SB-2/A

As filed with the Securities and Exchange Commission on January 21, 2004 Registration No. 333-18250

_______________________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________

AMENDMENT NO. 1

FORM SB-2

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

________________________________

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

__________________________________________

(Address and Telephone Number of Principal Executive Offices)

(Address of Principal Place of Business or Intended Principal Place of Business)

(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

_________________________________________

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	Amount of Registration Fee
Common stock underlying the 8% Convertible Debentures due December 27, 2004	13,500,000	$0.15	$2,025,000	$164
Common Stock underlying the Warrants	2,500,000	$0.15	$375,000	$30
Common Stock	1,000,000	$0.15	$150,000	$12
Total	17,000,000	---	$2,550,000	$206

(1)

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 five day average high and low bid price of the Registrant’s common stock as quoted on the Over-the-Counter Bulletin Board on August 22, 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.

DIATECT INTERNATIONAL CORPORATION

17,000,000 Shares of Common Stock

The 17,000,000 shares of common stock no par value are being offered by La Jolla Cove Investors, Inc. as a selling shareholder.  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.

Our common stock trades on the Over-the-Counter Bulletin Board, also called the OTCBB, under the trading symbol “DTCT”.  On December 3, 2003, the closing bid for our common stock as reported on the OTCBB was $0.30 per share.  As of December 3, 2003 there were 48,558,936 shares of common stock outstanding.

THIS INVESTMENT INVOLVES RISK.  SEE “RISK FACTORS” BEGINNING ON PAGE 8.

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.

__________________________________________

The date of this Prospectus is January __ , 2004

__________________________________________

TABLE OF CONTENTS

Prospectus Summary	3
Risk Factors	8
Cautionary Statement Regarding Forward-Looking Statements	14
Use of Proceeds	15
Selling Shareholder	15
Plan of Distribution	16
Business	19
Description of Property	22
Management	22
Executive Compensation	26
Security Ownership of Certain Beneficial Ownership and Management	30
Certain Relationships and Related Transaction	31
Description of Securities	32
Market For Common Equity and Related Shareholder Matters	33
Management’s Discussion and Analysis or Plan of Operations	34
Changes in and Disagreements with Accountants on accounting and Financial Disclosure	39
Legal Proceedings	40
Experts	40
Legal Matters	40
Financial Statements	F-1

-2-

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.

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.

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.  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 what management believes is a more effective insect 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.  We have all required EPA approvals necessary to manufacture, market and sell our products.

Recent Developments

Business

On September 10, 2003, we entered into a Sale and Purchase Agreement with Diatomaceous Earth Deposits of Virginia to purchase 90% of our diatomaceous earth mineral claims located at a site in Malheaur County Oregon for $31.1 million.

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 mineral claims were acquired in September 2001 after the then current owner failed to renew its claim.  The mineral claims were purchased for the payment of a $970 filing fee.

The purchase agreement provides that Diatect will receive annual payments of approximately $1.9 million per year beginning September 1, 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.

The definitive agreement was filed on Form 8-K reporting this transaction with the Securities and Exchange Commission on September 11, 2003.

In October 2003, the shares began trading on the Berlin Stock Exchange under the German trading symbol DI8.BER.  Management believes that being on the Berlin Stock Exchange will facilitate trading of the Company’s shares by German and European investors and should improve liquidity of the common stock overall.

-3-

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 17,000,000 shares covered by this prospectus, 16,000,000 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)

_____________________

CP

-4-

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.  The Market Price has a direct correlation to the total number of shares issuable upon conversion of the Debenture in that if the Market Price decreases we will have to issue a greater amount of shares.  As such, the total number of shares that we are obligated to issue upon conversion of the Debenture is essentially limitless.

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.

-5-

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 financial constraints we were unable to file the Registration Statement by March 27, 2003.  We did not have the cash necessary to pay the legal and accounting costs associated with the filing of the Registration Statement.  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:

-6-

•

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.

-7-

RISK FACTORS

You should carefully consider the risks described below before making an investment in Diatect.  The risks and uncertainties described below are those which are significant, currently know and unique to Diatect which make this offering speculative and risky.   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 and there can be no assurance that we will ever make a profit.

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:

•

the uncertainty of market acceptance of our products;

•

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

•

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

•

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 which may make it necessary to curtail operations.

We may never generate sufficient revenue to achieve profitability. We have incurred operating losses in each quarter since we commenced operations. We have incurred losses of approximately $17 million since we began our 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 have limited working capital 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.  

-8-

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.  The total amount of debt outstanding at September 30, 2003 was $4.3 million.  If adequate funds are not available or are not available on acceptable terms, we may not be able to:

•

fund then existing operations;

•

develop new or enhanced services and related products;

•

continue to develop our business plan; and,

•

otherwise respond to competitive pressures.  

As a result, our business, operating results and financial condition could be materially adversely affected and we may go out of business.  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.  If we are unable to continue operating you may loose your entire investment.

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.

-9-

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.  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 to 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 may cause us to go out of business.

If we are unable successfully to position ourselves in smaller niche markets, our business may not survive.

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 mean that we go out of business.

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.

-10-

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 and any significant claim could cause us to go out of business.

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.

-11-

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 66,000,000 shares of common stock sold on the public market as compared to approximately 49,000,000 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 December 3, 2003 of $.30.

% Below Market	Price Per Share	Conversion Price Discount of 25%	Number of Shares Issuable	Percentage Ownership of Outstanding Common Stock
25%	$.23	$.17	22,500,000	33%
50%	$.15	$.11	39,287,214	46%
75%	$.08	$.06	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.

-12-

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.  For details on such instructions, you should check with your broker or the Secretary of State where you desire to transfer the shares.

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 and such issuance may cause dilution.

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.  If we are required to issue additional shares your position may be diluted.

-13-

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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;

-14-

•

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.

-15-

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.  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. These numbers include also 2,500,000 shares of common stock underlying the Warrants.

As of December 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 December 3, 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.

Name of Selling Stockholder	Number of Shares Owned Prior to this Offering	Number of Shares Offered Hereby	Number of Shares Owned After this Offering, Assuming All Shares Offered Hereby are sold	Percentage of Ownership After this Offering
La Jolla Cove Investors, Inc. (1)	1,000,000	17,000,000	0	0

______________________________

(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.

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, including prevailing market 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:

-16-

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.

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.  

-17-

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.

-18-

BUSINESS

General

Diatect International Corporation was incorporated in California in May 19, 1979 under the name San Diego Bancorp and owned and operated banks until 1990 when we merged with Environ Guard Holdings.  The merger with Environ Guard was accounted for as a reverse merger with Environ Guard considered as the acquirer for accounting purposes.  After the merger we continued the business of Environ Guard under the name Applied Earth Technologies Inc.  In November 1998, the Company changed its name from Applied Earth Technologies to Diatect International Corporation.  During the last quarter of 2001 Herb Henderson the president retired, and Jay Downs assumed the position and the responsibility of taking the Company from the research phase to market.  In 2002, our primary focus was updating the packaging of our products for specific markets.  We also began a new “ ;Freddy the Fire Ant” marketing campaign, added field representatives, and relocated to Heber City.

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.  

We refer to our products as “natural killing agents” because “Silicon Dioxide” DE, Diatomaceous Earth, are fresh water diatoms and when viewed under a microscope they have the appearance of a jagged edge.  These edges cut the waxy coating of an insect causing them to bleed to death.  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.

Our primary focus is smaller niche markets that have been or are being abandoned by larger chemical companies.  For example, the mushroom industry which has a relatively small market.  Our market focus in on safe, non-hazardous, eco-sensitive insecticides. Historically, these smaller markets tend not to attract larger chemical companies due to the smaller volume demand. Larger chemical companies have been divesting themselves of products that fall into such niches because of the cost associated for producing products for such little return.  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

Management believes that there will be a greater demand for environmentally acceptable insecticide products in all agriculture-related industries in the coming future.  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 alone does not evaporate as quickly as it does in combination with DE, and is released for hours rather than minutes therefore enhancing the overall effectiveness of the product.  PBO increases the effectiveness of the pyrethrin by as much as ten times.  The terms “surfactants” is a term to describe substances that pro vide resiliency and stability to thin films and that markedly lower the surface tension of liquids, thus permitting easier bubble formation, an integral part of the foam manufacturing chemistry.  The term “chitin” refers to the waxy coating on the outside of an insect.

-19-

Diatect has five registered labels approved by the EPA.  Under the EPA labels, we manufacture and market nine brands of insecticides.  The following is a list of our product offerings:

•

Diatect II - Sold in the agriculture market, which according to the American Crop Protection Association is 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 and livestock.

•

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.  According to a study conducted by a research department at Texas A & M University, each year approximately 10,000 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 product for use on pet pests for homeowners, kennels, boarding facilities, veterinary clinics and other animal facilities.

-20-

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.  We have spent approximately $18.6 million obtaining EPA approval of our labels.  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

Three of the main ingredients in our products are diatomaceous earth (“DE”), PBO, and Pyrethrin.  Our supplier of DE is Cellite Corporation, Valent BioScience Corp supplies us with Pyrethrin.  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.  While all of our main ingredients are readily available, 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.  We have several ad campaigns including “Freddy the Fire Ant” and “Got Bugs”.

