 4.)  Under terms of the original agreement, the Company occupied the facilities with no charge until closing.  Other terms of the agreement called for a down payment of $28,500, escrow deposit in the amount of $384,000 and a letter of credit in the amount of $412,500.  The Company paid the down payment of $28,500 during the fourth quarter of the year ended December 31, 2001 and this amount is reflected in the attached financial statements as deposits at December 31, 2002.  During the same period, the Company also secured cash in the amount of $400,000, which was considered restricted for an escrow deposit.  These funds were returned to the lender in January 2003.  The Company has occupied the facilities since October 10, 2001.

G.A. Pope Charitable Trust Note Payable

In the first quarter of 2003, the Company borrowed $750,000 from a privately held trust.  One of the underlying loan covenants with the trust provides that the Company shall set aside a portion of its gross sales proceeds until the note is paid.  At June 30, 2003, the Company had not complied with aforementioned loan covenant.  In the third quarter of 2003, the Company is renegotiating the loan covenant and loan maturity with the trust.

F-28

NOTE 10 – DISTRIBUTION RETURNS

Loss on distribution returns

In the second quarter of 2003, the Company requested the return of product from a class of customers, (Future Farmers of America chapters in the State of Texas), because the Company had some concerns regarding inappropriate product storage conditions by customers and the related expected impact on product efficiency.  Therefore, upon receipt of this product, the Company recorded a loss on distribution and product returns of $174,150.  This amount consists of the write-off of the related customer receivables, offset by the recording of reusable inventory materials of $32,978.

NOTE 11 – SUBSEQUENT EVENTS

On August 12^th 2003, the Company entered in to a letter of intent with Diatomaceous Earth Deposits of Virginia to purchase 90% of Diatect International’s diatomaceous earth mining site in Oregon for $31.1 million.  At the current time, Diatect expects to finalize the transaction on or before September 15, 2003.  Diatomaceous Earth Deposits of Virginia is a corporation co-owned by Michael P. McQuade (an outside director of Diatect).  Initial terms of the agreement call for Diatect to receive annual payments of approximately $1.9 million per year beginning in September 2005 and continuing for a period of fifteen years thereafter.  Other terms will be negotiated prior to the scheduled closing.

F-29

DIATECT INTERNATIONAL CORPORATION

________________________________

Prospectus

________________________________

PART II

Item 24.   Indemnification of Directors and Officers

Our Articles of Incorporation include provisions, which limit the liability of our directors.  As permitted by applicable provisions of the California Law, directors will not be liable to Diatect for monetary damages arising from a breach of their fiduciary duty as directors in certain circumstances.  This limitation does not affect liability for any breach of a director’s duty to Diatect or our shareholders (i) with respect to approval by the director of any transaction from which he or she derives an improper personal benefit, (ii) with respect to acts or omissions involving an absence of good faith, that the director believes to be contrary to the best interests of Diatect or our shareholders, that involve intentional misconduct or a knowing and culpable violation of law, that constitute an unexcused pattern or inattention that amounts to an abdication of his or her du ty to Diatect or our shareholders, or that show a reckless disregard for duty to Diatect or our shareholders in circumstances in which he or she was, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to Diatect or our shareholders, or (iii) based on transactions between Diatect and our directors or another corporation with interrelated directors or based on improper distributions, loans or guarantees under applicable sections of California Law.  This limitation of directors’ liability also does not affect the availability of equitable remedies, such as injunctive relief or rescission.  

The Company has been advised that it is the position of the Commission that insofar as the provision in Diatect’s Articles of Incorporation, as amended, may be invoked for liabilities arising under the Securities Act, the provision is against public policy and is therefore unenforceable.

Item 25.   Other Expenses of Issuance and Distribution

The Company is not issuing any common stock under this Registration Statement.  All common stock registered pursuant to this Registration Statement is being registered on behalf of selling shareholder.  The Company has agreed to pay all costs of this Registration Statement.  The estimated expenses for the distribution of the common stock registered hereby, other than underwriting commissions, fees and Representative’s nonaccountable expense allowance are set forth in the following table:

Item	Amount
SEC Registration Fee	$            500
Transfer Agent Fees	500
Legal Fees	25,000
Accounting Fees	1,000
Printing and Engraving Costs	1,500
Miscellaneous	1,000
Total	$       29,500

-i-

Item 26.   Recent Sales of Unregistered Securities

During the past three years, we effected the following transactions in reliance upon exemptions from registration under the Securities Act as amended. Unless stated otherwise; (i) that each of the persons who received these unregistered securities had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risk of the receipt of these securities, and that they were knowledgeable about our operations and financial condition; (ii) no underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with the transactions; (iii) the transactions did not involve a public offerings; and (iv) each certificate issued for these unregistered securities contained a legend stating that the securities have not been registered under the Act and setting forth the restrictions on the transferability and the sale of the securities.

In November 2002 we sold 1,000,000 shares of our common stock for a purchase price of $100,000 to La Jolla Cove Investors, Inc.

On December 27, 2002, we entered into a Securities Purchase Agreement with La Jolla Cove Investors, Inc. relating to the sale of $150,000 in principal amount of an 8% Convertible Debenture due December 27, 2004 and Warrants.  The Debenture was amended on March 18, 2003 and increased by $100,00 in principal amount making the Debenture total $250,000. The Warrants were amended on March 27, 2003 to limit the number of shares issuable upon exercise of the Warrants to 2,500,000 shares of common stock.  Both the Debenture and the Warrants were amended further on August 6, 2003.

During the quarter ended December 31, 2002, we issued 206,000 shares of our common stock valued at $19,770 in payment of services provided by the board and for employee year-end bonuses, 615,000 shares of our common stock valued at $84,500 in payment of consulting services, 462,880 shares of our common stock valued at $53,139 for debt settlement, 1,000,000 shares of our common stock for cash of $100,000, and 180,500 shares of our common stock valued at $20,800 as loan incentives.  500,000 of the above shares issued in payment consulting services valued at $50,000 were issued pursuant to a Registration Statement on Form S-8.  

All of the remaining above securities have been issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

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Item 27.  Exhibits

Exhibit Number	Description
4.1	Securities Purchase Agreement dated as of December 27, 2002
4.2	Registration Rights Agreement dated as of December 27, 2002
4.3	Form of 8% Convertible Debenture due December 27, 2004
4.4	Common Stock Purchase Agreement dated as of November 25, 2002
4.5	Form of Warrant to Purchase Common Stock issued December 27, 2002
4.6	Letter Agreement, dated March 27, 2003
4.7	Letter Agreement, dated August 6, 2003
5.1	Opinion and Consent of Loeb & Loeb LLP
23.1	Consent of Williams & Webster, P.S.

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Item 28.  Undertakings.

We hereby undertake to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(a)

To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

(b)

To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933 if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum agg regate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

(c)

To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

provided, however, that paragraphs (a) and (b) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Securities and Exchange Commission by us pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement.

In addition, we hereby undertake:

(a)

That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and

(b)

To remove from registration by means of a post-effective amendment any of the securities being registered, which remain, unsold at the termination of the offering.

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We hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, each filing of our annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.  In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of ours in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appr opriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DIATECT INTERNATIONAL CORPORATION

By: /s/ Jay W. Downs

Name:

Jay W. Downs

Title:

President

Dated: August 22, 2003

Pursuant to the requirements of the Securities Act of 1933, as amended, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Jay W. Downs Jay W. Downs President, Principal Financial Officer and Chairman of the Board	Dated: August 22, 2003
/s/ Margie Humphries Margie Humphries Secretary	Dated: August 22, 2003
/s/ John L. Runft John L. Runft Director and Corporate Legal Council	Dated: August 22, 2003
/s/ M. Stewart Hyndman M. Stewart Hyndman Director	Dated: August 22, 2003
/s/ John H. Zenger John H. Zenger Director	Dated: August 22, 2003
/s/ Robert E. Crouch Robert E. Crouch Director	Dated: August 22, 2003
/s/ Frank Priestley Frank Priestley Director	Dated: August 22, 2003
/s/ Dr. Michael P. McQuade Dr. Michael P. McQuade Director	Dated: August 22, 2003
/s/ Dave H. Andrus Dave H. Andrus VP of Operations and Director	Dated: August 22, 2003

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EX-1

EXHIBIT 4.1

SECURITIES PURCHASE AGREEMENT

Securities Purchase Agreement dated as of December 27, 2002 (this “Agreement”) by and between Diatect International Corporation, a California corporation, with principal executive offices located at 875 S. Industrial Parkway, Heber, Utah 84032 (the “Company”), and La Jolla Cove Investors, Inc. (“Buyer”).

WHEREAS, Buyer desires to purchase from the Company, and the Company desires to issue and sell to Buyer, upon the terms and subject to the conditions of this Agreement, the 8% Convertible Debenture of the Company in the aggregate principal amount of $150,000 (the “Debenture”); and

WHEREAS, in conjunction with the Debenture, the Company has issued a Warrant to Purchase Common Stock to the Buyer (the “Warrant or Conversion Warrant”); and

WHEREAS, upon the terms and subject to the conditions set forth in the Debenture and the Warrant, the Debenture and Warrant are convertible and exercisable, respectively, into shares of the Company’s Common Stock (the “Common Stock”);

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows:

I.

PURCHASE AND SALE OF DEBENTURE

A.

Transaction.  Buyer hereby agrees to purchase from the Company, and the Company has offered and hereby agrees to issue and sell to Buyer in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the “Securities Act”), the Debenture.

B.

Purchase Price; Form of Payment.  The purchase price for the Debenture to be purchased by Buyer hereunder shall be $150,000  (the “Purchase Price”).  Simultaneously with the execution of this Agreement, Buyer shall pay $150,000 of the Purchase Price (the” Initial Purchase Price”) by wire transfer of immediately available funds to the Company.  Simultaneously with the execution of this Agreement, the Company shall deliver the Convertible Debenture and the Conversion Warrants (which shall have been duly authorized, issued and executed I/N/O Buyer or, if the Company otherwise has been notified, I/N/O Buyer’s nominee).  

II.

BUYER’S REPRESENTATIONS AND WARRANTIES

Buyer represents and warrants to and covenants and agrees with the Company as follows:

A.

Buyer is purchasing the Debenture and the Common Stock issuable upon conversion or redemption of the Debenture (the “Conversion Shares” and, collectively with the Debenture and the Warrant Shares, the “Securities”) for its own account, for investment purposes only and not with a view towards or in connection with the public sale or distribution thereof in violation of the Securities Act.

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B.

Buyer is (i) an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act, (ii) experienced in making investments of the kind contemplated by this Agreement, (iii) capable, by reason of its business and financial experience, of evaluating the relative merits and risks of an investment in the Securities, and (iv) able to afford the loss of its investment in the Securities.

C.

Buyer understands that the Securities are being offered and sold by the Company in reliance on an exemption from the registration requirements of the Securities Act and equivalent state securities and “blue sky” laws, and that the Company is relying upon the accuracy of, and Buyer’s compliance with, Buyer’s representations, warranties and covenants set forth in this Agreement to determine the availability of such exemption and the eligibility of Buyer to purchase the Securities;

D.

Buyer understands that the Securities have not been approved or disapproved by the Securities and Exchange Commission (the “Commission”) or any state or provincial securities commission.

E.

This Agreement has been duly and validly authorized, executed and delivered by Buyer and is a valid and binding agreement of Buyer enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws.

III.

THE COMPANY’S REPRESENTATIONS

The Company represents and warrants to Buyer that:

A.

Capitalization.

1.

The authorized capital stock of the Company consists of  __________ shares of Common Stock and _________ shares of Series A Preferred Stock of which __________ shares and __________ shares, respectively, are issued and outstanding as of the date hereof and are fully paid and nonassessable.  The amount, exercise, conversion or subscription price and expiration date for each outstanding option and other security or agreement to purchase shares of Common Stock is accurately set forth on Schedule III.A.1.

2.

The Conversion Shares and the Warrant Shares have been duly and validly authorized and reserved for issuance by the Company, and, when issued by the Company upon conversion of the Debenture, will be duly and validly issued, fully paid and nonassessable and will not subject the holder thereof to personal liability by reason of being such holder.

3.

Except as disclosed on Schedule III.A.3., there are no preemptive, subscription, “call,” right of first refusal or other similar rights to acquire any capital stock of the Company or other voting securities of the Company that have been issued or granted to any person and no other obligations of the Company s to issue, grant, extend or enter into any security, option, warrant, “call,” right, commitment, agreement, arrangement or undertaking with respect to any of their respective capital stock.

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B.

Organization; Reporting Company Status.

1.

The Company is a corporation duly organized, validly existing and in good standing under the laws of the state or jurisdiction in which it is incorporated and is duly qualified as a foreign corporation in all jurisdictions in which the failure so to qualify would reasonably be expected to have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of the Company or on the consummation of any of the transactions contemplated by this Agreement (a “Material Adverse Effect”).

2.

The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  The Common Stock is traded on the OTC Bulletin Board service of the National Association of Securities Dealers, Inc. (“OTCBB”) and the Company has not received any notice regarding, and to its knowledge there is no threat of, the termination or discontinuance of the eligibility of the Common Stock for such trading.

C.

Authorization.  The Company (i) has duly and validly authorized and reserved for issuance shares of Common Stock, which is a number sufficient for the conversion of the Debenture and the exercise of the Conversion Warrant and (ii) at all times from and after the date hereof shall have a sufficient number of shares of Common Stock duly and validly authorized and reserved for issuance to satisfy the conversion of the Debenture in full and the exercise of the Conversion Warrant.  The Company understands and acknowledges the potentially dilutive effect on the Common Stock of the issuance of the Conversion Shares and the Warrant Shares.  The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Debenture and the exercise of the Conversion Warrant and the Initial Warrant in accordance with this Agreement is a bsolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company and notwithstanding the commencement of any case under 11 U.S.C. § 101 et seq. (the “Bankruptcy Code”).  In the event the Company is a debtor under the Bankruptcy Code, the Company hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. § 362 in respect of the conversion of the Debenture.  The Company agrees, without cost or expense to Buyer, to take or consent to any and all action necessary to effectuate relief under 11 U.S.C. § 362.

D.

Authority; Validity and Enforceability.  The Company has the requisite corporate power and authority to enter into the Documents (as such term is hereinafter defined) and to perform all of its obligations hereunder and thereunder (including the issuance, sale and delivery to Buyer of the Securities).  The execution, delivery and performance by the Company of the Documents and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Debenture and the issuance and reservation for issuance of the Conversion Shares and the Warrant Shares) have been duly and validly authorized by all necessary corporate action on the part of the Company.  Each of the Documents has been duly and validly executed and delivered by the Company and each Document constitutes a valid and binding ob ligation of the Company enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws.  The Securities have been duly and validly authorized for issuance by the Company and, when executed and delivered by the Company, will be valid and binding obligations of the Company enforceable against it in accordance with their respective terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally.  For purposes of this Agreement, the term “Documents” means (i) this Agreement; (ii) the Registration Rights Agreement dated as of even date herewith between the Company and Buyer, &nbs p;(iii) the Debenture; and (iv) the Conversion Warrant.

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E.

Validity of Issuance of the Securities.  The Debenture, the Conversion Shares upon their issuance in accordance with the Debenture, and the Warrant Shares will be validly issued and outstanding, fully paid and nonassessable, and not subject to any preemptive rights, rights of first refusal, tag-along rights, drag-along rights or other similar rights.

F.

Non-contravention.  The execution and delivery by the Company of the Documents, the issuance of the Securities, and the consummation by the Company of the other transactions contemplated hereby and thereby do not, and compliance with the provisions of this Agreement and other Documents will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under, or result in the creation of any Lien (as such term is hereinafter defined) upon any of the properties or assets of the Company or any of its Subsidiaries under, or result in the termination of, or require that any consent be obtained or any notice be given with respect to (i) the Articles or Certificate of Incorporation or By-Laws of the Company or the comparable charter or organizational documents of any of its Subsidiaries, in each case as amended to the date of this Agreement, (ii) any loan or credit agreement, Debenture, bond, mortgage, indenture, lease, contract or other agreement, instrument or permit applicable to the Company or any of its Subsidiaries or their respective properties or assets or (iii) any Law (as such term is hereinafter defined) applicable to, or any judgment, decree or order of any court or government body having jurisdiction over, the Company or any of its Subsidiaries or any of their respective properties or assets.

G.

Approvals.  No authorization, approval or consent of any court or public or governmental authority is required to be obtained by the Company for the issuance and sale of the Securities to Buyer as contemplated by this Agreement, except such authorizations, approvals and consents as have been obtained by the Company prior to the date hereof.

H.

Commission Filings.  The Company has properly and timely filed with the Commission all reports, proxy statements, forms and other documents required to be filed with the Commission under the Securities Act and the Exchange Act since becoming subject to such Acts (the “Commission Filings”).  As of their respective dates, (i) the Commission Filings complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the Commission promulgated thereunder applicable to such Commission Filings and (ii) none of the Commission Filings contained at the time of its filing any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances unde r which they were made, not misleading.  The financial statements of the Company included in the Commission Filings, as of the dates of such documents, were true and complete in all material respects and complied with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto, were prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) (except in the case of unaudited statements permitted by Form 10-Q under the Exchange Act) applied on a consistent basis during the periods involved (except as may be indicated in the Debentures thereto) and fairly presented the consolidated financial position of the Company and its Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments that in the aggregate are not material and to any other adjustment d escribed therein).

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I.

Full Disclosure.  There is no fact known to the Company (other than general economic or industry conditions known to the public generally) that has not been fully disclosed in the Commission Filings that (i) reasonably could be expected to have a Material Adverse Effect or (ii) reasonably could be expected to materially and adversely affect the ability of the Company to performing its obligations pursuant to the Documents.

J.

Absence of Events of Default.  No “Event of Default” (as defined in any agreement or instrument to which the Company is a party) and no event which, with notice, lapse of time or both, would constitute an Event of Default (as so defined), has occurred and is continuing.

K.

Securities Law Matters.  Assuming the accuracy of the representations and warranties of Buyer set forth in Article II, the offer and sale by the Company of the Securities is exempt from (i) the registration and prospectus delivery requirements of the Securities Act and the rules and regulations of the Commission thereunder and (ii) the registration and/or qualification provisions of all applicable state and provincial securities and “blue sky” laws.  The Company shall not directly or indirectly take, and shall not permit any of its directors, officers or Affiliates directly or indirectly to take, any action (including, without limitation, any offering or sale to any person or entity of any security similar to the Debenture) which will make unavailable the exemption from Securities Act registration being relied upon by the Company for the offe r and sale to Buyer of the Debenture, the Conversion Shares and the Warrant Shares as contemplated by this Agreement.  No form of general solicitation or advertising has been used or authorized by the Company or any of its officers, directors or Affiliates in connection with the offer or sale of the Debenture (and the Conversion Shares) as contemplated by this Agreement or any other agreement to which the Company is a party.

L.

Registration Rights.  Except as set forth on Schedule III.L., no Person has, and as of the Closing (as such term is hereinafter defined), no Person shall have, any demand, “piggy-back” or other rights to cause the Company to file any registration statement under the Securities Act relating to any of its securities or to participate in any such registration statement.

M.

Interest.  The timely payment of interest on the Debenture is not prohibited by the Articles or Certificate of Incorporation or By-Laws of the Company, in each case as amended to the date of this Agreement, or any agreement, contract, document or other undertaking to which the Company is a party.

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N.

No Misrepresentation.  No representation or warranty of the Company contained in this Agreement or any of the other Documents, any schedule, annex or exhibit hereto or thereto or any agreement, instrument or certificate furnished by the Company to Buyer pursuant to this Agreement contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

O.

Finder’s Fee.  There is no finder’s fee, brokerage commission or like payment in connection with the transactions contemplated by this Agreement for which Buyer is liable or responsible.

IV.

CERTAIN COVENANTS AND ACKNOWLEDGMENTS

A.

Filings.  The Company shall make all necessary Commission Filings and “blue sky” filings required to be made by the Company in connection with the sale of the Securities to Buyer as required by all applicable Laws, and shall provide a copy thereof to Buyer promptly after such filing.

B.

Reporting Status.  So long as Buyer beneficially owns any of the Securities, the Company shall timely file all reports required to be filed by it with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.

C.

Listing.  Except to the extent the Company lists its Common Stock on The New York Stock Exchange, The American Stock Exchange or The Nasdaq Stock Market, the Company shall use its best efforts to maintain its listing of the Common Stock on OTCBB.  If the Common Stock is delisted from OTCBB, the Company will use its best efforts to list the Common Stock on the most liquid national securities exchange or quotation system that the Common Stock is qualified to be listed on.

D.

Reserved Conversion Common Stock.  The Company at all times from and after the date hereof shall have such number of shares of Common Stock duly and validly authorized and reserved for issuance as shall be sufficient for the conversion in full of the Debenture and the exercise of the Conversion Warrant.

E.

Information.  Each of the parties hereto acknowledges and agrees that Buyer shall not be provided with, nor be given access to, any material non-public information relating to the Company.

F.

Accounting and Reserves.  The Company shall maintain a standard and uniform system of accounting and shall keep proper books and records and accounts in which full, true, and correct entries shall be made of its transactions, all in accordance with GAAP applied on consistent basis through all periods, and shall set aside on such books for each fiscal year all such reserves for depreciation, obsolescence, amortization, bad debts and other purposes in connection with its operations as are required by such principles so applied.

G.

Transactions with Affiliates.  So long as the Debenture is outstanding, neither the Company nor any of its Subsidiaries shall, directly or indirectly, enter into any material transaction or agreement with any stockholder, officer, director or Affiliate of the Company or family member of any officer, director or Affiliate of the Company, unless the transaction or agreement is (i) reviewed and approved by a majority of Disinterested Directors (as such term is hereinafter defined) and (ii) on terms no less favorable to the Company or the applicable Subsidiary than those obtainable from a nonaffiliated person.  A “Disinterested Director” shall mean a director of the Company who is not and has not been an officer or employee of the Company and who is not a member of the family of, controlled by or under common control with, any su ch officer or employee.

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H.

Certain Restrictions.  So long as the Debenture is outstanding, no dividends shall be declared or paid or set apart for payment nor shall any other distribution be declared or made upon any capital stock of the Company, nor shall any capital stock of the Company be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of shares of Common Stock made for purposes of an employee incentive or benefit plan (including a stock option plan) of the Company or pursuant to any of the security agreements listed on Schedule III.A, for any consideration by the Company, directly or indirectly, nor shall any moneys be paid to or made available for a sinking fund for the redemption of any Common Stock of any such stock.

I.

Short Selling.

  So long as the Debenture is outstanding, Buyer agrees and covenants on its behalf and on behalf of its affiliates that neither Buyer nor its affiliates shall at any time engage in any short sales with respect to the Company’s Common Stock, or sell put options or similar instruments with respect to the Company’s Common Stock.

V.

ISSUANCE OF COMMON STOCK

A.

The Company undertakes and agrees that no instruction other than the instructions referred to in this Article V and customary stop transfer instructions prior to the registration and sale of the Common Stock pursuant to an effective Securities Act registration statement shall be given to its transfer agent for the Conversion Shares and the Warrant Shares and that the Conversion Shares and the Warrant Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement, the Registration Rights Agreement and applicable law.  Nothing contained in this Section V.A. shall affect in any way Buyer’s obligations and agreement to comply with all applicable securities laws upon resale of such Common Stock.

B.

Buyer shall have the right to convert the Debenture and exercise the Warrant by telecopying an executed and completed Conversion Notice (as such term is defined in the Debenture) or Warrant Notice of Exercise (as such term is defined in the Warrant) to the Company.  Each date on which a Conversion Notice or Warrant Notice of Exercise is telecopied to and received by the Company in accordance with the provisions hereof shall be deemed a Conversion Date (as such term is defined in the Debenture).  The Company shall cause the transfer agent to transmit the certificates evidencing the Common Stock issuable upon conversion of the Debenture (together with a new debenture, if any, representing the principal amount of the Debenture not being so converted) or exercise of the Warrant (together with a new Warrant, if any, representing the amount of the Warrant no t being so exercised) to Buyer via express courier, or if a Registration Statement covering the Common Stock has been declared effective by the SEC by electronic transfer, within three (3) business days after receipt by the Company of the Conversion Notice or Warrant Notice of Exercise(the “Delivery Date”).

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C.

Upon the conversion of the Debenture or exercise of the Warrant or part thereof, the Company shall, at its own cost and expense, take all necessary action (including the issuance of an opinion of counsel) to assure that the Company's transfer agent shall issue stock certificates in the name of Buyer (or its nominee) or such other persons as designated by Buyer and in such denominations to be specified at conversion representing the number of Common Stock of common stock issuable upon such conversion or exercise. The Company warrants that the Conversion Shares and Warrant Shares will be unlegended, free-trading, and freely transferable, and will not contain a legend restricting the resale or transferability of the Company Common Stock provided the Conversion Shares and Warrant Shares are being sold pursuant to an effective registration statement covering the Comm on Stock to be sold or is otherwise exempt from registration when sold.

D.

The Company understands that a delay in the delivery of the Common Stock in the form required pursuant to this section, or the Mandatory Redemption Amount described in Section E hereof, beyond the Delivery Date or Mandatory Redemption Payment Date (as hereinafter defined) could result in economic loss to the Buyer. As compensation to the Buyer for such loss, the Company agrees to pay late payments to the Buyer for late issuance of Common Stock in the form required pursuant to Section C hereof upon Conversion of the Debenture or late payment of the Mandatory Redemption Amount, in the amount of $100 per business day after the Delivery Date or Mandatory Redemption Payment Date, as the case may be, for each $10,000 of Debenture principal amount being converted or redeemed. The Company shall pay any payments incurred under this Section in immediately available funds upon demand. Furthermore, in addition to any other remedies which may be available to the Buyer, in the event that the Company fails for any reason to effect delivery of the Common Stock by the Delivery Date or make payment by the Mandatory Redemption Payment Date, the Buyer will be entitled to revoke all or part of the relevant Notice of Conversion or rescind all or part of the notice of Mandatory Redemption by delivery of a notice to such effect to the Company whereupon the Company and the Buyer shall each be restored to their respective positions immediately prior to the delivery of such notice, except that late payment charges described above shall be payable through the date notice of revocation or rescission is given to the Company.

E.

Mandatory Redemption. In the event the Company is prohibited from issuing Common Stock, or fails to timely deliver Common Stock on a Delivery Date, or upon the occurrence of an Event of Default (as defined in the Debenture) or for any reason other than pursuant to the limitations set forth herein, or upon the occurrence of an Event of Default as defined in the Debenture, then at the Buyer's election, the Company must pay to the Buyer ten (10) business days after request by the Buyer or on the Delivery Date (if requested by the Buyer) a sum of money determined by multiplying up to the outstanding principal amount of the Debenture designated by the Buyer by 130%, together with accrued but unpaid interest thereon ("Mandatory Redemption Payment"). The Mandatory Redemption Payment must be received by the Buyer on the same date as the Company Common Stock ot herwise deliverable or within ten (10) business days after request, whichever is sooner ("Mandatory Redemption Payment Date"). Upon receipt of the Mandatory Redemption Payment, the corresponding Debenture principal and interest will be deemed paid and no longer outstanding.

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F.

 Buy-In. In addition to any other rights available to the Buyer, if the Company fails to deliver to the Buyer such Common Stock issuable upon conversion of a Debenture or exercise of a Warrant by the Delivery Date and if ten (10) days after the Delivery Date the Buyer purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Buyer of the Common Stock which the Buyer anticipated receiving upon such conversion (a "Buy-In"), then the Company shall pay in cash to the Buyer (in addition to any remedies available to or elected by the Buyer) the amount by which (A) the Buyer's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate principal and/or interest amount of the Debenture or Warrant for which such conversio n or exercise was not timely honored, together with interest thereon at a rate of 15% per annum, accruing until such amount and any accrued interest thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty). For example, if the Buyer purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 of Debenture or Warrant principal and/or interest, the Company shall be required to pay the Buyer $1,000, plus interest. The Buyer shall provide the Company written notice indicating the amounts payable to the Buyer in respect of the Buy-In.

G.

The Securities shall be delivered by the Company to the Buyer pursuant to Section I.B. hereof on a “delivery-against-payment basis” at the Closing.

VI.

CLOSING DATE

The Closing shall occur by the delivery to the Buyer of the certificate evidencing the Debenture and all other Agreements and to the Company the Purchase Price.

VII.

CONDITIONS TO THE COMPANY’S OBLIGATIONS

Buyer understands that the Company’s obligation to sell the Debenture on the Closing Date to Buyer pursuant to this Agreement is conditioned upon:

A.

Delivery by Buyer of the Initial Purchase Price;

B.

The accuracy on the Closing Date of the representations and warranties of Buyer contained in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by Buyer in all material respects on or before the Closing Date of all covenants and agreements of Buyer required to be performed by it pursuant to this Agreement on or before the Closing Date; and

C.

There shall not be in effect any Law or order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement.

VIII.

CONDITIONS TO BUYER’S OBLIGATIONS

The Company understands that Buyer’s obligation to purchase the Securities on the Closing Date pursuant to this Agreement is conditioned upon:

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A.

Delivery by the Company of the Debenture, the Conversion Warrant and the other Agreements (I/N/O Buyer or I/N/O Buyer’s nominee);

B.

The accuracy on the Closing Date of the representations and warranties of the Company contained in this Agreement as if made on the Closing Date (except for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date) and the performance by the Company in all respects on or before the Closing Date of all covenants and agreements of the Company required to be performed by it pursuant to this Agreement on or before the Closing Date, all of which shall be confined to Buyer by delivery of the certificate of the chief executive officer of the Company to that effect;

C.

There not having occurred (i) any general suspension of trading in, or limitation on prices listed for, the Common Stock on the OTCBB/Pink Sheet, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States or any of its territories, protectorates or possessions or (iv) in the case of the foregoing existing at the date of this Agreement, a material acceleration or worsening thereof,

D.

There not having occurred any event or development, and there being in existence no condition, having or which reasonably and foreseeably could have a Material Adverse Effect;

E.

The Company shall have delivered to Buyer reimbursement of Buyer’s reasonable out-of-pocket costs and expenses incurred in connection with the transactions contemplated by this Agreement

F.

There shall not be in effect any Law, order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement;

G.

The Company shall have obtained all consents, approvals or waivers from governmental authorities and third persons necessary for the execution, delivery and performance of the Documents and the transactions contemplated thereby, all without material cost to the Company;.

H.

Buyer shall have received such additional documents, certificates, payment, assignments, transfers and other delivers as it or its legal counsel may reasonably request and as are customary to effect a closing of the matters herein contemplated.

I.

Delivery by the Company of an enforceability opinion from its outside counsel in form and substance satisfactory to Buyer.

J.

Reimbursement of Buyer’s legal fees in the amount of $5,000.

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IX.

SURVIVAL; INDEMNIFICATION

A.

The representations, warranties and covenants made by each of the Company and Buyer in this Agreement, the annexes, schedules and exhibits hereto and in each instrument, agreement and certificate entered into and delivered by them pursuant to this Agreement shall survive the Closing and the consummation of the transactions contemplated hereby.  In the event of a breach or violation of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Agreement or otherwise, whether at law or in equity, irrespective of any investigation made by or on behalf of such party on or prior to the Closing Date.

B.