Employees

As of the date of this prospectus, we had sixteen full time employees.

Reports to Security Holders – Where you can find additional information

We are a public company and we file our annual, quarterly and special reports and other information with the Securities and Exchange Commission.  You may read and copy any document we file at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.  You can request copies of these documents by writing to the SEC and paying a fee for the copying cost.  Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference room.  Our SEC filings are also available to the public at the SEC’s web site at http://www.sec.gov.

This Prospectus is only part of a registration statement on Form SB-2 that we have filed with the SEC under the Securities Act of 1933 and therefore omits certain information contained in the registration statement.  We have also filed exhibits to the registration statement that are excluded from this Prospectus, and you should refer to the applicable exhibit or schedule for a complete description of any statement referring to any contract or other document.  You may inspect or obtain a copy of the registration statement, including the exhibits and schedules, as described in the previous paragraph.

-21-

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.  Competition is based primarily on price and efficacy, which is generally measured by crop yield and overall cost of use to the grower. In addition, attracting and retaining qualified personnel, developing production and marketing expertise, developing proprietary products or processes and obtaining regulatory approvals on a timely basis are essential to establishing a competitive market position.

While our products are primarily used by smaller organic farmers, many of the large chemical pesticide companies are also developing products that they believe are less environmentally harmful than traditional chemical pesticides and that may directly compete with our products.  We may be unable to compete successfully against our current competitors or new market entrants may develop products that compete directly with our products and are more effective, less expensive or more widely accepted than our products.

DESCRIPTION OF PROPERTY

Diatect International Corporation, is located at 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 this facility 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%.

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

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, or one year, 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.

-22-

Name	Age	Position(s)
Jay W. Downs	56	President and Chairman of the Board
John L. Runft	65	Director
Margie Humphries	53	Secretary
M. Stewart Hyndman	46	Director
David H. Andrus	39	Director and Vice-President
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.  From 1989 to 1999, Jay was involved in the institutional food sales & supply business and then operated his own insurance brokerage which developed and marketed complete employee benefit packages.

David H. Andrus began an affiliation with Diatect International 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 field trials of the Diatect Insect Control within the poultry industry and for Fireant concerns in that region. As technical manager for Diatect, Dave was responsible for all field studies of our product.  Since August 2001, Dave has served as Vice-president of Operations and was appointed a director.

-23-

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).

M. Stewart Hyndman, since 1995, Mr. Hyndman served as the President of Magic Miles Ltd, Inc., Meridian, Idaho, an export trading company specializing in the export of agricultural commodities and industrial products.  

Dr. Michael P. McQuade has been in private dental practice since 1987.  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.  

Frank S. Priestly 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.

-24-

Margie Humphries was appointed Corporate Secretary in November of 2002.  She comes with 25 years of professional work experience.  Starting in December of 1991 until July of 1998, she worked for Wasatch Medical Center.  From July of 1998 until March 2002, when she joined Diatect International, she worked full time as a medical transcriptionist for Utah Valley Regional Medical Center.  

-25-

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 ($) (4)	Other Annual Compensation			Restricted Stock Awards	Options/ SARs	LTIP Payout	All Other Compensation
Jay W. Downs	2002	$120,000	$6,739	-			-	$ 10,799(4)	-	-
C.E.O. (1)	2001	$120,000	$5,709	-			$60,000	$ 18,892(4)	-	-
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	-			-	$ 6,480(5)	-	-
Vice President(3)	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.  The $ 19,000 Mr. Henderson received in 2000 was a consulting fee.

(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.

(4) The bonuses are 1% of total gross sales each year and are awarded pursuant to each officer’s employment agreement.  The options were granted under the 1995 Stock Option plan.

(5) Options granted under the 2002 Stock Option Plan.

Options/SAR Grants in Last Fiscal Year: December 31, 2002

Individual Grants

(a)


Name (b)
Number of Securities Underlying Options/SARs Granted (c)
% of Total Options/SARs Granted to Employees in Fiscal Year (d)

Exercise or Base Price (CASH) (e)


Expiration Date

Jay Downs	1,250,000	62.50	$ 0.17	2007
Dave Andrus	750,000	37.50	$ 0.17	2007

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:

-26-

____________________________________________________________________________________________________________

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 500,000 options for the purchase of our common stock at $0.10 per share.  At the filing date of this report, none of the 500,000 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.  The retainer agreement expired in 2001 and we did not execute a new agreement.  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.

-27-

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	0.18
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	$    -

-28-

	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
On or before December 31, 2007 and after the Company attaining $17,000,000 in gross annual sales	666,666	-	666,666
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

-29-

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 common stock valued at $47,000 to Herb Henderson, our former president for back wages.  We issued 1,300,000 shares of common stock valued at $97,500 for services to officers including 750,000 shares to Mr. Downs, 500,000 shares to Mr. Andrus; and 500,000 shares to Hawk & Associates and others and 500,000 shares of common stock valued at $37,500 as a severance bonus to our former president Mr. Herb Henderson.  All shares were valued at their fair market value on the date of issuance.  An officer, Mr. John Runft, 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 owed to Mr. Runft.

Options awarded during 2002 consisted of 1,250,000 granted to Jay W. Downs, and 750,000 granted to David H. Andrus, both of whom are corporate officers.  Options granted during 2001 consisted of 500,000 granted to Jay Downs, a corporate officer, and 600,000 to George Ann Pope, a lender to Diatect.

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 December 3, 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.

-30-

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 610 River Road Midway, Utah 84049
Common	John L. Runft, Director 1020 W. Main, Suite 400 Boise, Idaho 83702	2,139,290	4.41
Common	David Andrus, Director, Vice-president 1248 S. Pangea Circle Heber, Utah 84032	595,000	1.23
Common	Robert Crouch, Director	1,110,864	2.29
Common	M. Stewart Hyndman, Director 18520 11th N. Ext. Nampa, Idaho 83687	271,800	0.56
Common	John H. Zenger, Director	46,000	0.09
Common	Frank Priestley, Director 3473 South 3200 East Franklin, Idaho 83237	8,000	-
Common	Michael P. McQuade, Director 30 Courthouse Road Richmond, Virginia 23237	654,334	1.35
Common	Margie Humphries, Secretary 620 West 1250 South Heber, Utah 84032	78,500	0.16

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 September 2001, 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.  Please see footnote 4 to the interim financial statements or footnote 5 to the year end financial statements for a more detailed description of the notes payable.

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 of options to acquire 500,000 shares of common stock at an exercise price of $0.10 per share.  Upon his appointment to the position of CEO, 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 $.75 per share, for additional compensation of $37,500.  

On September 10, 2003, we entered into a Sale and Purchase Agreement with Diatomaceous Earth Deposits of Virginia to purchase 90% of our diatomaceous earth mineral claims located at a site in Malheaur County Oregon for $31.1 million.

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 mineral claims were acquired in September 2001 after the then current owner failed to renew its claim.  The mineral claims were purchased for the payment of a $970 filing fee.

The purchase agreement provides that Diatect will receive annual payments of approximately $1.9 million per year beginning September 1, 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.

-31-

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.  

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.

-32-

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 December 3, 2003, our common stock was quoted under the symbol “DTCT” and had a high of $0.30 and a low of $0.30.  All bid prices below have been rounded to the nearest whole cent.

	Bid Prices
	High	Low
Fiscal Year Ended December 31, 2003
Third Quarter	$   0.25	$   0.10
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
Second Quarter	$   0.14	$   0.12
First Quarter	$   0.25	$   0.15

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.

-33-

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 December 3, 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.

-34-

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.

Going Concern

Our auditors have issued their report which contains an explanatory paragraph as to the our ability to continue as a going concern.  We estimate that we will require $2,500,000 in order to satisfy our working capital needs and service existing debt and thereby avoid a future going concern.  We are currently addressing our liquidity issue by the following actions:  Increase in sales through new marketing campaigns and we also anticpate offering two new products in the first quarter of 2004.  We anitcipate that our increase selling efforts along with the introduction of new products will increase our revenues.  We are also evaluating our operations in an effort to reduce operating costs.  We are continually seeking investment capital through the public markets.  However, there is no guarantee that any of these strategies will enable us to meet its obliga tions for the foreseeable future.  Please see our discussion under Liquidity and Capital Resources.

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 $425,958 with a gross profit of $144,946 for the prior year period.  The increase in revenues and compared to prior year reflects the success of our increased marketing efforts which has resulted in an increase in our customer base.  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 reported operating expenses of $2,233,865 compared to $1,447,578 for prior year, an overall increase of $786,287.  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 $606,889.  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 decrease in depreciation was the result of a change in the distributors relationship.  The increase in salaries, wages and benefits expenses is due to a decision to restructure 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, Inc. in 2000.  See Note 1 for additional information on the transaction with National Diatect, Inc.  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.  

Other Income and Expenses.  Other expenses reported for the year ended December 31, 2002 totaled $176,269 consisting primarily of interest expense of $406,512 donations of $23,414 offset by $253,657 in gain from termination of debt. Other Income reported for the year ended December 31, 2001 totaled $251,210, consisting of $611,252 in gain from termination of debt, offset by interest and finance fees of $355,676, and miscellaneous expense of $4,366.  

-35-

During 2002, we obtained releases of certain contingent liabilities in the amount of $253,657, recorded as gain from termination of debt.  The debt was terminated due to the tolling of the statute of limitations.  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 $1,986,835 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.  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 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.

-36-

Nine Months ended September 30, 2003 compared to September 30, 2002

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. The employee receivable consists of cash loaned to various employees.  The Company has been recouping the money from the employees over a period of nine months through payroll deductions.  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.

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.

Revenues

During the nine months ended September 30, 2003 and 2002, our revenues were $583,811 and $587,133, respectively, with costs of sales of $244,843 and $164,718 with gross profits of $338,968 and $422,415. During the three months ending September 30, 2003 and 2002 our revenues were $241,084 and $424,450 respectively. A third quarter decrease in comparative revenue of $183,367 is attributed to two factors. The one time return of product from the Future Farmers of America that was originally booked in the third quarter of 2002. Also the fundraising groups have the option of fulfilling the signed contract in the fall or the spring, many have opted to start in the spring rather than the fall because of allowable time in the spring. Our fall revenue is carried into the first half of 2004. The increase in the cost of sales is due to the increase of promotional product being distributed in conjun ction with marketing efforts. In the current year, the company has begun to broaden its customer base in the government and agricultural areas to diversify our revenues. Brand awareness has been very promising for future growth of Diatect’s Results Brands.

-37-

Operating Expenses.

For the nine months ended September 30, 2003 and 2002, total operating expenses were $2,137,086 and $1,683,055, respectively, for total operating losses of $1,798,118 and $1,260,640. The majority of this increase is related to the increased in promotions and advertising (especially due to increased marketing efforts), as well as additional consulting and travel expenses related to those marketing efforts. We continue to market and advertise our products heavily in the southern part of the U.S. and in doing so, we had an increase in salaries, wages and benefits to $869,962, which is attributed to a solid customer base sales and administrative staffing needed to meet current demands.

Other Income and Expenses.

On September 10, 2003 we closed on the “Sale and Purchase Agreement” with Diatomaceous Earth Deposits of Virginia, LLC for $31,125,600 in the form of a Promissory Note, with 8% interest per annum and the first payment not due until September 1, 2005. After careful consideration and given the early stage of the transaction we have opted to realize $15,562,800 on the balance sheet while reserving all further gain for realization as future revenue.

Other income/expenses showed a gain of $14,850,381 for the nine months ended September 30, 2003 principally because of the inclusion of $15,562,800 of income from the aforementioned mining property sale. Other income/expense for the nine months ended September 30, 2002 was a loss of $357,630 substantially due to expenditures on interest expense. For the nine months ended September 30, 2003, we had net income of $13,052,263 and net income per share of $0.27 in contrast to the prior year corresponding period’s loss of $1,618,270 and net loss per share of $0.04.

For the period ended September 30, 2003, we requested the return of our Results Fire Ant product from the Future Farmers of America chapters in the State of Texas.  This was the first year of our fundraiser with the Future Farmers of America chapters in the State of Texas and we over estimated the amount of product that should have been shipped. Further, as a result of certain administrative changes with the management of Future Farmers of America, we had concerns regarding unsecured product storage conditions utilized by this organization. As such we requested the return of the product and we recorded a loss on distribution and product returns of $141,172.

Liquidity and Capital Resources

In the nine months ended September 30, 2003, our liquidity was substantially derived from the issuance of notes payable. Cash used in operations exceeded revenues. We continue to anticipate increases in market development and sales, which will bring us closer to profitability.

At September 30, 2003, we had current assets of $1,268,615, consisting principally of $166,255 in accounts receivable and $1,068,892 in inventory. We had current liabilities of $5,423,024, consisting primarily of trade accounts payable of $1,331,731, a line of credit of $113,976, interest payable of $456,685, and current notes payable of $2,693,268. Long term debt of $847,000, consists of the mortgage note payable for the purchase of our facilities. Accordingly, we have a working capital deficit of $4,154,409. At September 30, 2003, we had property, plant and equipment totaling $1,146,123, net of depreciation, and other assets of $17,302,622, consisting primarily of our $1,736,322 investment in EPA labels and our note receivable of $15,562,800.

For the period ended September 30, 2003, we requested the return of our Results Fire Ant product from the Future Farmers of America chapters in the State of Texas.  There were several reasons for the request, first, this was the first year of our fundraiser with the Future Farmers of America chapters in the State of Texas and we over estimated the amount of product that should have been shipped.  Secondly, we had concerns regarding the storage of the product during the summer months.  As such we requested the return of the product and we recorded a loss on distribution and product returns of $141,172.

Cash flows from financing activities for the quarter ended September 30, 2003 totaled $498,788, 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 and services, issuance of debt for accounts payable and securing a mortgage for our facilities totaling $847,000.

-38-

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 next 12 months, we intend to continue our marketing campaign for Results and Diatect lines and focus on the retention of existing customers and the acquisition of new customers. In addition, we plan to continue to invest in expanding our product offerings, improving our infrastructure and focusing on customer care. We believe that the proceeds from the Convertible Debenture, our available cash and anticipated future cash flows will be sufficient to fund currently anticipated liquidity needs for the next twelve months and beyond. However, any projections of future cash inflows and outflows and any projections of the future state of the economy, which may have a direct effect on our cash inflows, are subject to substantial uncertainty. If we determine that we need to raise additional capital in the future, we may seek to sell additional equity or borrow funds. The sale of addit ional equity would result in dilution to our shareholders. We cannot assure you that any of these financing alternatives will be available in amounts or on terms acceptable to us, if at all. If we are unable to raise or borrow any needed additional capital, we could be required to significantly alter our operating plan, which could have a material adverse effect on our business, financial condition or results of operations.

Critical Account Policies

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, intangible assets, contingencies and litigation. While the application of GAAP involves the exercise of varying degrees of judgment, the aforementioned four areas require more judgment relative to the others.

The Company bases it estimates on historical experience and on various other assumptions and factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company, based on its ongoing review, will make adjustments to its judgments and estimates where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.

The Company believes the following critical accounting policies are important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective or complex judgments often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES (BAD DEBTS)

An allowance for uncollectible trade receivables is recorded based on a combination of write-off history, aging analysis, and any specific known troubled accounts.

The Company reviews all accounts receivable considered at risk on a quarterly basis. The review primarily consist of an analysis based upon current information available about the customer, such as financial statements, news reports, published credit ratings, the current economic environment, as well as prior history. Using this information, the Company determines the expected cash flow for the receivable and calculates a recommended estimate of the potential loss and the probability of loss. For those accounts where the loss is probable, the Company records a specific reserve.

The Company records an unallocated reserve that is calculated by applying a write-off rate to the total portfolio, excluding accounts that have been specifically reserved. This write-off rate is based upon write-off history and is adjusted to reflect current economic conditions.

SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill and intangible assets be tested for impairment on an annual basis and between annual tests in certain circumstances. Application of the impairment test to our EPA labels and other intangible assets requires judgment and the determination of fair value. Significant judgments required to estimate the fair value of EPA labels include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or label impairment for each reporting period.

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS 5, Accounting for Contingencies, requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.

LEGAL CONTINGENCIES

The Company records reserves for legal contingencies when the information available to the Company indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual costs to vary materially from estimates. In addition, the Company regularly monitors its exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and its estimates with respect to related costs and exposures. It is possible that material differences in actual outcomes, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates, could have a material adverse effect on the Company's fi nancial condition, results of operations or cash flows.

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.  

EXPERTS

The financial statements for the years ending December 31, 2002 and 2001, 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.  The consolidated interim financials for the periods ended September 30, 2003 and 2002 are unaudited.

-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, except for Note 21 which is dated December 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
Leasehold improvements	-	5,547
Computer equipment & software	62,917	11,309
Office furniture & equipment	60,568	41,793
Manufacturing equipment	297,354	126,531
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	315,312	16,051
Settlements payable	181,357	214,693
Notes payable	2,132,181	1,703,914
Total Current Liabilities	4,746,719	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	(15,600,770)	(13,613,935)
Total Stockholders’ Deficit	(613,373)	(207,460)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$         4,271,477	$       2,856,458

The accompanying notes are an integral part of these consolidated 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	425,958
GROSS PROFIT	423,299	144,946
OPERATING EXPENSES
Salaries, wages and benefits	679,044	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
Litigation settlements	-	20,000
Impairment loss	27,050	-
Advertising and promotion	139,939	-
Royalties	113,623	-
Bad debts	110,916	-
Other operating expense	445,545	216,976
Total Operating Expenses	2,233,865	1,447,578
OPERATING LOSS	$    (1,810,566)	$     (1,302,632)
OTHER INCOME (EXPENSES)
Gain from termination of debt	253,657	611,252
Interest and finance fees	(406,512)	(355,676)
Donations	(23,414)	-
Miscellaneous	-	(4,366)
Total Other Income (Expenses)	(176,269)	251,210
LOSS BEFORE INCOME TAXES	(1,986,835)	(1,051,422)
INCOME TAXES	-	-
NET LOSS	$     (1,986,835)	$     (1,051,422)
NET LOSS PER COMMON SHARE, BASIC AND DILUTED
NET LOSS PER 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 consolidated financial statements.