The Company hereby agrees to indemnify and hold harmless Buyer, its affiliates and their respective officers, directors, partners and members (collectively, the “Buyer Indemnitees”) from and against any and all losses, claims, damages, judgments, penalties, liabilities and deficiencies (collectively, “Losses”) and agrees to reimburse Buyer Indemnitees for all out-of-pocket expenses (including the fees and expenses of legal counsel), in each case promptly as incurred by Buyer Indemnitees and to the extent arising out of or in connection with:

1.

any misrepresentation, omission of fact or breach of any of the Company’s representations or warranties contained in this Agreement or the other Documents, or the annexes, schedules or exhibits hereto or thereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement or the other Documents;

2.

any failure by the Company to perform any of its covenants, agreements, undertakings or obligations set forth in this Agreement or the other Documents or any instrument, certificate or agreement entered into or delivered by the Company pursuant to this Agreement or the other Documents;

3.

the purchase of the Debenture, the conversion of the Debenture, the payment of interest on the Debenture, the issuance of the Warrant Shares, the consummation of the transactions contemplated by this Agreement and the other Documents, the use of any of the proceeds of the Purchase Price by the Company, the purchase or ownership of any or all of the Securities, the performance by the parties hereto of their respective obligations hereunder and under the Documents or any claim, litigation, investigation, proceedings or governmental action relating to any of the foregoing, whether or not Buyer is a party thereto; or

4.

resales of the Common Stock by Buyer in the manner and as contemplated by this Agreement and the Registration Rights Agreement.

C.

Buyer hereby agrees to indemnify and hold harmless the Company, its Affiliates and their respective officers, directors, partners and members (collectively, the “Company Indemnitees”) from and against any and all Losses, and agrees to reimburse the Company Indemnitees for all out-of-pocket expenses (including the fees and expenses of legal counsel), in each case promptly as incurred by the Company Indemnitees and to the extent arising out of or in connection with:

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1.

any misrepresentation, omission of fact or breach of any of Buyer’s representations or warranties contained in this Agreement or the other Documents, or the annexes, schedules or exhibits hereto or thereto or any instrument, agreement or certificate entered into or delivered by Buyer pursuant to this Agreement or the other Documents; or

2.

any failure by Buyer to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement or the other Documents or any instrument, certificate or agreement entered into or delivered by Buyer pursuant to this Agreement or the other Documents.

D.

Promptly after receipt by either party hereto seeking indemnification pursuant to this Article  (an “Indemnified Party”) of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a “Claim”), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Article  is being sought (the “Indemnifying Party”) of the commencement thereof, but the omission so to notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights or defenses by reason of such failure.  In connection with any Claim as to which both the Indemnifying Party a nd the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof.  Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defens es available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim.  If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party.  Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel).  The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or c onsent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment.

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E.

In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party.  If the Indemnified Party disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or by binding arbitration conducted in accordance with the procedures and rules of the American Arbitration Association.  Judgment upon any award rendered by any arbitrators may be entered in any court having competent jurisdiction thereof.

X.

GOVERNING LAW

This Agreement shall be governed by and interpreted in accordance with the laws of the State of California, without regard to the conflicts of law principles of such state.

XI.

SUBMISSION TO JURISDICTION

Each of the parties hereto consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the City of San Diego or the state courts of the State of California sitting in the City of San Diego in connection with any dispute arising under this Agreement and the other Documents.  Each party hereto hereby irrevocably and unconditionally waives, to the fullest extent it may effectively do so, any defense of an inconvenient forum or improper venue to the maintenance of such action or proceeding in any such court and any night of jurisdiction on account of its place of residence or domicile.  Each party hereto irrevocably and unconditionally consents to the service of any and all process in any such action or proceeding in such courts by the mailing of copies of such process by registered or certified mail (return receipt requested), postage prepai d, at its address specified in Article XVII.  Each party hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

XII.

WAIVER OF JURY TRIAL

TO THE FULLEST EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND OTHER DOCUMENTS.  EACH PARTY HERETO (i) CERTIFIES THAT NEITHER OF THEIR RESPECTIVE REPRESENTATIVES, AGENTS OR ATTORNEYS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (ii) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS HEREIN.

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XIII.

COUNTERPARTS; EXECUTION

This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but both of which counterparts shall together constitute one and the same instrument.  A facsimile transmission of this signed Agreement shall be legal and binding on both parties hereto.

XIV.

HEADINGS

The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.

XV.

SEVERABILITY

In the event any one or more of the provisions contained in this Agreement or in the other Documents should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not in any way be affected or impaired thereby.  The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

XVI.

ENTIRE AGREEMENT; REMEDIES, AMENDMENTS AND WAIVERS

This Agreement and the Documents constitute the entire agreement between the parties hereto pertaining to the subject matter hereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of such parties.  No supplement, modification or waiver of this Agreement shall be binding unless executed in writing by both parties.  No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

XVII.

NOTICES

Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally, or sent by telecopier machine or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally, or by telecopier machine or overnight courier service as follows:

A.

if to the Company, to:

Diatect International Corporation

875 S. Industrial Parkway

Heber, Utah 84032

Telephone:

435-654-4370

Facsimile:

435-657-9794

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B.

if to Buyer, to:

La Jolla Cove Investors, Inc.

7817 Herschel Avenue, Suite 200

La Jolla, California 92037

Telephone:

858-551-8789

Facsimile:

858-551-0987

The Company or Buyer may change the foregoing address by notice given pursuant to this Article XVII.

XVIII.

CONFIDENTIALITY

Each of the Company and Buyer agrees to keep confidential and not to disclose to or use for the benefit of any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval of the other party; provide, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law (including, without limitation, pursuant to Item 601(b)(10) of Regulation S-K under the Securities Act and the Exchange Act).

XIX.

ASSIGNMENT

This Agreement shall not be assignable by either of the parties hereto prior to the Closing without the prior written consent of the other party, and any attempted assignment contrary to the provisions hereby shall be null and void; provide, however, that Buyer may assign its rights and obligations hereunder, in whole or in part, to any affiliate of Buyer.

IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to be executed and delivered on the date first above written.

Diatect International Corporation

La Jolla Cove Investors, Inc.

By: _______________________

By:_______________________

Title:______________________

Title:______________________

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SCHEDULE 111.L.

REGISTRATION RIGHTS

Name

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EX-2

EXHIBIT 4.2

REGISTRATION RIGHTS AGREEMENT

Registration Rights Agreement dated as of December 27, 2002 (this “Agreement”) by and between Diatect International Corporation, a California corporation, with principal executive offices located at 875 S. Industrial Parkway, Heber, Utah 84032 (the “Company”), and La Jolla Cove Investors, Inc. (the “Initial Investor”).

WHEREAS, upon the terms and subject to the conditions of the Securities Purchase Agreement dated as of December 27, 2002, by and between the Initial Investor and the Company (the “Securities Purchase Agreement”), the Company has agreed to issue and sell to the Initial Investor an 8 % Convertible Debenture (the “Debenture”) of the Company in the aggregate principal amount of $150,000 which, upon the terms of and subject to the conditions contained therein, is convertible into shares of the Company’s Common Stock (the “Common Stock”) ; and

WHEREAS, to induce the Initial Investor to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide with respect to the Common Stock issued upon conversion of the Debenture and the Warrant Shares certain registration rights under the Securities Act;

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows:

1.

Definitions

(A)

As used in this Agreement, the following terms shall have the meanings:

(1)

“Affiliate” of any specified Person means any other Person who directly, or indirectly through one or more intermediaries, is in control of, is controlled by, or is under common control with, such specified Person.  For purposes of this definition, control of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person whether by contract, securities, ownership or otherwise; and the terms “controlling” and “controlled” have the respective meanings correlative to the foregoing.

(2)

“Closing Date” means December 27, 2002.

(3)

“Commission” means the Securities and Exchange Commission.

(4)

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute.

(5)

“Investor” means each of the Initial Investor and any transferee or assignee of Registrable Securities which agrees to become bound by all of the terms and provisions of this Agreement in accordance with Section 8 hereof.

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(6)

“Person” means any individual, partnership, corporation, limited liability company, joint stock company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof.

(7)

“Prospectus” means the prospectus (including, without limitation, any preliminary prospectus and any final prospectus filed pursuant to Rule 424(b) under the Securities Act, including any prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance on Rule 430A under the Securities Act) included in the Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement and by all other amendments and supplements to such prospectus, including all material incorporated by reference in such prospectus and all documents filed after the date of such prospectus by the Company under the Exchange Act and incorporated by reference therein.

(8)

“Public Offering” means an offer registered with the Commission and the appropriate state securities commissions by the Company of its Common Stock and made pursuant to the Securities Act.

(9)

“Registrable Securities” means the Common Stock issued or issuable (i) upon conversion or redemption of the Debenture, (ii) exercise of the Conversion Warrants (iii) pursuant to the terms and provisions of the Debenture or the Securities Purchase Agreement, (iv) in connection with any distribution, recapitalization, stock-split, stock adjustment or reorganization of the Company; provided, however, a share of Common Stock shall cease to be a Registrable Security for purposes of this Agreement when it no longer is a Restricted Security.

(10)

“Registration Statement” means a registration statement of the Company filed on an appropriate form under the Securities Act providing for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Registrable Securities pursuant to Rule 415 under the Securities Act, including the Prospectus contained therein and forming a part thereof, any amendments to such registration statement and supplements to such Prospectus, and all exhibits to and other material incorporated by reference in such registration statement and Prospectus.

(11)

“Restricted Security” means any share of Common Stock issued upon conversion or redemption of the Debenture except any such share that (i) has been registered pursuant to an effective registration statement under the Securities Act and sold in a manner contemplated by the prospectus included in such registration statement, (ii) has been transferred in compliance with the resale provisions of Rule 144 under the Securities Act (or any successor provision thereto) or is transferable pursuant to paragraph (k) of Rule 144 under the Securities Act (or any successor provision thereto) or (iii) otherwise has been transferred and a new share of Common Stock not subject to transfer restrictions under the Securities Act has been delivered by or on behalf of the Company.

(12)

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute.

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(B)

All capitalized terms used and not defined herein have the respective meaning assigned to them in the Securities Purchase Agreement or the Debenture.

2.

Registration

(A)

Filing and Effectiveness of Registration Statement.  The Company shall prepare and file with the Commission as soon as practicable a Registration Statement relating to the offer and sale of the Registrable Securities and shall use its best efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable but in no event later than ninety (90) days after the Closing Date.  The Company shall promptly (and, in any event, no more than 24 hours after it receives comments from the Commission), notify the Buyer when and if it receives any comments from the Commission on the Registration Statement and promptly forward a copy of such comments, if they are in writing, to the Buyer.  At such time after the filing of the Registration Statement pursuant to this Section 2(A) as the Commiss ion indicates, either orally or in writing, that it has no further comments with respect to such Registration Statement or that it is willing to entertain appropriate requests for acceleration of effectiveness of such Registration Statement, the Company shall promptly, and in no event later than two (2) business days after receipt of such indication from the Commission, request that the effectiveness of such Registration Statement be accelerated within forty-eight (48) hours of the Commission’s receipt of such request.  The Company shall notify the Initial Investor by written notice that such Registration Statement has been declared effective by the Commission within 24 hours of such declaration by the Commission.

(B)

Eligibility for Use of Form S-3 or an SB-2.  The Company agrees that at such time as it meets all the requirements for the use of Securities Act Registration Statement on Form S-3 or SB-2 and it shall file all reports and information required to be filed by it with the Commission in a timely manner and take all such other action so as to maintain such eligibility for the use of such form.

(C)

Additional Registration Statement.  In the event the Current Market Price declines to a price per share the result of which is that the Company cannot satisfy its conversion obligations to Initial Investor hereunder, the Company shall, to the extent required by the Securities Act (because the additional shares were not covered by the Registration Statement filed pursuant to Section 2(a)), as reasonably determined by the Initial Investor, file an additional Registration Statement with the Commission for such additional number of Registrable Securities as would be issuable upon conversion of the Debenture (the “Additional Registrable Securities”) in addition to those previously registered.  The Company shall, to the extent required by the Securities Act, as reasonably determined by the Initial Investor, prepare and file with the Commiss ion not later than the 30th day thereafter, a Registration Statement relating to the offer and sale of such Additional Registrable Securities and shall use its best efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable but not later than 90 days thereafter.  The Company shall not include any other securities in the Registration Statement relating to the offer and sale of such Additional Registrable Securities.

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(D)

(i)

If the Company proposes to register any of its warrants, Common Stock or any other shares of common stock of the Company under the Securities Act (other than a registration (A) on Form S-8 or S-4 or any successor or similar forms, (B) relating to Common Stock or any other shares of common stock of the Company issuable upon exercise of employee share options or in connection with any employee benefit or similar plan of the Company or (C) in connection with a direct or indirect acquisition by the Company of another Person or any transaction with respect to which Rule 145 (or any successor provision) under the Securities Act applies), whether or not for sale for its own account, it will each such time, give prompt written notice at least 20 days prior to the anticipated filing date of the registration statement relating to such registration to each Investo r, which notice shall set forth such Investor’s rights under this Section 2(D) and shall offer such Investor the opportunity to include in such registration statement such number of Registrable Securities as such Investor may request.  Upon the written request of any Investor made within 10 days after the receipt of notice from the Company (which request shall specify the number of Registrable Securities intended to be disposed of by such Investor), the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities that the Company has been so requested to register by each Investor, to the extent requisite to permit the disposition of the Registrable Securities so to be registered; provided, however, that (A) if such registration involves a Public Offering, each Investor must sell its Registrable Securities to any underwriters selected by the Company with the consent of such Investor on the same terms and conditions as app ly to the Company and (B) if, at any time after giving written notice of its intention to register any Registrable Securities pursuant to this Section 2 and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such Registrable Securities, the Company shall give written notice to each Investor and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration.  The Company’s obligations under this Section 2(D) shall terminate on the date that the registration statement to be filed in accordance with Section 2(A) is declared effective by the Commission.

(ii)

If a registration pursuant to this Section 2(D) involves a Public Offering and the managing underwriter thereof advises the Company that, in its view, the number of shares of Common Stock that the Company and the Investors intend to include in such registration exceeds the largest number of shares of Common Stock that can be sold without having an adverse effect on such Public Offering (the “Maximum Offering Size”), the Company will include in such registration only such number of shares of Common Stock as does not exceed the Maximum Offering Size, and the number of shares in the Maximum Offering Size shall be allocated among the Company, the Investors and any other sellers of Common Stock in such Public Offering (“Third-Party Sellers”), first, pro rata among the Investors until all the shares of Common Stock originally propose d to be offered for sale by the Investors have been allocated, and second, pro rata among the Company and any Third-Party Sellers, in each case on the basis of the relative number of shares of Common Stock originally proposed to be offered for sale under such registration by each of the Investors, the Company and the Third-Party Sellers, as the case may be.  If as a result of the proration provisions of this Section 2(D)(ii), any Investor is not entitled to include all such Registrable Securities in such registration, such Investor may elect to withdraw its request to include any Registrable Securities in such registration.  With respect to registrations pursuant to this Section 2(D), the number of securities required to satisfy any underwriters’ over-allotment option shall be allocated among the Company, the Investors and any Third Party Seller pro rata on the basis of the relative number of securities offered for sale under such registration by each of the Investors, the Company and a ny such Third Party Sellers before the exercise of such over-allotment option.

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3.