F-4

DIATECT INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Shares	Stock 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 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
Issuance of shares in exercise of options in consideration of accrued legal fees at $0.17 per share	499,998	85,354	(55,354)	-	-	30,000
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 in exercise of options for cash at $0.36 per share	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	-	-	-	-	(1,986,835)	(1,986,835)
Balance as of December 31, 2002	45,013,414	$      14,971,327	$          36,070	$        (20,000)	$ (15,600,770)	$   (613,373)

The accompanying notes are an integral part of these consolidated 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	$        (1,986,835)	$      (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:
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)
Deposit payable	-	(20,000)
Interest payable	92,805	(436,537)
Other accrued liabilities	299,261	15,030
NET CASH FLOWS USED BY OPERATING ACTIVITIES	(1,385,131)	(556,662)
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	$                      -
Cash in escrow	-	(400,000)
Bank overdraft	(22,268)	22,268
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	1,609,498	688,871
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
Income tax paid	$                        -	$                      -
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 consolidated 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.

Cash in Escrow

The cash in escrow originated with funds originally loaned to the Company for a building purchase.

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 expense for the years ended December 31, 2002 and 2001 was $69,534 and $12,765, respectively.  Depreciation is provided for by the use of straight-line and accelerated methods over the estimated useful lives of the assets which ranged from 3 to 10 years.  The estimated useful lives by category of depreciable asset is listed as follows:

Computer equipment & software

3 to 5 years

Office furniture & equipment

5 years

Manufacturing equipment

5 to 10 years

Depletion is computed using the unit-of-production method, for any mining property 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.  The following table presents a reconciliation of adjusted net loss and adjusted net loss per share.

For the Year Ended December 31,

2002 2001

Reported net loss	$         (1,986,835)	$       (1,051,422)
Add back: Investment in EPA
Labels amortization	-	283,212

Adjusted net loss $        (1,986,835) $          (768,210)

Basic earnings per share
Reported net loss	$                 (0.05)	$                (0.03)
Investment in EPA Labels
Amortization	0.00	0.01

Adjusted net loss $                (0.05) $               (0.02)

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 $5,170,560, 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 $5,170,560 of the net deferred tax asset was recorded because management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset.  The following table shows the calculation of the deferred tax asset with the offsetting valuation allowance.

Net operating loss carryforwards	$       15,590,032
Less: Compensation paid with stock	(382,499)

Adjusted net operating loss carryforwards	$       15,207,533
Average tax rate applied	34%

Deferred tax asset	$         5,170,561
Less: valuation allowance	(5,170,561)

Deferred tax asset recognized $                       0

At December 31, 2002, the Company has net operating loss carryforwards of approximately $15,000,000, which will expire in the years 2001 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.

Reclassification

In 2001, certain amounts from prior periods which were previously reported as extraordinary items have been reclassified to cost of goods sold to conform to the current period presentation.  Also, certain amounts from prior periods which were previously reported as other income (expenses) have been reclassified to operating expenses.  These reclassifications have resulted in no changes to the Company’s accumulated deficit or net losses presented.

Revenue Recognition Policy

During 2002 and 2001, the Company’s revenues originated from sales of products.  Revenues from sales of product are recognized when the product is shipped freight on board and title passes to customers.  Sales credits and price concessions are treated as a reduction of revenues.  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.  The Company did not have a return and allowance account at December 31, 2002 and 2001 because of the lack of extensive sales history to be used to establish an estimate for returns and allowances.

Significant Customers

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.  During the year ended December 31, 2002, no single customer accounted for more than 10% of gross revenues.  During the year ended December 31, 2001, $146,184 of the Company’s gross revenues were derived from one customer.

Cost of Goods Sold

Cost of goods sold consists primarily of the raw materials, labor and overhead of products sold, inbound and outbound shipping charges, and packaging supplies.

Other Operating Expense

Other operating expense consists primarily of general expenses not individually material to the financial statements and not otherwise classified.

Advertising and Promotion Expenses

Advertising and promotion expenses consist primarily of costs incurred in the design, development, and printing of Company literature and marketing materials and expenses incurred in efforts to promote the Company’s product.  The Company expenses all advertising and promotion expenditures as incurred.  The Company’s advertising expenses were $139,939 for the year ended December 31, 2002.

Product Warranties

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

Research and Development

Research and development expenses are charged to operations as incurred.  The cost of intellectual property purchased from others that is immediately marketable or that has an alternative future use is capitalized and amortized as intangible assets.  Capitalized costs are amortized using the straight-line method over the estimated economic life, typically 10 years, of the related asset.  The Company periodically reviews its capitalized patent costs to access recoverability based on the projected undiscounted cash flows from operations.  Impairments are recognized in operating results when a permanent diminution in value occurs.  The Company incurred no research and development cost during the years ended December 31, 2002 and 2001.

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. The Company accrues vacation expense throughout the year and, if employees do not utilize their allotment, the Company will cash out all unused pay on the last calendar day of the year.  At December 31, 2002, the Company included $10,738 in other accrued liabilities for compensated absences.  The Company had incurred no liability for compensated absences at December 31, 2001.

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 for Stock Options and Warrants Granted to Employees and Nonemployees

Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (hereinafter “SFAS No. 123”), defines a fair value-based method of accounting for stock options and other equity instruments.  The Company has adopted this method, which measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period.

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.  The adoption of SFAS 148 has no impact on the Company’s financial condition or results of operations because the Company has already adopted SFAS 123.

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.  No penalties are associated with delinquent notes payable.  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	50,000
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, 2001, due on 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, non-interest bearing, dated October 15, 2001, due on October 15, 2002, convertible to common stock at $0.35 per share.	-	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 the rate of $0.25 per share 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 the rate of $0.25 per share 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, interest at 10%, convertible to common stock at the rate of $0.25 per share from September 12, 2002 through March 11, 2003, dated September 11, 2002, due on March 30, 2003	50,000	-
Keven Jensen, (a shareholder of the Company), unsecured, interest at 10%, convertible to common stock at the rate of $0.25 per share from October 1, 2002 through March 11, 2003, dated September 30, 2002, due on March 11, 2003	50,000	-
Orion B & Sue Bishop, (shareholders of the Company), unsecured, interest at 10%, convertible to common stock at the rate of $0.25 per share 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 at the rate $0.25 per share from October 2, 2002 through April 2, 2003, dated October 1, 2002, due on demand.	25,000	-
Orion B & Sue Bishop, ( a shareholder of the Company), unsecured, interest at 10%, convertible to common stock at the rate of $0.25 per share 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 at the rate of $0.25 per share 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 at the rate of $0.25 per share 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 at the rate of $0.25 per share 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 at the rate of $0.25 per share 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 at the rate of $1.00 per share or 75% of the average of the three lowest market prices during the 120 calendar days prior to election to convert, 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.

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.  The Company contested the related claim and did not accrue a liability for this claim because management did not expect to pay and did not record any liability for these back wages.  Therefore no gain is recorded for this settlement.

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.

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

Exercise of Options

During the year ended December 31, 2001, an officer and shareholder of the Company exercised stock options valued at $55,354 for 499,998 shares of the Company’s common stock.  The transaction effectively reduced the accrued legal fees owed to this officer for the amount of $30,000, the exercise price of the stock issued.  During the year ended December 31, 2002, a shareholder of the Company exercised stock option valued at $66,110 to purchase 600,000 shares of the Company’s common stock.  The Company received $150,000 cash based on the exercise price of the stock issued.

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 Malheur 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	$            1,209	$          354,467	$                    -	$        355,676
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.

NOTE 21 – CORRECTION OF AN ERROR

The accompanying financial statements for 2002 have been restated to correct an error, additional accrued salaries, made in 2002.  The effect of the restatement was to increase accrued liabilities and increase net loss for 2002 by $10,738 net of income tax (nil per share).  Accumulated deficit at the beginning of 2002 was not effected by this correction.

F-22

DIATECT INTERNATIONAL CORPORATION

INTERIM FINANCIAL STATEMENTS

September 30, 2003

Diatect International Corp.

Consolidated Balance Sheets

September 30, 2003 (Unaudited)
December 31, 2002

ASSETS
CURRENT ASSETS
Cash	$                    1,898	$                 4,509
Cash in escrow	-	400,000
Accounts receivable, net of allowance for uncollectible accounts	166,255	3,525,643
Employee receivable	1,805	1,270
Prepaid interest	15,067	108,048
Prepaid expenses	14,698	56,399
Inventories	1,068,892	1,259,149

Total Current Assets 1,268,615 2,182,018

PROPERTY, PLANT AND EQUIPMENT
Mining property	940	940
Land	150,000	-
Building	725,500	-
Computer equipment & software	76,371	62,917
Office furniture & equipment	62,599	60,568
Manufacturing equipment	297,354	297,354
Less accumulated depreciation	(166,641)	(97,142)

Total Property, Plant and Equipment 1,146,123 324,637

OTHER ASSETS
Note receivable – related party	15,562,800	-
Deposits	-	28,500
Patents	3,500	-
Investments in EPA labels	1,736,322	1,736,322

Total Other Assets 17,302,622 1,764,822

TOTAL ASSETS $          19,717,360 $          4,271,477

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable	$            1,331,731	$         1,400,610
Accounts payable – related party	128,607	37,710
Lease payable	12,026	18,067
Line of credit	113,976	351,048
Bank overdraft	59,034	-
Interest payable	456,685	310,434
Settlements payable	136,709	181,357
Other accrued liabilities	256,631	190,951
Royalty payable	113,623	113,623
Notes payable	2,814,002	2,132,181
Related party notes payable	120,734	-

Total Current Liabilities 5,423,024 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 123,895 134,739

STOCKHOLDERS’ EQUITY (DEFICIT)
Common stock, no par value; 100,000,000 shares authorized;
50,334,485 and 45,013,414 shares issued and outstanding	15,845,140	14,971,327
Common stock subscribed	(20,000)	(20,000)
Stock options	36,070	36,070
Accumulated deficit	(2,537,769)	(15,590,032)

Total Stockholders’ Equity (Deficit) 13,323,440 (602,635)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $          19,717,360 $           4,271,477

See condensed notes to interim consolidated financial statements.

F-23

Diatect International Corp.

Consolidated Statements of Operations

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2003 (Unaudited) 2002 (Unaudited) 2003 (Unaudited) 2002 (Unaudited)

REVENUES	$             241,084	$            424,450	$            583,811	$             587,133
COST OF SALES	88,239	98,333	244,843	164,718

GROSS PROFIT 152,845 326,117 338,968 422,415

OPERATING EXPENSES
Salaries, wages & benefits	314,901	233,459	869,962	469,766
Executive compensation	68,615	60,693	185,165	204,293
Registration fees	12,621	6,797	30,465	17,822
Depreciation and amortization	22,378	17,186	69,499	47,324
Contract labor	8,997	-	63,256	66,361
Legal and professional fees	48,733	47,960	164,655	126,305
Advertising and promotion	73,944	91,181	300,528	212,090
Consulting	25,000	20,700	37,500	98,506
Travel & entertainment	28,599	22,202	96,220	58,703
Supplies	2,732	30,899	31,576	117,249
Bad debts	18,300	1,065	88,200	108,652
Other operating expense	82,230	20,074	203,060	155,984

Total Operating Expenses 707,050 552,216 2,137,086 1,683,055

OPERATING LOSS (554,205) (226,099) (1,798,118) (1,260,640)

OTHER INCOME (EXPENSES)
Sale of mining property	15,562,800	-	15,562,800	-
Interest expense	(237,986)	(182,718)	(585,605)	(334,250)
Settlement of other expenses	-	-	(141,172)	-
Contributions	-	(23,414)	-	(23,414)
Miscellaneous	14,358	483	14,358	34

Total Other Income (Expenses) 15,339,172 (205,649) 14,850,381 (357,630)

NET INCOME (LOSS) BEFORE INCOME TAXES	14,784,967	(431,748)	13,052,263	(1,618,270)
NET INCOME TAXES	-	-	-	-

NET LOSS $       14,784,967 $         (431,748) $        13,052,263 $        (1,618,270)

BASIC AND DILUTED NET LOSS PER SHARE $                 0.30 $              (0.01) $                 0.27 $                 (0.04)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED

49,794,334

41,512,331

47,951,328

40,038,428

See condensed notes to interim consolidated financial statements.

F-24

Diatect International Corp.

Consolidated Cash Flow Statements

For the Nine Months Ended

September 30,

2003 (Unaudited) 2002 (Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$          13,052,263	$        (1,618,272)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	69,499	47,324
Donation of building	-	23,164
Issuance of stock for services	121,010	130,620
Issuance of stock for finance charges	168,381	141,690
Issuance of stock for expenses	13,760	151,700
Issuance of debt for expenses	63,675	-
Bad debts	88,200	-
Prepaid finance charges paid by issuance of stock	-	21,250
Revenue recognized on receipt of notes receivable	(15,562,800)	-
Changes in assets and liabilities:
Cash in escrow	400,000	-
Accounts receivable	98,188	(195,639)
Employee receivable	(535)	-
Prepaid interest	92,981	17,903
Prepaid royalties	-	17,809
Prepaid expenses	41,701	-
Inventories	190,257	(1,074,087)
Deposits	28,500	-
Accounts payable and accrued expenses	520,928	1,206,150
Accounts payable – related parties	90,897	14,452
Other accrued liabilities	65,680	122,102

NET CASH FLOWS USED BY OPERATING ACTIVITIES (457,415) (993,834)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment	(43,984)	(234,960)

NET CASH FLOWS USED BY INVESTING ACTIVITIES (43,984) (234,960)

CASH FLOWS FROM FINANCING ACTIVITIES
Payments of settlements	-	(33,336)
Proceeds from lines of credit	-	246,941
Proceeds from lease payable	-	25,826
Proceeds from bank overdraft	(59,034)	(22,268)
Proceeds from sale of stock	78,000	622,065
Commitments and contingencies	(10,844)	(1,000)
Payment of lease payable	(9,433)	-
Net change of line of credit	(237,072)	-
Payments of notes payable	(417,716)	(70,306)
Proceeds from notes payable	1,154,887	475,000

NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 498,788 1,242,922

NET INCREASE (DECREASE IN CASH) (2,611) 14,128

CASH AT BEGINNING OF YEAR 4,509 888

CASH AT END OF PERIOD $                   1,898 $               15,016

SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest expense paid	$                  6,484	$                1,449
Income taxes paid	$                          -	$                        -
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for notes payable and interest	$              449,625	$                        -
Issuance of common stock for services	$              121,010	$            130,620
Issuance of common stock for prepaid finance charges	$                          -	$              21,250
Issuance of debt for account payable	$                56,797	$            409,799
Issuance of common stock for settlement and interest	$              288,628	$                        -
Issuance of common stock for finance charges	$              168,381	$              51,700
Donation of building	$                          -	$              23,164
Property acquired by mortgage	$              847,000	$                        -
Revenue recognized on receipt of notes receivable	$      (15,562,800)	$                        -

See condensed notes to interim consolidated financial statements.

F-25

DIATECT INTERNATIONAL CORP.

Notes to the Interim Consolidated Financial Statements

September 30, 2003

NOTE 1 – BASIS AND PRESENTATION

The foregoing unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America.  The unaudited interim financial statements should be read in conjunction with the audited financial statements for the period 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 accounting principles generally accepted in the United States of America, 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 nine-month period ended September 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 contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  For the nine months ended September 30, 2003, the Company sustained income of $13,052,263.  As of September 30, 2003 the Company’s accumulated deficit was $2,537,769.  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.

Restatement and Reclassification

Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2003 presentation.

Provision for 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 in 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 September 30, 2003, the Company had net deferred tax assets calculated at an expected rate of 34% of approximately $6,300,000 principally arising from net operating loss carryforwards for income tax purposes.  As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been established at September 30, 2003.  The significant components of the deferred tax asset at September 30, 2003 and December 31, 2002 were as follows:

September 30, 2003 December 31, 2002

Net operating loss carryforward	$           16,027,764	$            13,613,975
Current year-to-date (income) loss	(13,052,263)	1,970,222
Less: Installment sale income from mine property	15,562,800	-
Tax amortization for intangible assets	212,409	-
Compensation paid with stock	(40,010)	(218,109)
Deferred tax asset	6,361,638	5,225,470
Deferred tax asset valuation allowance	$          (6,361,638)	$           (5,224,470)

At September 30, 2003, the Company has net operating loss carryforwards of approximately $18,700,000, which expire in the years 2005 through 2022.  The Company recognized approximately $40,000 of losses from issuance of restricted common stock and stock options for services in fiscal 2003, which are not deductible for tax purposes and are not included in the above calculation of deferred tax assets.  The change in the allowance account from December 31, 2002 to September 30, 2003 was $1,137,168.

NOTE 2 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Diatect International Corp. was incorporated in the State of California in 1979.  

The Company’s wholly owned subsidiaries have been abandoned.

F-26

NOTE 3 – INVENTORIES

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

September 30, 2003 December 31, 2002

Raw Materials	$                 56,905	$               78,169
Packaging Materials	14,949	12,874
Finished Goods	997,038	1,168,106

Total $            1,068,892 $          1,259,149

Finished goods consist of different forms of packaged products for use in pesticide applications.