Obligations of the Company

In connection with the registration of the Registrable Securities, the Company shall:

(A)

Promptly (i) prepare and file with the Commission such amendments (including post-effective amendments) to the Registration Statement and supplements to the Prospectus as may be necessary to keep the Registration Statement continuously effective and in compliance with the provisions of the Securities Act applicable thereto so as to permit the Prospectus forming part thereof to be current and useable by Investors for resales of the Registrable Securities for a period of five (5) years from the date on which the Registration Statement is first declared effective by the Commission (the “Effective Time”) or such shorter period that will terminate when all the Registrable Securities covered by the Registration Statement have been sold pursuant thereto in accordance with the plan of distribution provided in the Prospectus, transferred pursuant to Rule 144 under the Securities Act or otherwise transferred in a manner that results in the delivery of new securities not subject to transfer restrictions under the Securities Act (the “Registration Period”) and (ii) take all lawful action such that each of (A) the Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading and (B) the Prospectus forming part of the Registration Statement, and any amendment or supplement thereto, does not at any time during the Registration Period include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;

(B)

During the Registration Period, comply with the provisions of the Securities Act with respect to the Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Investors as set forth in the Prospectus forming part of the Registration Statement;

(C)

(i) Prior to the filing with the Commission of any Registration Statement (including any amendments thereto) and the distribution or delivery of any Prospectus (including any supplements thereto), provide (A) draft copies thereof to the Investors and reflect in such documents all such comments as the Investors (and their counsel) reasonably may propose and (B) to the Investors a copy of the accountant’s consent letter to be included in the filing and (ii) furnish to each Investor whose Registrable Securities are included in the Registration Statement and its legal counsel identified to the Company, (A) promptly after the same is prepared and publicly distributed, filed with the Commission, or received by the Company, one copy of the Registration Statement, each Prospectus, and each amendment or supplement thereto and (B) such number of copies of the Prospectus and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor;

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(D)

(i) Register or qualify the Registrable Securities covered by the Registration Statement under such securities or “blue sky” laws of such jurisdictions as the Investors who hold a majority-in-interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in such jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times during the Registration Period, (iii) take all such other lawful actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period and (iv) take all such other lawful actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (A) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(D), (B) subject itself to general taxation in any such jurisdiction or (C) file a general consent to service of process in any such jurisdiction;

(E)

As promptly as practicable after becoming aware of such event, notify each Investor of the occurrence of any event, as a result of which the Prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare an amendment to the Registration Statement and supplement to the Prospectus to correct such untrue statement or omission, and deliver a number of copies of such supplement and amendment to each Investor as such Investor may reasonably request;

(F)

As promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the Commission of any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time and take all lawful action to effect the withdrawal, recession or removal of such stop order or other suspension;

(G)

Cause all the Registrable Securities covered by the Registration Statement to be listed on the principal national securities exchange, and included in an inter-dealer quotation system of a registered national securities association, on or in which securities of the same class or series issued by the Company are then listed or included;

(H)

Maintain a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement;

(I)

Cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the registration statement and enable such certificates for the Registrable Securities to be in such denominations or amounts, as the case may be, as the Investors reasonably may request and registered in such names as the Investor may request; and, within three (3) business days after a registration statement which includes Registrable Securities is declared effective by the Commission, deliver and cause legal counsel selected by the Company to deliver to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such registration statement) an appropriate instruction and, to the extent necessary, an opinion of such counsel;

(J)

Take all such other lawful actions reasonably necessary to expedite and facilitate the disposition by the Investors of their Registrable Securities in accordance with the intended methods therefor provided in the Prospectus which are customary under the circumstances;

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(K)

Make generally available to its security holders as soon as practicable, but in any event not later than three (3) months after (i) the effective date (as defined in Rule 158(c) under the Securities Act) of the Registration Statement and (ii) the effective date of each post-effective amendment to the Registration Statement, as the case may be, an earnings statement of the Company and its subsidiaries complying with Section 11 (a) of the Securities Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158);

(L)

In the event of an underwritten offering, promptly include or incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the managers reasonably agree should be included therein and to which the Company does not reasonably object and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after it is notified of the matters to be included or incorporated in such Prospectus supplement or post-effective amendment;

(M)

(i) Make reasonably available for inspection by Investors, any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by such Investors or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and (ii) cause the Company’s officers, directors and employees to supply all information reasonably requested by such Investors or any such underwriter, attorney, accountant or agent in connection with the Registration Statement, in each case, as is customary for similar due diligence examinations; provided, however, that all records, information and documents that are designated in writing by the Company, in good faith, as confidential, proprietary or containing any material non public information shall be kept confidential by such Investors and any such underwriter, attorney, accountant or agent (pursuant to an appropriate confidentiality agreement in the case of any such holder or agent), unless such disclosure is made pursuant to judicial process in a court proceeding (after first giving the Company an opportunity promptly to seek a protective order or otherwise limit the scope of the information sought to be disclosed) or is required by law, or such records, information or documents become available to the public generally or through a third party not in violation of an accompanying obligation of confidentiality; and provided, further, that, if the foregoing inspection and information gathering would otherwise disrupt the Company’s conduct of its business, such inspection and information gathering shall, to the maximum extent possible, be coordinated on behalf of the Investors and the other parties entitled thereto by one firm of counsel designed by and on beh alf of the majority in interest of Investors and other parties;

(N)

In connection with any underwritten offering, make such representations and warranties to the Investors participating in such underwritten offering and to the managers, in form, substance and scope as are customarily made by the Company to underwriters in secondary underwritten offerings;

(O)

In connection with any underwritten offering, obtain opinions of counsel to the Company (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managers) addressed to the underwriters, covering such matters as are customarily covered in opinions requested in secondary underwritten offerings (it being agreed that the matters to be covered by such opinions shall include, without limitation, as of the date of the opinion and as of the Effective Time of the Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from the Registration Statement and the Prospectus, including any documents incorporated by reference therein, of an untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, subject to customary limitations);

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(P)

In connection with any underwritten offering, obtain “cold comfort” letters and updates thereof from the independent public accountants of the Company (and, if necessary, from the independent public accountants of any subsidiary of the Company or of any business acquired by the Company, in each case for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each underwriter participating in such underwritten offering (if such underwriter has provided such letter, representations or documentation, if any, required for such cold comfort letter to be so addressed), in customary form and covering matters of the type customarily covered in “cold comfort” letters in connection with secondary underwritten offerings;

(Q)

In connection with any underwritten offering, deliver such documents and certificates as may be reasonably required by the managers, if any, and

(R)

In the event that any broker-dealer registered under the Exchange Act shall be an “Affiliate” (as defined in Rule 2729(b)(1) of the rules and regulations of the National Association of Securities Dealers, Inc. (the “NASD Rules”) (or any successor provision thereto)) of the Company or has a “conflict of interest” (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor provision thereto)) and such broker-dealer shall underwrite, participate as a member of an underwriting syndicate or selling group or assist in the distribution of any Registrable Securities covered by the Registration Statement, whether as a holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company shall assist such broker-dealer in complying with the requirements of the NASD Rules, including, without limitation, by (A) engaging a “qualified independent underwriter” (as defined in Rule 2720(b)(15) of the NASD Rules (or any successor provision thereto)) to participate in the preparation of the Registration Statement relating to such Registrable Securities, to exercise usual standards of due diligence in respect thereof and to recommend the public offering price of such Registrable Securities, (B) indemnifying such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 6 hereof and (C) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the NASD Rules.

4.

Obligations of the Investors

In connection with the registration of the Registrable Securities, the Investors shall have the following obligations:

(A)

It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request;

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(B)

Each Investor by its acceptance of the Registrable Securities agrees to cooperate with the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of its election to exclude all of its Registrable Securities from the Registration Statement; and

(C)

Each Investor agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in Section 3(E) or 3(F), it shall immediately discontinue its disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor’s receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(E) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor’s possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice.

5.

Expenses of Registration

All expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Section 3, but including, without limitation, all registration, listing, and qualifications fees, printing and engraving fees, accounting fees, and the fees and disbursements of counsel for the Company, and the reasonable fees of one firm of counsel to the holders of a majority in interest of the Registrable Securities shall be borne by the Company.

6.

Indemnification and Contribution

(A)

Indemnification by the Company.  The Company shall indemnify and hold harmless each Investor and each underwriter, if any, which facilitates the disposition of Registrable Securities, and each of their respective officers and directors and each person who controls such Investor or underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being sometimes hereinafter referred to as an “Indemnified Person”) from and against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement of a material fact contained in any Registration Statement or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, or arise out of or are based upon an untrue statement of a material fact contained in any Prospectus or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company hereby agrees to reimburse such Indemnified Person for all reasonable legal and other expenses incurred by them in connection with investigating or defending any such action or claim as and when such expenses are incurred; provided, however, that the Company shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission from, such R egistration Statement or Prospectus in reliance upon and in conformity with written information furnished to the Company by such Indemnified Person expressly for use therein or (ii) in the case of the occurrence of an event of the type specified in Section 3(E), the use by the Indemnified Person of an outdated or defective Prospectus after the Company has provided to such Indemnified Person an updated Prospectus correcting the untrue statement or alleged untrue statement or omission or alleged omission giving rise to such loss, claim, damage or liability.

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(B)

Notice of Claims, etc.  Promptly after receipt by a party seeking indemnification pursuant to this Section 6 (an “Indemnified Party”) of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a “Claim”), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section 6 is being sought (the “Indemnifying Party”) of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure.  In connection with any Claim as to which both the Ind emnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof.  Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, costs and expenses, (y) the Indemnified Party and the Indemnifying Party shall reasonably have concluded that representation of the Indemnified Party by the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses avail able to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim.  If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party.  Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of counsel for the Indemnified Party (together with appropriate local counsel).  The Indemnified Party shall not, without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnifying Party from all liabilities with respect to such Claim or judgment.

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(C)

Contribution.  If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Person under subsection (A)  above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations.  The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such Indemnifying Party or by such Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.  The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(D) were determined by pro rata allocation (even if the Investors or any underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(D).  The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably i ncurred by such Indemnified Party in connection with investigating or defending any such action or claim.  No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.  The obligations of the Investors and any underwriters in this Section 6(D) to contribute shall be several in proportion to the percentage of Registrable Securities registered or underwritten, as the case may be, by them and not joint.

(D)

Notwithstanding any other provision of this Section 6, in no event shall any (i) Investor be required to undertake liability to any person under this Section 6 for any amounts in excess of the dollar amount of the proceeds to be received by such Investor from the sale of such Investor’s Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) pursuant to any Registration Statement under which such Registrable Securities are to be registered under the Securities Act and (ii) underwriter be required to undertake liability to any Person hereunder for any amounts in excess of the aggregate discount, commission or other compensation payable to such underwriter with respect to the Registrable Securities underwritten by it and distributed pursuant to the Registration Statement.

(E)

The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have to any Indemnified Person and the obligations of any Indemnified Person under this Section 6 shall be in addition to any liability which such Indemnified Person may otherwise have to the Company.  The remedies provided in this Section 6 are not exclusive and shall not limit any rights or remedies which may otherwise be available to an indemnified party at law or in equity.

7.

Rule 144

With a view to making available to the Investors the benefits of Rule 144 under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit the Investors to sell securities of the Company to the public without registration (“Rule 144”), the Company agrees to use its best efforts to:

(1)

comply with the provisions of paragraph (c) (1) of Rule 144 and

(2)

file with the Commission in a timely manner all reports and other documents required to be filed by the Company pursuant to Section 13 or 15(d) under the Exchange Act; and, if at any time it is not required to file such reports but in the past had been required to or did file such reports, it will, upon the request of any Investor, make available other information as required by, and so long as necessary to permit sales of, its Registrable Securities pursuant to Rule 144.

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8.

Assignment

The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors to any permitted transferee of all or any portion of such Registrable Securities (or all or any portion of the Debenture or Warrant of the Company which is convertible into such securities) only if (a) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment, the securities so transferred or assi gned to the transferee or assignee constitute Restricted Securities and (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein.

9.

Amendment and Waiver

Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a majority-in-interest of the Registrable Securities.  Any amendment or waiver effected in accordance with this Section 9 shall be binding upon each Investor and the Company.

10.

Changes in Common Stock

If, and as often as, there are any changes in the Common Stock by way of stock split, stock dividend, reverse split, combination or reclassification, or through merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof, as may be required, so that the rights and privileges granted hereby shall continue with respect to the Common Stock as so changed.

11.

Miscellaneous

(A)

A person or entity shall be deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities.  If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities.

(B)

If, after the date hereof and prior to the Commission declaring the Registration Statement to be filed pursuant to Section 2(a) effective under the Securities Act, the Company grants to any Person any registration rights with respect to any Company securities which are more favorable to such other Person than those provided in this Agreement, then the Company forthwith shall grant (by means of an amendment to this Agreement or otherwise) identical registration rights to all Investors hereunder.

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(C)

Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally, or sent by telecopier machine or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally, or by telecopier machine or overnight courier service as follows:

(1)

if to the Company, to:

Diatect International Corporation

875 S. Industrial Parkway

Heber, Utah 84032

Telephone:

435-654-4370

Facsimile:

435-657-9794

 (2)

if to the Buyer, to:

La Jolla Cove Investors, Inc.

7817 Herschel Avenue, Suite 200

La Jolla, California 92037

Telephone:

858-551-8789

Facsimile:

858-551-0987

 (3)

if to any other Investor, at such address as such Investor shall have provided in writing to the Company.

The Company, the Initial Investor or any Investor may change the foregoing address by notice given pursuant to this Section 11(C).

(D)

Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

(E)

This Agreement shall be governed by and interpreted in accordance with the laws of the State of California.  Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of San Diego or the state courts of the State of California sitting in the City of San Diego in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions.

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(F)

Should any party hereto employ an attorney for the purpose of enforcing or construing this Agreement, or any judgment based on this Agreement, in any legal proceeding whatsoever, including insolvency, bankruptcy, arbitration, declaratory relief or other litigation, the prevailing party shall be entitled to receive from the other party or parties thereto reimbursement for all reasonable attorneys' fees and all reasonable costs, including but not limited to service of process, filing fees, court and court reporter costs, investigative costs, expert witness fees, and the cost of any bonds, whether taxable or not, and that such reimbursement shall be included in any judgment or final order issued in that proceeding.  The "prevailing party" means the party determined by the court to most nearly prevail and not necessarily the one in whose favor a judgment is rendered.

(G)

The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law.  If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction.  It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be here after declared invalid, illegal, void or unenforceable.

(H)

The Company shall not enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof.  The Company is not currently a party to any agreement granting any registration rights with respect to any of its securities to any person which conflicts with the Company’s obligations hereunder or gives any other party the right to include any securities in any Registration Statement filed pursuant hereto, except for such rights and conflicts as have been irrevocably waived.  Without limiting the generality of the foregoing, without the written consent of the holders of a majority in interest of the Registrable Securities, the Company shall not grant to any person the right to request it to register any of its securities under the Securities Act unless the rights so granted are subject in all respect to the prior rights of the holders of Registrable Securities set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement.  The restrictions on the Company’s rights to grant registration rights under this paragraph shall terminate on the date the Registration Statement to be filed pursuant to Section 2(A) is declared effective by the Commission.

(I)

This Agreement, the Securities Purchase Agreement, the Debenture and the Conversion Warrants Agreement, of even date herewith among the Company and the Initial Investor constitute the entire agreement among the parties hereto with respect to the subject matter hereof.  There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein.  These Agreements supersede all prior agreements and undertakings among the parties hereto with respect to the subject matter hereof.

(J)

Subject to the requirements of Section 8 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto.

(K)

All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require.

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(L)

The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof.

(M)

The Company acknowledges that any failure by the Company to perform its obligations under Section 3, or any delay in such performance, could result in direct damages to the Investors and the Company agrees that, in addition to any other liability the Company may have by reason of any such failure or delay, the Company shall be liable for all direct damages caused by such failure or delay.

(N)

This Agreement may be executed in counterparts, each of which shall be deemed an original but both of which shall constitute one and the same agreement.  A facsimile transmission of this signed Agreement shall be legal and binding on the parties hereto.

IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to be executed and delivered on the date first above written.

Diatect International Corporation

By:  __________________________

Name:

Title:

La Jolla Cove Investors, Inc.

By:  ___________________________

Name:

Title:

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EX-3

EXHIBIT 4.3

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE, AND IS BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS.  THIS SECURITY MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS.

8 % CONVERTIBLE DEBENTURE

Company: Diatect International Corporation

Company Address: 875 S. Industrial Parkway, Heber City, Utah 84032

Maturity Date: December 27, 2004

Principal Amount: $150,000

Diatect International Corporation, a California corporation, and any successor or resulting corporation by way of merger, consolidation, sale or exchange of all or substantially all of the assets or otherwise  (the “Company”), for value received, hereby promises to pay to the Holder (as such term is hereinafter defined), or such other Person (as such term is hereinafter defined) upon order of the Holder, on December 27, 2004 (the “Maturity Date”), the principal sum of one-hundred fifty thousand dollars ($150,000), as such sum may be adjusted pursuant to Article 3, and to pay interest thereon from the date hereof, monthly in arrears, on the 15^th day of each month (each an “Interest Payment Due Date” and collectively, the “Interest Payment Due Dates”), commencing on February 15, 2003, at the rate of eight percent (8%) per annum (the “Debenture Interest Rate”), until the Principal Amount (as such term is hereinafter defined) of this Debenture has been paid in full.  All interest payable on the Principal Amount of this Debenture shall be calculated on the basis of a 360-day year for the actual number of days elapsed.  Payment of interest on this Debenture shall be in cash. This Debenture may not be prepaid without the written consent of the Holder.