NOTE 4 – NOTES PAYABLE

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

Creditor and Conditions September 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 $400,000 of funds and issuance of 644,715 shares of the Company’s common stock at $0.34 per share for $200,000 principal and $19,000 interest expense.	(600,000)
Kyle Baird, (a shareholder of the Company), unsecured, interest at 10%, dated July 5, 2002, due on September 30, 2002, paid by issuance of 318,955 shares of the Company’s common stock at $0.24 per share for $74,000 principal and $2,842 accrued interest.	(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 341,583 shares of the Company’s stock at $0.23 per share.	(79,250)
Hyrum L. & Helen Mae Andrus, (shareholders of the Company), interest at 8%, dated April 24, 2002, due on September 24, 2002, delinquent, partial payment.	(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, 375,000 shares of stock at $0.10 per share issued for additional consideration as interest expense, interest at 10%, dated January 15, 2003, due on July 15, 2003.	750,000
Stonefield, Inc., secured by deed of trust, interest at 13% with monthly payments of interest only commencing February 17, 2003, dated January 15, 2003, due on January 17, 2005.	847,000
LaJolla Cove Investors, Inc., (a shareholder of the Company), unsecured, 8% convertible debenture convertible to common stock, dated March 18, 2003, due on demand.	100,000
Dave Russell, (a shareholder of the Company), unsecured, interest at 10$, dated May 20, 2003, due November 20, 2003.	100,000
Kevin Jensen (a shareholder of the Company), unsecured, interest at 10% dated April 25, 2003 due July 24, 2003, delinquent.	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 52,553,shares of the Company’s common stock at $0.25 per share for principal, $315 accrued interest and $325 interest expense.	(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 52,552,shares of the Company’s common stock at $0.25 per share for principal, $264 accrued interest and $374 interest expense.	(12,500)
Compax/Flexpak a vendor of the Company, has converted the account payable balance to an unsecured 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.	6,532
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
Dave Russell, (a shareholder of the Company), unsecured, interest at 10%, dated July 7, 2003, due January 7, 2003, delinquent.	10,000
Gary Hanson, (a shareholder of the Company), unsecured, interest at 10%, dated July 1, 2003, due on demand.	6,000
Amanda Wright, (a shareholder of the Company), unsecured, interest at 10%, dated January 11, 2002, due on July 11, 2002, paid by issuance of cash.	(9,000)
Hyrum L. & Helen Andrus, (shareholders of the Company), unsecured, interest at 10%, dated June 25, 2002, due on demand, renegotiate the note for another six months beginning July 10, 2003.  All prior interest and original note was converted to a new note.	(35,485) 38,000
Jeffrey Mathews (a shareholder of the Company), unsecured, interest at 8%, dated July 3, 2002, due on January 15, 2003, paid by issuance of 58,815 shares of the Company’s common stock at $0.20 per share for principal and interest	(10,403)
Orion Bishop, (a shareholder of the Company), unsecured, interest at 10%, dated September 18, 2003 due March 18, 2004.	30,000
Brian & Roxanne Clark, (shareholders of the Company), unsecured, interest at 10%, dated June 25, 2003 due on demand, paid by issuance of cash.	(2,200)
George Anne Pope Charitable Trust, (a shareholder of the Company), unsecured, interest at 10%, dated January 15, 2003 due on July 15, 2003, renegotiated the note for another six months dated July 16, 2003.  All prior interest and original note was converted to a new note.	(750,000) 787,500
Max E. Sluga, (a shareholder of the Company), unsecured, interest at 10%, dated July 28, 2003 due January 28, 2004	20,000
Dave H. Andrus, (a shareholder of the Company), unsecured, interest at 10%, due December 31, 2005	104,934
Jay Downs, (a shareholder of the Company), unsecured, interest at 10%, due December 31, 2005	10,800

Total	3,661,002
Less current portion	2,814,002

Total long term notes payable $         847,000

F-27

NOTE 5 – LINES OF CREDIT

On July 19, 2002, the Company secured a $250,000 line of credit with Zion’s 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.

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 nine months ended September 30, 2003, the Company issued 5,321,071 shares of its common stock.  For debt and interest valued at $674,803, the Company issued 3,779,494 shares.  The Company also issued 80,000 shares of its common stock to directors for services valued at $12,550.  There were 896,577 shares issued to employees, consultants and others for services valued at $108,460.  The stock issued was valued at its fair market value on the dates of issuance.  The Company also sold 565,000 shares of its common stock for $78,000 in cash during the same fiscal period.

Berlin Stock Exchange

On September 23, 2003, the Company was granted permission to trade its shares on the Third Market Segment of the Berlin Stock Exchange.  

NOTE 8 – STOCK OPTIONS

There were no options exercised or issued during the quarter ended September 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 agreement include the Company’s assumption of an interest-only two-year mortgage in the amount of $847,000, with payments of $9,200 per month at 13% annual interest rate. Under terms of the original agreement, the Company occupied the facilities with no charge until closing.  Other terms included a cash down payment of $28,500 during the fourth quarter of the year ended December 31, 2001, which 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. The Company renegotiated the terms of the loan covenant and extended the loan maturity to January 16, 2004.

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 – SALE OF MINING RIGHTS

On September 10, 2003, the Company successfully completed a transaction whereby it sold 90% of its rights to a diatomaceous earth mining site in Oregon to a related party, a LLC principally owned by a Diatect director, for a $31.1 million note.  Prior to the transaction, the Company obtained letters of appraisal from consulting geologists in support of the transaction sale price.  Under the terms of the agreement, Diatect will begin receiving annual note principal payments of $1,945,350 per year plus interest at 8% per annum for sixteen consecutive years beginning with the first scheduled payment in September 2005.

The Company’s note is secured by a sale and purchase agreement wherein the purchaser obligates itself to certain conditions including the payment to Diatect of ascending royalties based on the sales of mined product.

In recording the transaction after lengthy consideration, the Company opted to initially discount the face value of the note received.  The note was recorded at $15,562,800, with the related entry to other income in the Company’s statement of operations.

F-29

DIATECT INTERNATIONAL CORPORATION

________________________________

Prospectus

________________________________

PART II

Item 24.   Indemnification of Directors and Officers

Our By-Laws include provisions, which limit the liability of our directors.  As permitted by applicable provisions of the California corporations code section 204.5, 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 duty 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 to Mr. Barry Clark, 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.

-ii-

Item 27.  Exhibits

Exhibit Number	Description
3.1	Articles of Incorporation***
3.2	By-Laws**
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*
10.1	Sale and Purchase Agreement dated September 10, 2003**
10.2	Employment Agreement of Dave Andrus, dated July 1, 2001**
10.3	Employment Agreement of Jay Downs, dated September 20, 2001**
23.1	Consent of Williams & Webster, P.S.**

* Filed on August 26, 2003.

** Filed herewith.

*** To be filed by amendment.

-iii-

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.

-iv-

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) 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 Act and is, therefore, unenforceable.  

-v-

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/A 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: January 21, 2004

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: January 21, 2004
/s/ Margie Humphries Margie Humphries Secretary	Dated: January 21, 2004
/s/ John L. Runft Director and Corporate Legal Council	Dated: January __, 2004
/s/ M. Stewart Hyndman Director	Dated: January __, 2004
/s/ Frank Priestley Director	Dated: January __, 2004
/s/ Dr. Michael P. McQuade Dr. Michael P. McQuade Director	Dated: January 21, 2004
/s/ Dave H. Andrus Dave H. Andrus VP of Operations and Director	Dated: January 21, 2004

-vi-

EX-1

Exhibit 3.2

BY-LAWS

of

DIATECT INTERNATIONAL CORPORATION

(A California Corporation)

ARTICLE I

Principal Office

Section 1.  The principal executive office for the transaction of the business of the corporation is hereby fixed and located at 875 South Industrial Parkway, Heber City, Utah 84032.

Section 2.  The board of directors may at any time establish other business offices within or without the State of California.

ARTICLE II

Meetings of Shareholders

Section 1.  All meetings of the shareholders shall be at any place within or without the State of California which may be designed either by the board of directors or by the written consent of all the shareholders entitled to vote thereat and not present at the meeting given either before or after the meeting and filed with the secretary of the corporation.  In the absence of any such designation, shareholders’ meetings shall be held at the principal executive office of the corporation.

Section 2.  The annual meeting of the shareholders of the corporation shall be held on such date and at such time as shall be determined by the board of directors, not more than 15 months after the date of the preceding annual meeting or, in the case of the first annual meeting, not more than 15 months after the organization of the corporation.  At such meeting, directors shall be elected and any other proper business may be transacted which is within the powers of the shareholders.  Written notice of each annual meeting shall be given to each shareholder entitled to vote either personally or by first-class mail or other means of written communications (which includes, without limitation and wherever used in these by-laws, telegraphic and facsimile communication), charges prepaid, addressed to each shareholder at his address appearing on the books of the corporatio n, or given by him to the corporation for the purpose of notice.  If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing of the same provided such notices and reports shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice or report to all other shareholders.  If no address of a shareholder appears on the books of the corporation or is given by the shareholder to the corporation, notice is duly given to him if sent by mail or other means of written communication addressed to the place where the principal executive office of the corporation is located or if published at least once in a newspaper of general circulation in the county in which said principal executive office is located.  

All such notices shall be given to each shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before each annual meeting.  Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the United States mail or delivered to a common carrier for transmission to the recipient or actually transmitted by the person giving the notice by electronic means to the recipient or sent by other means of written communication.  An affidavit of mailing of any such notice in accordance with the foregoing provisions, executed by the secretary, assistant secretary or transfer agent of the corporation shall be prima facie evidence of the giving of the notice.  

Such notice shall state

(a)

the place, date and hour of the meeting;

(b)

those matters which the board, at the time of the mailing of the notice, intends to present for action by the shareholders;

(c)

if directors are to be elected, the names of nominees intended at the time of the notice to be presented by management for election;

(d)

the general nature of a proposal, if any, to take action with respect to the approval of (i) a contract or other transaction with an interested director, (ii) amendment of the articles of incorporation, (iii) a reorganization of the corporation as defined in Section 181 of the General Corporation Law, (iv) voluntary dissolution of the corporation, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and

(e)

such other matters, if any, as may be expressly required by statute.

Section 3.  Special meetings of the shareholders for the purpose of taking any action permitted to be taken by the shareholders under the General Corporation Law and the articles of incorporation of this corporation, may be called by the chairman of the board or the president, or by any vice president, or by the board of directors, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting.  Upon request in writing that a special meeting of shareholders be called for any proper purpose, directed to the chairman of the board, president, vice president or secretary by any person (other than the board of directors) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons c alling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request.  Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner and contain the same statements as required for annual meetings of shareholders.  Notice of any special meeting shall also specify the general nature of the business to be transacted, and no other business may be transacted at such meeting.  

Section 4.  The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting shall constitute a quorum for the transaction of business.  The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.

Section 5.  Any shareholders’ meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum no other business may be transacted at such meeting, except as provided in Section 4 above.  

When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors shall set a new record date.  Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Section 2 of this Article II.  At any adjourned meeting the shareholders may transact any business, which might have been transacted at the original meeting.

Section 6.   Unless a record date for voting purposes be fixed as provided in Section 1 of Article VII of these by-laws then, subject to the provisions of Sections 702 and 704, inclusive, of the Corporation Code of California, only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the business day next preceding the day on which notice of the meeting is given or if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of shareholders is held, shall be entitled to vote at such meeting and such day shall be the record date for such meeting.  Any shareholder entitled to vote on any matter may vote part of the share in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal (other than elections of directors or officers), but if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder’s approving vote is with respect to all shares such is entitled to vote. Such vote may be viva voce or by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at any election and before the voting begins.  If a quorum is present, except with respect to election of directors, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the General Corporation Law or the articles of incorporation.  Subject to the requirements of the next sentence, every shareholder entitled to vote at any election for directors may cumulate his votes and give one candidate a number of votes equal to the number of dir ectors to be elected multiplied by the number of votes to which his shares are entitled, or distribute his votes on the same principle among as many candidates as he shall think fit.  No shareholder shall be entitled to cumulate votes unless such candidate or candidates’ names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder’s intention to cumulate his votes.  If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination.  The candidates receiving the highest number of votes of shares entitled to be voted for them, up to the number of directors to be elected, shall be elected.

Section 7.  The transactions at any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes thereof.  The waiver of notice or consent need not specify either the business to be transacted or the purpose of any regular or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in subparagraph (d) of the third paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of such proposal.  All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.  

Attendance of a person at a meeting shall also constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of such objection is expressly made at the meeting.  

Section 8.  Directors may be elected without a meeting by a consent in writing, setting forth the action so taken, signed by all of the persons who would be entitled to vote for the election of directors, provided that, without notice except as hereinafter set forth, a director may be elected at any time to fill a vacancy not filled by the directors by the written consent of persons holding a majority of the outstanding shares entitled to vote for the election of directors.  

Any other action which, under any provision of the California General Corporation Law, may be taken at a meeting of the shareholders, may be taken without a meeting, and without notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote filed with the secretary of the corporation and shall be maintained in the corporate records.

Unless the consents of all shareholders entitled to vote have been solicited in writing:

(a)

Notice of any proposed shareholder approval of (i) a contract or other transaction with an interested director; (ii) indemnification of an agent of the corporation as authorized by Section 11 of Article III of these by-laws; (iii) a reorganization of the corporation as defined in Section 181 of the General Corporation Law; or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any, without a meeting by less than unanimous written consent, shall be given at least ten (10) days before the consummation of the action authorized by such approval; and

(b)

Prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent, to those shareholders entitled to vote who have not consented in writing.  Such notices shall be given in the manner provided in Section 2 of Article II of these by-laws.  

Unless, as provided in Section 1 of Article VII of these by-laws, the board of directors has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be the day on which the first written consent is given.  

Any shareholder giving a written consent, or the shareholder’s proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorized the proposed action have been filed with the secretary of the corporation, but may not do so thereafter.  Such revocation is effective upon its receipt by the secretary of the corporation.

Section 9.  Every person entitled to vote or execute consents shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by such person or his duly authorized agent and filed with the secretary of the corporation.  A proxy shall be deemed executed if the shareholder’s name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder’s attorney in fact.  Any proxy duly executed which does not state that it is irrevocable shall continue in full force and effect until, (i) an instrument revoking it or a duly executed proxy bearing a later date is filed with the secretary of the corporation prior to the vote pursuant thereto, (ii) the person executing the proxy attends the meeting and votes in person, or (iii) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted; provided that no such proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless otherwise provided in the proxy.  The revocability of a proxy, which states on its face that it is irrevocable, shall be governed by the provisions of Sections 705 (e) and (f) of the General Corporation Law.

Section 10.  In advance of any meeting of shareholders, the board of directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment thereof.  If inspectors of election be not so appointed, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting.  The number of inspectors shall be either one or three.  If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed.  In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may, and on the request of any shareholder or a shareholder’s proxy shall, be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the chairman of the meeting.  

The duties of such inspectors shall be as prescribed by Section 707 of the General Corporation Law and shall include:  determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders.  In the determination of the validity and effect of proxies the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed.

The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical.  If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all.  Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein.  

ARTICLE III

Board of Directors

Section 1.  Subject to the provisions of the California General Corporation Law and any limitations in the articles of incorporation and these by-laws as to action to be authorized or approved by the shareholders, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors.  Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the board of directors shall have the following powers, to wit:

First:  To conduct, manage and control the affairs and business of the corporation and to make such rules and regulations therefore, not inconsistent with law or with the articles of incorporation or with the by-laws, as they may deem best;

Second:  To elect and remove at pleasure the officers, agents and employees of the corporation, prescribe their duties and fix their compensation;

Third:  To authorize the issue of shares of stock of the corporation from time to time upon such terms as may be lawful, in consideration of money paid, labor done, services actually rendered to the corporation or for its benefit or in its formation or reorganization, debts or securities canceled, and tangible or intangible property actually received, but neither promissory notes of the purchaser (unless adequately secured by collateral other than the shares acquired or unless permitted by Section 408 of the General Corporation Law) nor future services shall constitute payment or part payment for the shares of the corporation;

Fourth:  To borrow money and incur indebtedness for the purposes of the corporation and to cause to be executed and delivered therefore, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefore; and

Fifth:  To alter, repeal or amend, from time to time, and at any time, these by-laws and any and all amendments of the same, and from time to time, and at any time, to make and adopt such new and additional by-laws as may be necessary and proper, subject to the power of the shareholders to adopt, amend or repeal such by-laws, or to revoke the delegation of authority of the directors, as provided by law or by Article VII of these by-laws.

Sixth:  By resolution adopted by a majority of the authorized number of directors, to designate an executive and other committees, each consisting of two or more directors, to serve at the pleasure of the board, and to prescribe the manner in which proceedings of such committee shall be conducted.  Any such committee, to the extent provided in a resolution of the board, shall have all of the authority of the board, except with respect to:

(i)

The approval of any action for which the General Corporation Law or the articles of incorporation also require shareholder approval;

(ii)

The filling of vacancies on the board or in any committee;

(iii)

The fixing of compensation of the directors for serving on the board or on any committee;

(iv)

The adoption, amendment or repeal of by-laws;

(v)

The amendment or repeal of any resolution of the board;

(vi)

Any distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the board; and

(vii)

The appointment of other committees of the board or the members thereof.

Section 2.  The authorized number of directors shall not be less than eight (8) nor more than eleven (11).  The exact authorized number of directors shall be fixed from time to time, within the limits specified in this Section 2 or in the articles of incorporation, by the board of directors, or by a by-law or amendment thereof duly adopted by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of a majority of the outstanding share entitled to vote, until changed by a duly adopted amendment to the articles of incorporation or by an amendment to this by-law adopted by approval of the outstanding shares.

Section 3.  The directors shall be elected at each annual meeting of shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose.  Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected, except as otherwise provided by statute.  

Section 4.  A vacancy in the board of directors shall be deemed to exist in case of the death, resignation or removal of any director, if a director has been declared of unsound mind by order of court or convicted of a felony, if the authorized number of directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting.

Vacancies in the board of directors, except for a vacancy created by the removal of a director, may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of the shareholders.  

The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors.  Any such election by written consent shall require the consent of holders of a majority of the outstanding shares entitled to vote.

Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary of the board of directors of the corporation, unless the notice specified a later time for the effectiveness of such resignation.  If the board of directors accepts the resignation of a director tendered to take effect at a future time, the board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective.

No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office.

ARTICLE IV

Meetings of Directors

Section 1.  Regular meetings of the board of directors shall be held at any place within or without the State of California that has been designated from time to time by the board of directors.  In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation, except as provided in Section 2.  Special meetings of the board of directors may be held at any place within or without the State of California which has been designated in the notice of the meeting, or, if not designated in the notice or if there is no notice, at the principal executive office of the corporation.

Section 2.  Immediately following each annual meeting of the shareholders there shall be a regular meeting of the board of directors of the corporation at the place of said annual meeting or at such other place as shall have been designated by the board of directors for the purpose of organization, election of officers and the transaction of other business.  Other regular meetings of the board of directors shall be held without call on such date and time as may be fixed by the board of directors; provided, however, that should any such day fall on a legal holiday, then said meeting shall be held at the same time on the next day thereafter ensuing which is not a legal holiday.  Notice of regular meetings of the directors is hereby dispensed with and no notice whatever of any such meeting need be given, provided that notice of any change in the time or place or regular meetings shall be given to all of the directors in the same manner as notice for special meetings of the board of directors.  