ARTICLE 1

DEFINITIONS

SECTION 1.1

Definitions.  The terms defined in this Article whenever used in this Debenture have the following respective meanings:

(i)

“Affiliate” has the meaning ascribed to such term in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.

(ii)

“Bankruptcy Code” means the United States Bankruptcy Code of 1986, as amended (11 U.S.C. §§ 101 et. seq.).

(iii)

“Business Day” means a day other than Saturday, Sunday or any day on which banks located in the State of California are authorized or obligated to close.

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(iv)

“Capital Shares” means the Common Stock and any other shares of any other class or series of capital stock, whether now or hereafter authorized and however designated, which have the right to participate in the distribution of earnings and assets (upon dissolution, liquidation or winding-up) of the Company.

(v)

“Closing Date” means December 27, 2002.

(vi)

“Common Shares” or “Common Stock” means shares of the Company’s Common Stock.

(vii)

“Common Stock Issued at Conversion”, when used with reference to the securities deliverable upon conversion of this Debenture, means all Common Shares now or hereafter Outstanding and securities of any other class or series into which this Debenture hereafter shall have been changed or substituted, whether now or hereafter created and however designated.

(viii)

“Conversion” or “conversion” means the repayment by the Company of the Principal Amount of this Debenture (and, to the extent the Holder elects as permitted by Section 3.1, accrued and unpaid interest thereon) by the delivery of Common Stock on the terms provided in Section 3.2, and “convert,” “converted,” “convertible” and like words shall have a corresponding meaning.

(ix)

“Conversion Date” means any day on which all or any portion of the Principal Amount of this Debenture is converted in accordance with the provisions hereof.

(x)

“Conversion Notice” means a written notice of conversion substantially in the form annexed hereto as Exhibit A.  

(xi)

“Conversion Price” on any date of determination means the applicable price for the conversion of this Debenture into Common Shares on such day as set forth in Section 3.1(a).

(xii)

“Current Market Price” on any date of determination means the closing price of a Common Share on such day as reported on the NASDAQ OTCBB Exchange; provided that, if such security is not listed or admitted to trading on the NASDAQ OTCBB, as reported on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing bid price of such security on the over-the-counter market on the day in question as reported by Bloomberg LP or a similar generally accepted reporting service, as the case may be.

(xiii)

“Deadline” means the date that is the 90th day from the Closing Date.

(xiv)

“Debenture” or “Debentures” means this 8% Convertible Debenture of the Company or such other convertible debenture(s) exchanged therefor as provided in Section 2.1.

(xv)

“Discount Multiplier” has the meaning set forth in Section 3.1(a).

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(xvi)

“Event of Default” has the meaning set forth in Section 6.1.

(xvii)

“Holder” means La Jolla Cove Investors, Inc., any successor thereto, or any Person to whom this Debenture is subsequently transferred in accordance with the provisions hereof.

(xviii)

“Interest Payment Due Date” has the meaning set forth in the opening paragraph of this Debenture.

(xix)

“Market Disruption Event” means any event that results in a material suspension or limitation of trading of the Common Shares.

(xx)

“Market Price” per Common Share means the lowest price of the Common Shares during any Trading Day as reported on the NASDAQ OTCBB; provided that, if such security is not listed or admitted to trading on the NASDAQ OTCBB, as reported on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the lowest price of the Common Shares during any Trading Day on the over-the-counter market as reported by Bloomberg LP or a similar generally accepted reporting service, as the case may be.

(xxi)

“Maximum Rate” has the meaning set forth in Section 6.3.

(xxii)

“Outstanding” when used with reference to Common Shares or Capital Shares (collectively, “Shares”) means, on any date of determination, all issued and outstanding Shares, and includes all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that any such Shares directly or indirectly owned or held by or for the account of the Company or any Subsidiary of the Company shall not be deemed “Outstanding” for purposes hereof.

(xxiii)

“Person” means an individual, a corporation, a partnership, an association, a limited liability company, an unincorporated business organization, a trust or other entity or organization, and any government or political subdivision or any agency or instrumentality thereof.

(xxiv)

“Principal Amount” means, for any date of calculation, the principal sum set forth in the first paragraph of this Debenture (but only such principal amount as to which the Holder has (a) actually advanced pursuant to the Securities Purchase Agreement (b) not theretofore furnished a Conversion Notice in compliance with Section 3.2).

(xxv)

“Registration Rights Agreement” means that certain Registration Rights Agreement of even date herewith by and between the Company and Holder, as the same may be amended from time to time.

(xxvi)

“SEC” means the United States Securities and Exchange Commission.

(xxvii)

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as in effect at the time.

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(xxviii)

“Securities Purchase Agreement” means that certain Securities Purchase Agreement of even date herewith by and among the Company and Holder, as the same may be amended from time to time.

(xxix)

“Subsidiary” means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by the Company.

(xxx)

“Trading Day” means any day on which (i) purchases and sales of securities on the principal national security exchange or quotation system on which the Common Shares are traded are reported thereon, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, as reported by Bloomberg LP or a similar generally accepted reporting service, as the case may be, (ii) at least one bid for the trading of Common Shares is reported and (iii) no Market Disruption Event occurs.

All references to “cash” or “$” herein means currency of the United States of America.

ARTICLE 2

EXCHANGES, TRANSFER AND OPTIONAL REDEMPTION

SECTION 2.1.

Exchange and Registration of Transfer of Debentures.  The Holder may, at its option, surrender this Debenture at the principal executive offices of the Company and receive in exchange therefor a Debenture or Debentures, each in the denomination of $1,000 or an integral multiple of $500 in excess thereof, dated as of the date of this Debenture (which shall accrue interest from the most recent Interest Payment Due Date on which an interest payment was made in full), and payable to such Person or order as may be designated by such Holder.  The aggregate Principal Amount of the Debenture or Debentures exchanged in accordance with this Section 2.1 shall equal the aggregate unpaid Principal Amount of this Debenture as of the date of such surrender; provided, however, that upon any exchange pursuant to this Section 2.1 there shall be filed with the Company the name and address for all purposes hereof of the Holder or Holders of the Debenture or Debentures delivered in such exchange.  This Debenture, when presented for registration of transfer or for exchange or conversion, shall (if so required by the Company) be duly endorsed, or be accompanied by a written instrument of transfer in form reasonably satisfactory to the Company duly executed, by the Holder duly authorized in writing.

SECTION 2.2

Loss, Theft, Destruction of Debenture.  Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Debenture and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Debenture, the Company shall make, issue and deliver, in lieu of such lost, stolen, destroyed or mutilated Debenture, a new Debenture of like tenor and unpaid Principal Amount dated as of the date hereof (which shall accrue interest from the most recent Interest Payment Due Date on which an interest payment was made in full).  This Debenture shall be held and owned upon the express condition that the provisions of this Section 2.2 are exclusive with respect to the replacement of a mutil ated, destroyed, lost or stolen Debenture and shall preclude any and all other rights and remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of negotiable instruments or other securities without the surrender thereof.

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SECTION 2.3

Who Deemed Absolute Owner.  The Company may deem the Person in whose name this Debenture shall be registered upon the registry books of the Company to be, and may treat it as, the absolute owner of this Debenture (whether or not this Debenture shall be overdue) for the purpose of receiving payment of or on account of the Principal Amount of this Debenture, for the conversion of this Debenture and for all other purposes, and the Company shall not be affected by any notice to the contrary.  All such payments and such conversions shall be valid and effectual to satisfy and discharge the liability upon this Debenture to the extent of the sum or sums so paid or the conversion or conversions so made.

SECTION 2.4

Repayment at Maturity.  At the Maturity Date, the Company shall repay the outstanding Principal Amount of this Debenture in whole in cash, together with all accrued and unpaid interest thereon, in cash, to the Maturity Date.  

ARTICLE 3

CONVERSION OF DEBENTURE

SECTION 3.1

Conversion; Conversion Price; Valuation Event.  (a) At the option of the Holder, this Debenture may be converted, either in whole or in part, up to the full Principal Amount hereof (in increments of $1,000 in Principal Amount) into Common Shares (calculated as to each such conversion to the nearest 1/100th of a share), at any time and from time to time on any Business Day, subject to compliance with Section 3.2.  The number of Common Shares into which this Debenture may be converted is equal to (i) the Principal Amount of the Debenture being converted at the Conversion Date (plus, at the option of the Holder, any accrued and unpaid interest on the Debenture being converted through the Conversion Date) divided by (ii) the Conversion Price.  In addition, the Company shall pay to the Holder on the Conversion Date, in cash, any accrued and unpai d interest on the Debenture being converted not included at the option of the Holder in clause (i) of the immediately preceding sentence.  The “Conversion Price” shall be equal to the lesser of (i) $0.25, or (ii) eighty percent (80%) of the average of the three lowest Market Prices during the twenty (20) Trading Days prior to Holder’s election to convert (a “Discount Multiplier”); provided, that in the event the Registration Statement has not been declared effective by the SEC by the Deadline or, if the Registration Statement has theretofore been declared effective but is not thereafter effective, then the applicable Discount Multiplier shall decrease by three percentage points (3%) for each month or partial month occurring after the Deadline that the Registration Statement is not effective.

(b)

Notwithstanding the provisions of Section 3.1(a), in the event the Company’s Registration Statement has not been declared effective by the Deadline, other than as a result of delay by either the SEC or the attorneys filing the Registration Statement on behalf of the Company, or, if the Registration Statement has theretofore been declared effective but is not thereafter effective, the following will also apply in addition to any damages incurred by the Holder as a result thereof:

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(i)

The Holder may demand repayment of one hundred and fifty percent (150%) of the Principal Amount of the Debenture, together with all accrued and unpaid interest thereon, in cash, at any time prior to the Company’s Registration Statement being declared effective by the SEC or during the period that the Company’s Registration Statement is not effective, such repayment to be made within three (3) business days of such demand.  In the event that the Debenture is so accelerated, in addition to the repayment of one hundred and fifty percent (150%) of the Principal Amount together with accrued interest as aforesaid, the Company shall immediately issue and pay, as the case may be, to the Holder 25,000 Shares of Common Stock and $5,000 for each thirty (30) day period, or portion thereof, during which the Principal Amount, including interest thereon, remains unpai d, with the monthly payment amount to increase to $10,000 for each thirty (30) day period, or portion thereof, after the first ninety (90) day period;

(ii)

If the Holder does not elect to accelerate the Debenture, the Company shall immediately issue or pay, as the case may be, to Holder 25,000 Shares of Common Stock and $5,000 for each thirty (30) day period, or portion thereof, that the Registration Statement is not effective, with the monthly payment amount to increase to $10,000 for each thirty (30) day period, or portion thereof, after the first ninety (90) day period.

SECTION 3.2

Exercise of Conversion Privilege.  (a) Conversion of this Debenture may be exercised on any Business Day by the Holder by telecopying an executed and completed Conversion Notice to the Company.  Each date on which a Conversion Notice is telecopied to the Company in accordance with the provisions of this Section 3.2 shall constitute a Conversion Date.  The Company shall convert this Debenture and issue the Common Stock Issued at Conversion in the manner provided below in this Section 3.2, and all voting and other rights associated with the beneficial ownership of the Common Stock Issued at Conversion shall vest with the Holder, effective as of the Conversion Date at the time specified in the Conversion Notice.  The Conversion Notice also shall state the name or names (with addresses) of the persons who are to become the holders of the Common Stock Issued at Conversion in connection with such conversion.  The Holder shall deliver this Debenture by express courier within thirty (30) days following the date on which the telecopied Conversion Notice has been transmitted to the Company.  Upon surrender for conversion, this Debenture shall be accompanied by a proper assignment hereof to the Company or be endorsed in blank.  As promptly as practicable after the receipt of the Conversion Notice as aforesaid, but in any event not more than three (3) Business Days after the Company’s receipt of such Conversion Notice, the Company shall (i) issue the Common Stock Issued at Conversion in accordance with the provisions of this Article 3 and (ii) cause to be mailed for delivery by overnight courier, or if a Registration Statement covering the Common Stock has been declared effective by the SEC cause to be electronically transferred, to Holder (x) a certificate or certificate(s) representing the number of Common Shares to which the Holder i s entitled by virtue of such conversion, (y) cash, as provided in Section 3.3, in respect of any fraction of a Common Share deliverable upon such conversion and (z) cash or shares of Common Stock, as applicable, representing the amount of accrued and unpaid interest on this Debenture as of the Conversion Date.  Such conversion shall be deemed to have been effected at the time at which the Conversion Notice indicates, and at such time the rights of the Holder of this Debenture, as such (except if and to the extent that any Principal Amount thereof remains unconverted), shall cease and the Person and Persons in whose name or names the Common Stock Issued at Conversion shall be issuable shall be deemed to have become the holder or holders of record of the Common Shares represented thereby, and all voting and other rights associated with the beneficial ownership of such Common Shares shall at such time vest with such Person or Persons.  The Conversion Notice shall constitute a contract between the Hold er and the Company, whereby the Holder shall be deemed to subscribe for the number of Common Shares which it will be entitled to receive upon such conversion and, in payment and satisfaction of such subscription (and for any cash adjustment to which it is entitled pursuant to Section 3.4), to surrender this Debenture and to release the Company from all liability thereon (except if and to the extent that any Principal Amount thereof remains unconverted).  No cash payment aggregating less than $1.00 shall be required to be given unless specifically requested by the Holder.

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(b)

If, at any time after the date of this Debenture, (i) the Company challenges, disputes or denies the right of the Holder hereof to effect the conversion of this Debenture into Common Shares or otherwise dishonors or rejects any Conversion Notice delivered in accordance with this Section 3.2 or (ii) any third party who is not and has never been an Affiliate of the Holder commences any lawsuit or legal proceeding or otherwise asserts any claim before any court or public or governmental authority which seeks to challenge, deny, enjoin, limit, modify, delay or dispute the right of the Holder hereof to effect the conversion of this Debenture into Common Shares, then the Holder shall have the right, by written notice to the Company, to require the Company to promptly redeem this Debenture for cash at one hundred and fifty (150%) of the Principal Amount thereof, together wit h all accrued and unpaid interest thereon to the date of redemption.  Under any of the circumstances set forth above, the Company shall be responsible for the payment of all costs and expenses of the Holder, including reasonable legal fees and expenses, as and when incurred in defending itself in any such action or pursuing its rights hereunder (in addition to any other rights of the Holder).

(c)

The Holder shall be entitled to exercise its conversion privilege notwithstanding the commencement of any case under the Bankruptcy Code.  In the event the Company is a debtor under the Bankruptcy Code, the Company hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. § 362 in respect of the Holder’s conversion privilege.  The Company hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. § 362 in respect of the conversion of this Debenture.  The Company agrees, without cost or expense to the Holder, to take or consent to any and all action necessary to effectuate relief under 11 U.S.C. § 362.

SECTION 3.3

Fractional Shares.  No fractional Common Shares or scrip representing fractional Common Shares shall be delivered upon conversion of this Debenture.  Instead of any fractional Common Shares which otherwise would be delivered upon conversion of this Debenture, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction multiplied by the Current Market Price on the Conversion Date.  No cash payment of less than $1.00 shall be required to be given unless specifically requested by the Holder.

SECTION 3.4

Adjustments.  The Conversion Price and the number of shares deliverable upon conversion of this Debenture are subject to adjustment from time to time as follows:

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(i)

Reclassification, Etc.  In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another Person (where the Company is not the survivor or where there is a change in or distribution with respect to the Common Stock of the Company), sell, convey, transfer or otherwise dispose of all or substantially all its property, assets or business to another Person, or effectuate a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of (each, a “Fundamental Corporate Change”) and, pursuant to the terms of such Fundamental Corporate Change, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other s ubscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation (“Other Property”) are to be received by or distributed to the holders of Common Stock of the Company, then the Holder of this Debenture shall have the right thereafter, at its sole option, to (x) require the Company to prepay this Debenture for cash at one hundred and fifty percent (150%) of the Principal Amount thereof, together with all accrued and unpaid interest thereon to the date of prepayment, (y) receive the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property as is receivable upon or as a result of such Fundamental Corporate Change by a holder of the number of shares of Common Stock into which such the outstanding portion of this Debenture may be converted at the Conversion Price applicable immediately prior to such Fundamental Corporate Change or (z) requi re the Company, or such successor, resulting or purchasing corporation, as the case may be, to, without benefit of any additional consideration therefor, execute and deliver to the Holder a debenture with substantial identical rights, privileges, powers, restrictions and other terms as this Debenture in an amount equal to the amount outstanding under this Debenture immediately prior to such Fundamental Corporate Change.  For purposes hereof, “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to prepayment and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purc hase any such stock.  The foregoing provisions shall similarly apply to successive Fundamental Corporate Changes.  

SECTION 3.5

Certain Conversion Limits.

Notwithstanding anything herein to the contrary, if and to the extent that, on any date, the holding by the Holder of this Debenture would result in the Holder’s being deemed the beneficial owner of more than five percent (5%) of the then Outstanding shares of Common Stock, then the Holder shall not have the right, and the Company shall not have the obligation, to convert any portion of this Debenture as shall cause such Holder to be deemed the beneficial owner of more than five percent (5%) of the then Outstanding shares of Common Stock.  If any court of competent jurisdiction shall determine that the foregoing limitation is ineffective to prevent a Holder from being deemed the beneficial owner of more than five percent (5%) of the then Outstanding shares of Common Stock, then the Company shall prepay such portion of this Debenture as shall cause such Holder to be deem ed the beneficial owner of more than five percent (5%) of the then Outstanding shares of Common Stock.  Upon such determination by a court of competent jurisdiction, the Holder shall have no interest in or rights under such portion of the Debenture.  Any and all interest paid on or prior to the date of such determination shall be deemed interest paid on the remaining portion of this Debenture held by the Holder.  Such prepayment shall be for cash at a prepayment price of one hundred and fifty percent (150%) of the Principal Amount thereof, together with all accrued and unpaid interest thereon to the date of prepayment.

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SECTION 3.6

Surrender of Debentures.  Upon any redemption of this Debenture pursuant to Sections 3.2, 3.5 or 6.2, or upon maturity pursuant to Section 2.4, the Holder shall either deliver this Debenture by hand to the Company at its principal executive offices or surrender the same to the Company at such address by nationally recognized overnight courier.  Payment of the redemption price or the amount due on maturity specified in Section 2.4, shall be made by the Company to the Holder against receipt of this Debenture (as provided in this Section 3.5) by wire transfer of immediately available funds to such account(s) as the Holder shall specify by written notice to the Company.  If payment of such redemption price is not made in full by the redemption date, or the amount due on maturity is not paid in full by the Maturity Date, the Holder shall again have th e right to convert this Debenture as provided in Article 3 hereof or to declare an Event of Default.

ARTICLE 4

STATUS; RESTRICTIONS ON TRANSFER

SECTION 4.1

Status of Debenture.  This Debenture constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms subject, as to enforceability, to general principles of equity and to principles of bankruptcy, insolvency, reorganization and other similar laws of general applicability relating to or affecting creditors’ rights and remedies generally.

SECTION 4.2

Restrictions on Transfer.  This Debenture, and any Common Shares deliverable upon the conversion hereof, have not been registered under the Securities Act.  The Holder by accepting this Debenture agrees that this Debenture and the shares of Common Stock to be acquired as interest on and upon conversion of this Debenture may not be assigned or otherwise transferred unless and until (i) the Company has received the opinion of counsel for the Holder that this Debenture or such shares may be sold pursuant to an exemption from registration under the Securities Act or (ii) a registration statement relating to this Debenture or such shares has been filed by the Company and declared effective by the SEC.

Each certificate for shares of Common Stock deliverable hereunder shall bear a legend as follows unless and until such securities have been sold pursuant to an effective registration statement under the Securities Act:

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Securities Act”).  The securities may not be offered for sale, sold or otherwise transferred except (i) pursuant to an effective registration statement under the Securities Act or (ii) pursuant to an exemption from registration under the Securities Act in respect of which the issuer of this certificate has received an opinion of counsel satisfactory to the issuer of this certificate to such effect.  Copies of the agreement covering both the purchase of the securities and restrictions on their transfer may be obtained at no cost by written request made by the holder of record of this certificate to the Secretary of the issuer of this certificate at the principal executive offices of the issuer of this certificate.”

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ARTICLE 5

COVENANTS

SECTION 5.1

Conversion.  The Company shall cause the transfer agent, not later than three (3) Business Days after the Company’s receipt of a Conversion Notice, to issue and deliver to the Holder the requisite shares of Common Stock Issued at Conversion. Such delivery shall be by electronic transfer if a Registration Statement covering the Common Stock has been declared effective by the SEC.

SECTION 5.2

Notice of Default.  If any one or more events occur which constitute or which, with notice, lapse of time, or both, would constitute an Event of Default, the Company shall forthwith give notice to the Holder, specifying the nature and status of the Event of Default or such other event(s), as the case may be.

SECTION 5.3

Payment of Obligations.  So long as this Debenture shall be outstanding, the Company shall pay, extend, or discharge at or before maturity, all its respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings.

SECTION 5.4

Compliance with Laws.  So long as this Debenture shall be outstanding, the Company shall comply with all applicable laws, ordinances, rules, regulations and requirements of governmental authorities, except for such noncompliance which would not have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of the Company and the Subsidiaries.

SECTION 5.5

Inspection of Property, Books and Records.  So long as this Debenture shall be outstanding, the Company shall keep proper books of record and account in which full, true and correct entries shall be made of all material dealings and transactions in relation to its business and activities and shall permit representatives of the Holder at the Holder’s expense to visit and inspect any of its respective properties, to examine and make abstracts from any of its respective books and records, not reasonably deemed confidential by the Company, and to discuss its respective affairs, finances and accounts with its respective officers and independent public accountants, all at such reasonable times and as often as may reasonably be desired.

ARTICLE 6

REMEDIES

SECTION 6.1

Events of Default.  “Event of Default” wherever used herein means any one of the following events:

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(i)

the Company shall default in the payment of principal of or interest on this Debenture as and when the same shall be due and payable and, in the case of an interest payment default, such default shall continue for five (5) Business Days after the date such interest payment was due, or the Company shall fail to perform or observe in any other covenant, agreement, term, provision, undertaking or commitment under this Debenture, the Conversion Warrants (as defined in the Securities Purchase Agreement), the Securities Purchase Agreement or the Registration Rights Agreement and such default shall continue for a period of ten (10) Business Days after the delivery to the Company of written notice that the Company is in default hereunder or thereunder;

(ii)

any of the representations or warranties made by the Company herein, in the Securities Purchase Agreement, the Registration Rights Agreement or in any certificate or financial or other written statements heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Debenture, the Warrants, the Securities Purchase Agreement or the Registration Rights Agreement shall be false or misleading in a material respect on the Closing Date;

(iii)

under the laws of any jurisdiction not otherwise covered by clauses (iv) and (v) below, the Company or any Subsidiary (A) becomes insolvent or generally not able to pay its debts as they become due, (B) admits in writing its inability to pay its debts generally or makes a general assignment for the benefit of creditors, (C) institutes or has instituted against it any proceeding seeking (x) to adjudicate it a bankrupt or insolvent, (y) liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors including any plan of compromise or arrangement or other corporate proceeding involving or affecting its creditors or (z) the entry of an order for relief or the appointment of a receiver, trustee or other similar person for it or for an y substantial part of its properties and assets, and in the case of any such official proceeding instituted against it (but not instituted by it), either the proceeding remains undismissed or unstayed for a period of sixty (60) calendar days, or any of the actions sought in such proceeding (including the entry of an order for relief against it or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its properties and assets) occurs or (D) takes any corporate action to authorize any of the above actions;

(iv)

the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company or any Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under the Bankruptcy Code or any other applicable Federal or state law, or appointing a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding-up or liquidation of its affairs, and any such decree or order continues and is unstayed and in effect for a period of sixty (60) calendar days;

(v)

the institution by the Company or any Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Bankruptcy Code or any other applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as and when they become due, or the taking of corporate action by the Company in furtherance of any such action;

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(vi)

a final judgment or final judgments for the payment of money shall have been entered by any court or courts of competent jurisdiction against the Company and remains undischarged for a period (during which execution shall be effectively stayed) of thirty (30) days, provided that the aggregate amount of all such judgments at any time outstanding (to the extent not paid or to be paid, as evidenced by a written communication to that effect from the applicable insurer, by insurance) exceeds One Hundred Thousand Dollars ($100,000);

(vii)

it becomes unlawful for the Company to perform or comply with its obligations under this Debenture, the Conversion Warrant, the Securities Purchase Agreement or the Registration Rights Agreement in any respect;

(viii)

the Common Shares shall be delisted from the NASDAQ OTCBB (the “Trading Market” or, to the extent the Company becomes eligible to list its Common Stock on any other national security exchange or quotation system, upon official notice of listing on any such exchange or system, as the case may be, it shall be the “Trading Market”) or suspended from trading on the Trading Market, and shall not be reinstated, relisted or such suspension lifted, as the case may be, within five (5) days or;

(ix)

the Company shall default (giving effect to any applicable grace period) in the payment of principal or interest as and when the same shall become due and payable, under any indebtedness, individually or in the aggregate, of more than One Hundred Thousand Dollars ($100,000);

SECTION 6.2

Acceleration of Maturity; Rescission and Annulment.  If an Event of Default occurs and is continuing, then and in every such case the Holder may, by a notice in writing to the Company, rescind any outstanding Conversion Notice and declare that all amounts owing or otherwise outstanding under this Debenture are immediately due and payable and upon any such declaration this Debenture shall become immediately due and payable in cash at a price of one hundred and fifty percent (150%) of the Principal Amount thereof, together with all accrued and unpaid interest thereon to the date of payment; provided, however, in the case of any Event of Default described in clauses (iii), (iv), (v) or (vii) of Section 6.1, such amount automatically shall become immediately due and payable without the necessity of any notice or declaration as aforesaid.

SECTION 6.3

Late Payment Penalty.  If any portion of the principal of or interest on this Debenture shall not be paid within ten (10) days of when it is due, the Discount Multiplier under this Debenture, and under all warrants granted by the Company to the Holder, shall decrease by one percentage point (1%) for all conversions of this Debenture and warrant exercises thereafter.

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SECTION 6.4

Maximum Interest Rate.

Notwithstanding anything herein to the contrary, if at any time the applicable interest rate as provided for herein shall exceed the maximum lawful rate which may be contracted for, charged, taken or received by the Holder in accordance with any applicable law (the “Maximum Rate”), the rate of interest applicable to this Debenture shall be limited to the Maximum Rate.  To the greatest extent permitted under applicable law, the Company hereby waives and agrees not to allege or claim that any provisions of this Note could give rise to or result in any actual or potential violation of any applicable usury laws.

SECTION 6.5

Remedies Not Waived.  No course of dealing between the Company and the Holder or any delay in exercising any rights hereunder shall operate as a waiver by the Holder.

ARTICLE 7

MISCELLANEOUS

SECTION 7.1

Notice of Certain Events.  In the case of the occurrence of any event described in Section 3.4 of this Debenture, the Company shall cause to be mailed to the Holder of this Debenture at its last address as it appears in the Company’s security registry, at least twenty (20) days prior to the applicable record, effective or expiration date hereinafter specified (or, if such twenty (20) days’ notice is not possible, at the earliest possible date prior to any such record, effective or expiration date), a notice thereof, including, if applicable, a statement of (y) the date on which a record is to be taken for the purpose of such dividend, distribution, issuance or granting of rights, options or warrants, or if a record is not to be taken, the date as of which the holders of record of Common Stock to be entitled to such dividend, distribution, issuanc e or granting of rights, options or warrants are to be determined or (z) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of record of Common Stock will be entitled to exchange their shares for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale transfer, dissolution, liquidation or winding-up.

SECTION 7.2

Register.  The Company shall keep at its principal office a register in which the Company shall provide for the registration of this Debenture.  Upon any transfer of this Debenture in accordance with Articles 2 and 4 hereof, the Company shall register such transfer on the Debenture register.

SECTION 7.3

Withholding.  To the extent required by applicable law, the Company may withhold amounts for or on account of any taxes imposed or levied by or on behalf of any taxing authority in the United States having jurisdiction over the Company from any payments made pursuant to this Debenture.

SECTION 7.4

Transmittal of Notices.  Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally, or sent by telecopier machine or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally, or by telecopier machine or overnight courier service as follows:

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(1)

if to the Company, to:

Diatect International Corporation

875 S. Industrial Parkway

Heber, Utah 84032

Telephone:

435-654-4370

Facsimile:

435-657-9794

(2)

if to the Holder, to:

La Jolla Cove Investors, Inc.

7817 Herschel Avenue, Suite 200

La Jolla, California 92037

Telephone:

858-551-8789

Facsimile:

858-551-0987

Each of the Holder or the Company may change the foregoing address by notice given pursuant to this Section 7.4.

SECTION 7.5

Attorneys’ Fees.  Should any party hereto employ an attorney for the purpose of enforcing or construing this Agreement, or any judgment based on this Agreement, in any legal proceeding whatsoever, including insolvency, bankruptcy, arbitration, declaratory relief or other litigation, the prevailing party shall be entitled to receive from the other party or parties thereto reimbursement for all reasonable attorneys' fees and all reasonable costs, including but not limited to service of process, filing fees, court and court reporter costs, investigative costs, expert witness fees, and the cost of any bonds, whether taxable or not, and that such reimbursement shall be included in any judgment or final order issued in that proceeding.  The "prevailing party" means the party determined by the court to most nearly prevail and not necessarily t he one in whose favor a judgment is rendered.

SECTION 7.6

Governing Law.  This Debenture shall be governed by, and construed in accordance with, the laws of the State of California (without giving effect to conflicts of laws principles).  With respect to any suit, action or proceedings relating to this Debenture, the Company irrevocably submits to the exclusive jurisdiction of the courts of the State of California sitting in San Diego and the United States District Court located in the City of San Diego and hereby waives, to the fullest extent permitted by applicable law, any claim that any such suit, action or proceeding has been brought in an inconvenient forum.  Subject to applicable law, the Company agrees that final judgment against it in any legal action or proceeding arising out of or relating to this Debenture shall be conclusive and may be enforced in any other jurisdiction within or outside th e United States by suit on the judgment, a certified copy of which judgment shall be conclusive evidence thereof and the amount of its indebtedness, or by such other means provided by law.

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SECTION 7.7

Headings.  The headings of the Articles and Sections of this Debenture are inserted for convenience only and do not constitute a part of this Debenture.

SECTION 7.8

Payment Dates.  Whenever any payment hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

SECTION 7.9

Binding Effect.  Each Holder by accepting this Debenture agrees to be bound by and comply with the terms and provisions of this Debenture.

SECTION 7.10

No Stockholder Rights.  Except as otherwise provided herein, this Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof.

SECTION 7.11

Facsimile Execution.

Facsimile execution shall be deemed originals.

IN WITNESS WHEREOF, the Company has caused this Debenture to be signed by its duly authorized officer on the date of this Debenture.

Diatect International Corporation

By:  ______________________________________

Title: _____________________________________

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EXHIBIT A

DEBENTURE CONVERSION NOTICE

TO:

Diatect International Corporation

The undersigned owner of this 8% Convertible Debenture due December 27, 2004 (the “Debenture”) issued by Diatect International Corporation (the “Company”) hereby irrevocably exercises its option to convert $__________ Principal Amount of the Debenture [and accrued and unpaid interest thereon to the date of this Notice] into shares of Common Stock in accordance with the terms of the Debenture.  The undersigned hereby instructs the Company to convert the portion of the Debenture specified above into shares of Common Stock Issued at Conversion in accordance with the provisions of Article 3 of the Debenture.  The undersigned directs that the Common Stock and certificates therefor deliverable upon conversion, the Debenture reissued in the Principal Amount not being surrendered for conversion hereby, [the check or shares of Common Stock in paym ent of the accrued and unpaid interest thereon to the date of this Notice,] together with any check in payment for fractional Common Stock, be registered in the name of and/or delivered to the undersigned unless a different name has been indicated below.  All capitalized terms used and not defined herein have the respective meanings assigned to them in the Debenture.  The conversion pursuant hereto shall be deemed to have been effected at the date and time specified below, and at such time the rights of the undersigned as a Holder of the Principal Amount of the Debenture set forth above shall cease and the Person or Persons in whose name or names the Common Stock Issued at Conversion shall be registered shall be deemed to have become the holder or holders of record of the Common Shares represented thereby and all voting and other rights associated with the beneficial ownership of such Common Shares shall at such time vest with such Person or Persons.

Date and time:  __________________

______________________________

By: ___________________________

Title: _________________________

Fill in for registration of Debenture:
Please print name and address
(including ZIP code number):

A-1

EX-4

EXHIBIT 4.4

COMMON STOCK PURCHASE AGREEMENT

This Common Stock Purchase Agreement (the "Agreement") is dated as of November 25, 2002, by and among Diatect International Corporation, a corporation organized under the laws of the State of California (the "Company") (OTCBB: "DTCT") and La Jolla Cove Investors, Inc. (the "Purchaser").

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Purchaser and the Purchaser shall purchase 1,000,000 shares of the Company's common stock (the "Common Stock"); and

WHEREAS, such purchase and sale will be made in reliance upon the provisions of Section 4(2) and Rule 506 of Regulation D ("Regulation D") of the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"), or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the purchases of Common Stock to be made hereunder.

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE I

Purchase and Sale of Stock

Section 1.1

Purchase and Sale of Common Shares.  Upon the following terms and subject to the conditions contained herein, the Company shall, on the date hereof, issue and sell to the Purchaser, and the Purchaser shall purchase from the Company, an aggregate of 1,000,000 shares of Common Stock (the "Common Shares"), for a total consideration of $100,000.

Section 1.2

Closing.  The closing of the purchase and sale of the Common Shares (the "Closing") to be acquired by the Purchaser from the Company shall take place at the offices of Purchaser on the date hereof (the "Closing Date").

ARTICLE II

Representations and Warranties

Section 2.1

Representations and Warranties of the Company.  In order to induce the Purchaser to enter into this Agreement and to purchase the Common Shares, the Company hereby makes the following representations and warranties to the Purchaser:

(a)

Organization, Good Standing and Power.  The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has the requisite corporate power to own, lease and operate its properties and assets and to conduct its business as it is now being conducted and to enter into this Agreement and to perform its obligations hereunder.

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(b)

Authorization; Enforcement.  The Company has the requisite corporate power and authority to enter into and perform this Agreement and to issue and sell the Common Shares in accordance with the terms hereof.  The execution, delivery and performance of this Agreement by the Company and the consummation by it of the transactions contemplated hereby  have been duly and validly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors or stockholders is required.  This Agreement has been duly executed and delivered by the Company.  This Agreement constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by other equitable principles of general application.

(c)

Issuance of Shares.  The Common Shares to be issued at the Closing have been duly authorized by all necessary corporate action and, when paid for or issued in accordance with the terms hereof, the Common Shares shall be validly issued and outstanding, fully paid and non-assessable.

(d)

No Conflicts.  The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated herein and therein do not and will not (i) violate any provision of the Company’s Certificate of Incorporation ("Articles") or Bylaws, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Company is a party or by which any of its properties or assets are bound, (iii) create or impose a lien, mortgage, security interest, charge or encumbrance of any nature whatsoever on any property of the Company un der any agreement or any commitment to which the Company is a party or by which the Company is bound or by which any of its properties or assets are bound, or (iv) result in a violation of any rule, regulation, order, judgment or decree applicable to the Company or by which any property or asset of the Company is bound or affected, except, in all cases other than violations pursuant to clause (i) above, for such conflicts, defaults, terminations, amendments, acceleration, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect. "Material Adverse Effect" shall mean any effect on the business, operations, properties, prospects, or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole.  

(f)

Certain Fees.  The Company has not employed any broker or finder or incurred any liability for any brokerage or investment banking fees, commissions, finders' or structuring fees, financial advisory fees or other similar fees in connection with this Agreement.

Section 2.2

Representations and Warranties of the Purchaser.  The Purchaser hereby makes the following representations and warranties to the Company:

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(a)

Organization and Standing of the Purchaser. The Purchaser is a corporation duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, and the Purchaser was not formed for the specific purpose of acquiring the Common Shares.

(b)

Authorization and Power.  The Purchaser has the requisite power and authority to enter into and perform this Agreement and to purchase the Common Shares being sold to it hereunder.  The execution, delivery and performance of this Agreement by the Purchaser and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Purchaser or its Board of Directors, stockholders, members, managers or partners, as the case may be, is required.  This Agreement has been duly executed and delivered by the Purchaser on the Closing Date.  This Agreement constitutes a valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insol vency, reorganization, moratorium, liquidation, conservatorship, or similar laws relating to, or affecting generally the enforcement of, creditors' rights or remedies or by other equitable principles of general application.

(c)

No Conflicts.  The execution, delivery and performance of this Agreement and the consummation by the Purchaser of the transactions contemplated herein do not and will not (i) result in a violation of the Purchaser’s charter documents, bylaws, partnership agreement, operating agreement or other organizational documents, or (ii) conflict with, constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument to which the Purchaser is a party of by which the Purchaser is bound, or result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to the Purchaser or its properties (except for such conflicts, defaults and violations as would not, individually or in the aggregate, have a material adverse effect on the Purchaser).

(d)

Acquisition for Investment.  The Purchaser is purchasing the Common Shares solely for its own account for the purpose of investment and not with a view to or for sale in connection with distribution.  The Purchaser does not have a present intention to sell the Common Shares, nor a present arrangement (whether or not legally binding) or intention to effect any distribution of the Common Shares to or through any person or entity; provided,  however, that (a) by making the representations herein and subject to Section 2.2(f) below, the Purchaser does not agree to hold the Common Shares for any minimum or other specific term and reserves the right to dispose of the Common Shares at any time in accordance with federal securities laws applicable to such disposition, and (b) the Company acknowledges that the Purchaser has entered into that certain Put and Call Agreement dated as of the date hereof with respect to the Common Shares.  The Purchaser acknowledges that it is able to bear the financial risks associated with an investment in the Common Shares

(e)

Accredited Purchasers.  The Purchaser is an "accredited investor" as defined in Regulation D promulgated under the Securities Act and is a resident of California.  The Purchaser has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of the Purchaser's investment in the Company.

-3-

(f)

Rule 144.  The Purchaser understands that the Common Shares must be held indefinitely unless such Shares are registered under the Securities Act or an exemption from registration is available.  The Purchaser acknowledges that the Purchaser is familiar with Rule 144 of the rules and regulations of the Securities and Exchange Commission (“SEC”), as amended, promulgated pursuant to the Securities Act ("Rule 144"), and that the Purchaser has been advised that Rule 144 permits resales only under certain circumstances.  The Purchaser understands that to the extent that Rule 144 is not available, the Purchaser will be unable to sell any Shares without either registration under the Securities Act or the existence of another exemption from such registration requirement.

(g)

No Broker-Dealer Affiliation.  The Purchasers is not a broker-dealer registered with the Commission or an affiliate (as such term is defined in Rule 144(a) promulgated under the Securities Act) of a broker-dealer registered with the Commission.

(h)

General.  The Purchaser understands that the Common Shares are being offered and sold in reliance on a transactional exemption from the registration requirement of federal and state securities laws and the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Purchaser set forth herein in order to determine the applicability of such exemptions and the suitability of such Purchaser to acquire the Common Shares.  The Purchaser understands that no United States federal or state agency or any government or governmental agency has passed upon or made any recommendation or endorsement of the Common Shares.

(i)

No General Solicitation.  The Purchaser acknowledges that the Common Shares were not offered to the Purchaser by means of any form of general or public solicitation or general advertising, or publicly disseminated advertisements or sales literature, including (i) any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media, or broadcast over television or radio, or (ii) any seminar or meeting to which the Purchaser was invited by any of the foregoing means of communications.

ARTICLE III

Registration Rights

Section 3.1

Registration Rights.

If, at any time while the Purchaser owns the Common Stock, the Seller shall prepare and file with the SEC a registration statement relating to the offer and sale of any of the common stock of the Company, the Company shall, at its own cost and expense, include the Common Stock in such registration statement. The Company shall promptly (and, in any event, no more than 24 hours after it receives comments from the SEC), notify the Purchaser when and if it receives any comments from the SEC on such registration statement and promptly forward a copy of such comments, if they are in writing, to the Purchaser.  The Seller shall notify Purchaser by written notice that such registration statement has been declared effective by the SEC within 24 hours of such declaration by the SEC.

-4-

ARTICLE IV

Stock Certificate Legend

Section 4.1

Legend.  Each certificate representing the Common Shares, as applicable and appropriate, shall be stamped or otherwise imprinted with a legend in substantially the following form (in addition to any legend required by applicable federal, provincial or state securities or "blue sky" laws):

THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR THE COMPANY SHALL HAVE RECEIVED AN OPINION IN FORM, SCOPE AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, OF COUNSEL, WHO IS REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS IS NOT REQUIRED.

ARTICLE V

Termination

This Agreement may be terminated at any time prior to the Closing by the mutual written consent of the Company and the Purchaser.

ARTICLE VI

Miscellaneous

Section 6.1

Fees and Expenses.  The Company shall pay the fees and expenses of Purchaser for its advisors, counsel, accountants and other experts, if any, and all other expenses, incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, such amount not to exceed $2,500.

Section 6.2

Consent to Jurisdiction.  Each of the Company and the Purchaser (i) hereby irrevocably submits to the jurisdiction of the United States District Court sitting in the District of San Diego and the courts of the State of California located in San Diego county for the purposes of any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereunder or thereunder and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper.  Each of the Company and the Purchaser consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such pa rty at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing in this Section 6.2 shall affect or limit any right to serve process in any other manner permitted by law.

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Section 6.3

Entire Agreement; Amendment.  This Agreement contains the entire understanding and agreement of the parties with respect to the matters covered hereby and, except as specifically set forth herein, neither the Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters, and they supersede all prior understandings and agreements with respect to said subject matter, all of which are merged herein.  No provision of this Agreement may be waived or amended, except by a written instrument signed by the Company and the Purchaser.

Section 6.4

Notices.  Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery by telex (with correct answer back received), telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.  The addresses for such communications shall be:

If to the Company:

Diatect International Corporation

875 S. Industrial Parkway

Heber City, Utah 84032

Telephone:

435-654-4370

Facsimile:

435-657-9794

If to the Purchaser:

La Jolla Cove Investors, Inc.

7817 Herschel Ave., Suite 200

La Jolla, CA 92037

Telephone:

858-551-8789

Facsimile:

858-551-0987

Any party hereto may from time to time change its address for notices by giving at least ten (10) days written notice of such changed address to the other party hereto.

Section 6.5

Waivers.  No waiver by either party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provisions, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter.

-6-

Section 6.6

Headings.  The article, section and subsection headings in this Agreement are for convenience only and shall not constitute a part of this Agreement for any other purpose and shall not be deemed to limit or affect any of the provisions hereof.

Section 6.7

Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns.  No rights or obligations hereunder may be assigned by either party hereto, except that the rights and obligations of the Company may be assigned.

Section 6.8

No Third Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

Section 6.9

Governing Law.  This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without giving effect to the choice of law provisions.  This Agreement shall not be interpreted or construed with any presumption against the party causing this Agreement to be drafted.

Section 6.10

Survival.  The representations, warranties, agreements and covenants set forth in this Agreement shall survive the execution and delivery hereof and the Closing hereunder indefinitely.

Section 6.11

Counterparts.  This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and shall become effective when counterparts have been signed by each party and delivered to the other parties hereto, it being understood that all parties need not sign the same counterpart. Facsimile execution shall be deemed originals.

Section 6.12

Severability.  The provisions of this Agreement are severable and, in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement, and this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of such provision, had never been contained herein, so that such provisions would be valid, legal and enforceable to the maximum extent possible.

Section 6.13

Further Assurances.  From and after the date of this Agreement, upon the request of the Purchaser or the Company, each of the Company and the Purchaser shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement.

-7-

Section 6.14

Rule 144.  So long as the Purchaser owns any of the Common Stock, the Company shall file all reports required to be filed by it with the SEC pursuant to the Securities Exchange Act of 1934.

Section 6.15

Listing.  The Company shall use its best efforts to maintain its listing on the OTC Bulletin Board.

Section 6.16

Attorneys' Fees.  In the event of any legal action between the parties with respect to this Agreement or the subject matter hereof, the prevailing party shall be entitled to recover reasonable attorneys' fees in addition to court costs and litigation expenses incurred in said legal action, regardless of whether such legal action is prosecuted to judgment.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective authorized officer as of the date first above written.

Diatect International Corporation

By:_________________________________

Name:
Title:   

La Jolla Cove Investors, Inc.

By: ________________________________

Name:

Title:

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EX-5

EXHIBIT 4.5

WARRANT TO PURCHASE COMMON STOCK

(CONVERSION WARRANTS)

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT FOR DISTRIBUTION, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED NEITHER THE WARRANT NOR THE SHARES MAY BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. THIS WARRANT MUST BE SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO THE SALE, PLEDGE OR OTHER TRANSFER OF ANY INTEREST IN THIS WARRANT OR THE SHARES ISSUABLE HEREUNDER.

Issuer:  Diatect International Corporation
Class of Stock: Common Stock
Issue Date: December 27, 2002
Expiration Date: December 27, 2004

THIS WARRANT TO PURCHASE COMMON STOCK is being issued pursuant to that certain Securities Purchase Agreement dated as of the date hereof (the “Purchase Agreement”) between Diatect International Corporation, a California corporation (the “Company”) and La Jolla Cove Investors, Inc. (“Holder”).

The Company hereby grants to Holder the right to purchase that number of shares of the Company’s Common Stock (the “Shares” or “Warrant Shares”) equal to the number of shares of Common Stock issued to Holder from time to time pursuant to the conversion of the Debenture (as such term is defined in the Purchase Agreement).  For avoidance of doubt, this Warrant may be exercised concurrently with or subsequent to the issuance of a Conversion Notice under the Debenture. The date that the Holder issues a Conversion Notice is hereafter referred to as the “Conversion Date.”  Defined terms not defined herein shall have the meanings ascribed to them in the Debenture or the Purchase Agreement.

This Warrant shall expire and Holder shall no longer be able to purchase the Warrant Shares on December 27, 2004.

ARTICLE 1

EXERCISE

1.1

Method of Exercise.  Holder may exercise this Warrant by delivering a duly executed Warrant Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company, along with a check payable to the Company for the aggregate Exercise Price for the Shares being purchased.

-1-

1.2

Delivery of Certificate and New Warrant.  As promptly as practicable after the receipt of the Warrant Notice of Exercise, but in any event not more than three (3) Business Days after the Company’s receipt of the Warrant Notice of Exercise, the Company shall issue the Shares and cause to be mailed for delivery by overnight courier, or if a Registration Statement covering the Shares has been declared effective by the SEC cause to be electronically transferred, to Holder a certificate representing the Shares acquired and, if this Warrant has not been fully exercised and has not expired, a new Warrant substantially in the form of this Warrant representing the right to acquire the portion of the Shares not so acquired.

1.3

Replacement of Warrants.  On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor.

1.4.

Exercise Price.  The Exercise Price of this Warrant shall be the lesser of (a) $0.25; or (b) eighty percent (80%) of the average of the three lowest Market Prices during the twenty (20) Trading Days prior to Holder’s election to exercise (“Discount Multiplier”), provided, that in the event that the Registration Statement has not been declared effective by the SEC by the Deadline, then the Discount Multiplier shall decrease by three percentage points (3%) for each month or partial month occurring after the Deadline that the Registration Statement has not been declared effective by the SEC; or (c) the price paid to convert the corresponding portion of the Debenture.

ARTICLE 2

ADJUSTMENT TO THE SHARES

The number of Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment form time to time upon the occurrence of certain events, as follows:

2.1

Reclassification.  In case of any reclassification or change of outstanding securities of the class issuable upon exercise of this Warrant then, and in any such case, the Holder, upon the exercise hereof at any time after the consummation of such reclassification or change, shall be entitled to receive in lieu of each Share theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and/or property received upon such reclassification or change by a holder of one Share.  The provisions of this Section 2.1 shall similarly apply to successive reclassifications or changes.

-2-

2.2

Subdivision or Combination of Shares.  If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Shares, the Exercise Price shall be proportionately decreased in the case of a subdivision or increased in the case of a combination.

2.3

Stock Dividends.  If the Company, at any time while this Warrant is outstanding shall pay a dividend with respect to its Shares payable in Shares, or make any other distribution of Shares with respect to Shares (except any distribution specifically provided for in Section 2.1 and Section 2.2 above), then the Exercise Price shall be adjusted, effective from and after the date of determination of shareholders entitled to received such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction, (a) the numerator of which shall be the total number of Shares outstanding immediately prior to such dividend or distribution, and (b) the denominator of which shall be the total number of Shares outstanding immediately after such dividend or distribution.

2.4

Non-Cash Dividends.  If the Company at any time while this Warrant is outstanding shall pay a dividend with respect to Shares payable in securities other than Shares or other non-cash property, or make any other distribution of such securities or property with respect to Shares (except any distribution specifically provided for in Section 2.1 and Section 2.2 above), then this Warrant shall represent the right to acquire upon exercise of this Warrant such securities or property which a holder of Shares would have been entitled to receive upon such dividend or distribution, without the payment by the Holder of any additional consideration for such securities or property.

2.5

Effect of Reorganization and Asset Sales.  If any (i) reorganization or reclassification of the Common Stock (ii) consolidation or merger of the Company with or into another corporation, or (iii) sale or all or substantially all of the Company’s operating assets to another corporation followed by a liquidation of the Company (any such transaction shall be followed by a liquidation of the Company (any such transaction shall be referred to herein as an “Event”, is effected in such a way that holders of common Stock are of Common Stock are entitled to receive securities and/or assets as a result of their Common Stock ownership, the Holder, upon exercise of this Warrant, shall be entitled to receive such shares of stock securities or assets which the Holder would have received had it fully exercised this Warrant on or prior the record date for su ch Event.  The Company shall not merge into or consolidate with another corporation or sell all of its assets to another corporation for a consideration consisting primarily of securities or such corporation, unless the successor or acquiring corporation, as the case may be, shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed or observed by the Company and all of the obligations and liabilities hereunder, subject to such modification as shall be necessary to provide for adjustments which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 2.  The foregoing provisions shall similarly apply to successive mergers, consolidations or sales of assets.

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2.6

Adjustment of Number of Shares.  Upon each adjustment in the Exercise Price, the number of Shares shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares, purchasable immediately prior to such adjustment and the denominator of which shall be the Exercise Price immediately thereafter.

2.7

No Impairment.  The Company shall not, by amendment of its articles of incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out all of the provisions of this Warrant and in taking all such action as may be reasonably necessary or appropriate to protect Holder’s rights hereunder against impairment.  If the Company takes any action affecting its Common Stock other than as described above that adversely affects Holder’s rights under this Warrant, the Exercise Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warran t shall be adjusted upward in such a manner that the aggregate Exercise Price of this Warrant is unchanged.

2.8

Fractional Shares.  No fractional Shares shall be issuable upon the exercise of this Warrant, and the number of Shares to be issued shall be rounded down to the nearest whole Share.

2.9

Certificate as to Adjustments.  Upon any adjustment of the Exercise Price, the Company, at its expense, shall compute such adjustment and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based.  The Company shall, upon written request, furnish Holder a certificate setting forth the Exercise Price in effect upon the date thereof and the series of adjustments leading to such Exercise Price.

2.10

No Rights of Shareholders.  This Warrant does not entitle Holder to any voting rights or any other rights as a shareholder of the Company prior to the exercise of Holder’s right to purchase Shares as provided herein.

ARTICLE 3

REPRESENTATIONS AND COVENANTS OF THE COMPANY

3.1

Representations and Warranties.  The Company hereby represents and warrants to Holder that all Shares which may be issued upon the exercise of the purchase right represented by this Warrant, shall, upon issuance, be duly authorized, validly issued, fully paid and nonasessable, and free of any liens and encumbrances.  

3.2

Notice of Certain Events.  If the company proposes at any time (a) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other fights; (c) to effect any reclassification or recapitalization of Common Stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the Company’s securities for cash, then, in connection with each such event, the Company shall give Holder ( 1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of Common Stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of Common Stock will be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights.

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3.3

Information Rights.  So long as Holder holds this Warrant and/or any of the Shares, the company shall deliver to Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days of their availability, the annual audited financial statements of the Company certified by independent public accountants of recognized standing, and (c) within forty-five (45) days after the end of each fiscal quarter or each fiscal year, the Company’s quarterly, unaudited financial statements.

3.4

Reservation of Warrant Shares.  The Company has reserved and will keep available, out of the authorized and unissued shares of Common Stock, the full number of shares sufficient to provide for the exercise of the rights of purchase represented by this Warrant.

3.5

Registration Rights. If Holder exercises this Warrant and purchases some or all of the Shares, Holder shall have the Registration Rights set forth in that certain Registration Rights Agreement executed concurrently therewith.

ARTICLE 4

REPRESENTATIONS AND COVENANTS OF THE HOLDER

4.1

Private Issue.  Holder understands (i) that the Shares issuable upon exercise of Holder’s rights contained in the Warrant are not registered under the Act or qualified under applicable state securities laws on the ground that the issuance contemplated by the Warrant will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company’s reliance on such exemption is predicated on Holder’s representations set forth in this Article 4.

4.2

Financial Risk.  Holder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to bear the economic risks of its investment.

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4.3

Risk of No Registration.  Holder understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the Act, or file reports pursuant to Section 15(d), of the Securities Exchange Act of 1934 (the “1934 Act”), or if a registration statement covering the securities under the Act is not in effect when it desires to sell (i) the right to purchase Shares pursuant to the Warrant, or (ii) the Shares issuable upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period.

4.4

Accredited Investor.  Holder is an “accredited investor,” as such term is defined in Regulation D promulgated pursuant to the Act.

ARTICLE 5

MISCELLANEOUS

5.1

Term.  This Warrant is exercisable, in whole or in part, at any time and from time to time on or after the Conversion Date and on or before the Expiration Date set forth above.

5.2

Compliance with Securities Laws on Transfer.  This Warrant may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company) and without the prior written consent of Company, which consent shall not be unreasonably withheld, provided that Holder shall have the right without the consent of the Company to transfer or assign in whole or in part this Warrant and the Shares issuable upon exercise this Warrant to any of Holder’s affiliates, successors, assigns or the United States Federal Reserve Board.  The Company shall not require Holder to provide an opinion of counsel if the tr ansfer is to an affiliate of Holder.

5.3

Transfer Procedure.  Holder agrees that unless there is in effect a registration statement under the Act covering the proposed transfer of all or part of this Warrant, prior to any such proposed transfer the Holder shall give written notice thereof to the Company (a “Transfer Notice”).  Each Transfer Notice shall describe the manner and circumstances of the proposed transfer in reasonable detail and, if the company so requests, shall be accompanied by an opinion of legal counsel, in a form reasonably satisfactory to the Company, to the effect that the proposed transfer may be effected without registration under the Act; provided that the Company will not require opinions of counsel for transactions involving transfers to affiliates or pursuant to Rule 144 promulgated by the Securities and Exchange Commission under the act, except in unus ual circumstances.

5.4

Notices, etc.  All notices and other communications required or permitted hereunder shall be in writing and shall be delivered personally, or sent by telecopier machine or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally, or by telecopier machine or overnight courier service as follows:

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if  to the Company, to:

Diatect International Corporation

875 S. Industrial Parkway

Heber, Utah 84032

Telephone:

435-654-4370

Facsimile:

435-657-9794

if to the Holder, to:

La Jolla Cove Investors, Inc.

7817 Herschel Avenue, Suite 200

La Jolla, CA 92037

Telephone:

858-551-8789

Facsimile:

858-551-0987

or at such other address as the Company shall have furnished to the Holder.  Each such notice or other communication shall for all purposes of this agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or five days after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid.

5.5

Counterparts.  This agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. Facsimile execution shall be deemed originals.

5.6

Waiver.  This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

5.7

Attorneys Fees.  In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys fees.

5.8

Governing Law; Jurisdiction.  This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. Each of the parties hereto consents to the jurisdiction of the federal courts whose districts encompass any part of the City of San Diego or the state courts of the State of California sitting in the City of San Diego in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions.

IN WITNESS WHEREOF, the parties hereto have duly caused this Warrant to Purchase Common Stock to be executed and delivered on the date first above written.

Diatect International Corporation

La Jolla Cove Investors, Inc.

By :___________________________

By: __________________________

Title:__________________________

Title:_________________________

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APPENDIX 1

WARRANT NOTICE OF EXERCISE

1.

The undersigned hereby elects to purchase _____ shares of the Common Stock of Diatect International Corporation pursuant to the terms of the Warrant to Purchase Common Stock issued by Diatect International Corporation on December 27, 2002 and tenders herewith payment of the purchase price of such shares in full.

2.

Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below:

_____________________

_____________________

_____________________

(Name and Address)

3.

The undersigned makes the representations and covenants set forth in Article 4 of the Warrant to Purchase Common Stock.

________________________________
(Signature)

___________________________
(Date)

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EX-6

EXHIBIT 4.6

LA JOLLA COVE INVESTORS, INC.

2250 UNION STREET, SUITE 301

SAN FRANCISCO, CALIFORNIA 94123

TELEPHONE:  (415) 409-8703

FACSIMILE:    (415) 409-8704

E-MAIL: LJCI@PACBELL.NET

LA JOLLA                                                                                                                                   www.ljcinvestors.com

SAN FRANCISCO

March 27, 2003

Jay W. Downs

Diatect International Corporation

875 S. Industrial Parkway

Heber City, UT 84032

Dear Jay:

This letter shall serve as an addendum to the following documents: 8 % Convertible Debenture, Registration Rights Agreement, Securities Purchase Agreement and the Warrant to Purchase Common Stock. Capitalized terms shall have the meaning set forth in the respective documents. The following changes and additions are hereby made and agreed upon:

1.

The second sentence of Section 3.1(a) of the Convertible Debenture is hereby amended to read as follows:

“The number of Common Shares into which this Debenture may be converted is equal to the dollar amount of the Debenture being converted multiplied by eleven, minus the product of the Conversion Price multiplied by ten times the dollar amount of the Debenture being converted, divided by the Conversion Price.”

2.

The first sentence of the second paragraph of the Warrant to Purchase Common Stock is hereby amended to read as follows:

“The Company hereby grants to Holder the right to purchase that number of shares of the Company’s Common Stock (the “Shares” or “Warrant Shares”) equal to ten (10) times the dollar amount of the Debenture being converted.”

3.

Section 1.4 of the Warrant to Purchase Common Stock is hereby amended to read as follows:

“The Exercise Price of this Warrant shall be $1.00.

Sincerely,

Travis W. Huff

Portfolio Manager

Agreed to:

Diatect International Corporation

By: __________________________

Title: _________________________

EX-7

EXHIBIT 4.7

ADDENDUM TO CONVERTIBLE DEBENTURE

This Addendum to Convertible Debenture and Warrant to Purchase Common Stock (“Addendum”) is entered into as of the 6th day of August 2003 by and between Diatect International Corporation, a California corporation (“Diatect”), and La Jolla Cove Investors, Inc., a California corporation (“LJCI”).

WHEREAS, LJCI and Diatect are parties to that certain 8% Convertible Debenture dated as of December 27, 2002 (“Debenture”); and

WHEREAS, the parties desire to amend the Debenture in certain respects.

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Diatect and LJCI agree as follows:

1.

All terms used herein and not otherwise defined herein shall have the definitions set forth in the Debenture.

2.

The Deadline is hereby changed to be the date that is the 30^th day from the date of this Addendum.

3.

The Conversion Price set forth in section 3.1(a) of the Debenture is hereby changed to be the lesser of: (i) $1.00, or (ii) seventy-five percent (75%) of the average of the three lowest Market Prices during the 180 calendar days prior to LJCI’s election to convert (a “Discount Multiplier”). All other terms and provisions of section 3.1(a) of the Debenture (including the Discount Multiplier reduction) shall remain in full force and effect.

4.

LJCI hereby waives all penalties accrued to date under section 3.1(b) of the Debenture.

5.

Within 5 business days of the date of this Addendum, Diatect shall pay to LJCI all interest that is presently due under the Debenture.

6.

Except as specifically amended herein, all other terms and conditions of the Debenture shall remain in full force and effect.

IN WINESS WHEREOF, Diatect and LJCI have caused this Addendum to be signed by its duly authorized officers on the date first set forth above.

Diatect International Corporation

La Jolla Cove Investors, Inc.

By: __________________________

By: __________________________

Name: _______________________

Name: ________________________

Title: ________________________

Title: _________________________

#

EX-8

EXHIBIT 23.1

Williams & Webster, P.S.

Certified Public Accountants & Business Consultants

Bank of America Financial Centre – 601 W. Riverside, Suite 1940 – Spokane, WA 99201-0611

509-838-5111 Fax: 509-838-5114 – E-mail: wwpepar@williams-webster.com

CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS

We consent to the use of our report dated March 28, 2003, on the consolidated financial statements of Diatect International Corp. as of December 31, 2002 and 2001, and the inclusion of our name under the heading “Experts” in the Form SB-2 Registration Statement filed with the Securities and Exchange Commission.

“Williams & Webster, P.S”

Williams & Webster, P.S.

Spokane, Washington

August 25, 2003

EX-9

EXHIBIT 5.1

		TELEPHONE:  310.282.2000 FACSIMILE:  310.282.2200 www.loeb.com
A LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS	10100 SANTA MONICA BOULEVARD SUITE 2200 LOS ANGELES, CA  90067-4164

Direct Dial: 310-282-2350
e-mail: dficksman@loeb.com

August 25, 2003

Diatect International Corporation

Board of Directors

875 S. Industrial Parkway

Herber City, UT 84032

Ladies and Gentlemen:

We have acted as counsel to Diatect International Corporation, a California company (the “Company”), in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Act”), of a Registration Statement on Form SB-2 (the “Registration Statement”), relating to the proposed sale by La Jolla Cove Investors, Inc. (the “Selling shareholder”) of 17,000,000 shares of the Company’s common stock (the “Common Stock”).  

In so acting, we have examined and relied upon the originals or copies, certified or otherwise identified to our satisfaction, of such Company records, documents, certificates and other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below. Based upon the foregoing and such examination of law as we have deemed necessary, we are of the opinion that the Common Stock to be offered by the Selling shareholder, when sold under the circumstances contemplated in the Registration Statement, will be legally issued, fully paid and non-assessable.

The opinions we express herein are limited to matters involving the California corporate law and the federal laws of the United States and are further expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise as to any other matters relating to the Company or the Common Stock.

We consent to the use of this letter as an Exhibit to the Registration Statement and to the use of our name under the heading “Legal Matters” included in the Prospectus forming a part of the Registration Statement.

Sincerely,

David L. Ficksman
a Partner of the Firm