Section 3.  Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or president or, if both the chairman of the board and the president are absent or are unable or refuse to act, by any vice president or by any two directors.  Notice of the time and place of special meetings shall be delivered personally or by telephone to each director, or sent by first-class mail or telegram or facsimile transmission, charges prepaid, addressed to him at his address as it appears upon the records of the corporation or, if it is not so shown on the records and is not readily ascertainable, at the place at which the meetings of the directors are regularly held.  In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting.  In case such notice is telegraphed or sent by facsimile transmission, it shall be delivered to a common carrier for transmission to the director or actually transmitted by the person giving the notice by electronic means to the director at least forty-eight (48) hours prior to the time of the holding of the meeting.  In case such notice is delivered personally or by telephone as above provided, it shall be so delivered at least twenty-four (24) hours prior to the time of the holding of the meeting   Any notice given personally or by telephone may be communicated to either the director or to a person at the office of the director whom the person giving the notice has reason to believe will promptly communicate it to the director.  Such deposit in the mail, delivery to a common carrier, transmission by electronic means or delivery, personally or by telephone, as above provided, shall be due, legal and personal notice to such directors.  The notice need not specif y the place of the meeting if the meeting is to be held at the principal executive office of the corporation, and need not specify the purpose of the meeting.

Section 4.  Presence of a majority of the authorized number of directors at a meeting of the board of directors constitutes a quorum for the transmission of business, except as hereinafter provided.  Members of the board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another.  Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Sections 310, 311 and 317 of the General Corporation Law.  A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, provided that any action taken is approved by at least a majority of the required quorum for such meeting.  A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place.  If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment.  

Section 5.  The transactions of any meeting of the board of directors, however called or notice to wherever held, shall be as valid as though had a meeting duly held after regular call and notice, if a quorum is present, and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof.  All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.  Notice of a meeting shall also be deemed duly given to any director who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director.

Section 6.  A quorum of the directors may adjourn any directors’ meeting to meet again at a stated day and hour; provided, however, that in the absence of a quorum a majority of the directors present at any directors’ meeting, either regular or special, may adjourn from time to time until the time fixed for the next regular meeting of the board.  

Section 7.  If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment.  Otherwise notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned.

Section 8.  Any action required or permitted to be taken by the board of directors, may be taken without a meeting if all members of the board shall individually or collectively consent in writing to such action.  Such written consent or consents shall be filed with the minutes of the proceedings of the board.  Such action by written consent shall have the same force and effect as a unanimous vote of such directors.  

Section 9.  The provisions of this Article IV shall also apply, with necessary changes in points of detail, to committees of the board of directors, if any, and to actions by such committees (except for the first sentence of Section 2 of Article IV, which shall not apply, and except that special meetings of a committee may also be called at any time by any two members of the committee), unless otherwise provided by these by-laws or by the resolution of the board of directors designating such committees.  For such purpose, references to “the board” or “the board of directors” shall be deemed to refer to each such committee and references to “directors” and “members of the board” shall be deemed to refer to members of the committee.  Committees of the board of directors may be designated, and shall be subject to the limitations on their authority, as provided in Section 311 of the General Corporation Law.

Section 10.  Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the board.

Section 11.  

(a)

For the purpose of this section, “agent” means any person who is or was a director, officer, employee or other agent of this corporation, or is or was serving at the request of this corporation as director, officer, employee or agent or another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of this corporation or of another enterprise at the request of such predecessor corporation;  “proceeding” means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and “expenses” includes, without limitation, attorneys’ fees and any expenses of establishing a ri ght to indemnification under subdivision (d) or subdivision (e) (3) of this section.

(b)

This corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this corporation) by reason of the fact that such person is or was an agent of this corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably relieved to be in the best interests of this corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful.  The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presump tion that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this corporation or that the person had reasonable cause to believe that the person’s conduct was unlawful.

(c)

This corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or complete action by or in the right of this corporation to procure a judgment in its favor by reason of the fact that such person is or was an agent of this corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of this corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.  No indemnification shall be made under this subdivision (c):  

(1)

In respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to this corporation in the performance of such person’s duty to this corporation, unless and only to the extent that the court in which such action was brought shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for the expenses which such court shall determine;

(2)

Of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval; or

(3)

Of expenses incurred in defending a threatened or pending action, which is settled or otherwise disposed of without court approval.

(d)

To the extent that an agent of this corporation has been successful on the merits in defense of any proceeding referred to in subdivision (b) or (c) or in defense of any claim, issue or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith.  

(e)

Except as provided in subdivision (d), any indemnification under this section shall be made by this corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standards of conduct set forth in subdivision (b) or (c), by:

(1)

A majority vote of a quorum consisting of directors who are not parties to such proceeding;

(2)

Approval or ratification by the affirmative vote of a majority of the shares of this corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote.  For such purpose, the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon; or

(3)

The court in which such proceeding is or was pending, upon application made by this corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by this corporation.

(f)

Expenses incurred in defending any proceeding may be advanced by this corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the agent to repay such amount unless it shall be determined ultimately that the agent is entitled to indemnified as authorized in this section.

(g)

Nothing contained in this section shall affect any right to indemnification to which persons other than directors and officers of this corporation or any subsidiary hereof may be entitled by contract or otherwise.

(h)

No indemnification or advance shall be made under this section, except as provided in subdivision (d) or subdivision (e) (3), in any circumstance where it appears:

1.

That it would be inconsistent with a provision of the articles, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or

2.

That it would be inconsistent with any condition expressly imposed by a court in approving a settlement.

(i)

Upon and in the event of a determination by the board of directors of this corporation to purchase such insurance, this corporation shall purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent’s status as such whether or not this corporation would have the power to indemnify the agent against such liability under the provisions of this section.

ARTICLE V

Officers

Section 1.  The officers of the corporation shall be:  the chairman of the board; the president; the secretary; and a treasurer, who shall also be, and be known as, the chief financial officer of the corporation.  The corporation may also have at the discretion of the board of directors, a vice chairman, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, a controller, and such other officers as may be designated from time to time by the board of directors.  Any number of offices may be held by the same person.  The officers shall be elected by the board of directors and shall hold office at the pleasure of the board.

Chairman of the Board

Section 2.  The chairman of the board shall preside at all meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by these by-laws.  The chairman of the board shall be an ex officio member of all committees of the board of directors.  

Vice Chairman

Section 2A.  The vice chairman, if there be such an officer, shall have the powers, duties and responsibilities specified by resolution of the board of directors.  

President

Section 3.  The president shall be the chief executive officer of the corporation and shall, subject to the direction of the board of directors, have general supervision, direction and control of the business and officers of the corporation.

Vice Presidents

Section 4.  In the absence of disability or refusal to act of the president, the vice presidents in order of their rank as fixed by the board of directors, or, if not ranked, the vice president designated by the president or the board of directors, shall perform all of the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president.  The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them, respectively, by the board of directors or the by-laws.  The board of directors may designate certain vice presidents as senior vice presidents of the corporation.  Any senior vice president shall rank in the order fixed by the board of directors, and shall in any respect have precedence over all vice presidents of the corporation so designated.  

Secretary

Section 5.  The secretary shall keep or cause to be kept at the principal executive office of the corporation or such other place as the board of directors may order, a book of minutes of all proceedings of the shareholders, the board of directors and committees of the board, with the time and place of holding, whether regular or special, and if special how authorized, the notice thereof given, the names of those present at directors’ and committee meetings, and the number of shares present or represented at shareholders’ meetings.  The secretary shall keep or cause to be kept at the principal executive office or at the office the corporation’s transfer agent a record of shareholders or a duplicate record of shareholders showing the names of the shareholders and their addresses, the number of shares and classes of shares held by each, th e number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation.  The secretary or an assistant secretary, or, if they are absent or unable or refuse to act, any other officer of the corporation, shall give or cause to be given notice of all the meetings of the shareholders, the board of directors and committees of the board required by the by-laws or by law to be given, and he shall keep the seal of the corporation, if any, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the by-laws.

Assistant Secretaries

Section 6.  It shall be the duty of the assistant secretaries to assist the secretary in the performance of his duties and generally to perform such other duties as may be delegated to them by the board of directors.  

Chief Financial Officer

Section 7.  The treasurer shall be the chief financial officer of the corporation an shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account of the corporation.  He shall receive and deposit all moneys and other valuables belonging to the corporation in the name and to the credit of the corporation and shall disburse the same only in such manner as the board of directors or the appropriate officers of the corporation may from time to time determine, shall render to the president and the board of directors, whenever they request it, an account of his transactions as treasurer and of the financial condition of the corporation, and he shall perform such further duties as the board of directors may require.  

Controller

Section 8.  It shall be the duty of the Controller to assist the chief financial officer in the performance of his duties and generally to perform such other duties as may be delegated to them by the board of directors.

Officers of Operating Divisions

Section 9.  In addition to the foregoing officers of the corporation, the board of directors, or any officer of the corporation to whom such authority may be delegated, may from time to time designate officers of one or more of the corporation’s operating divisions existing under Article VI hereof (such persons being herein referred to as “divisional officers”).  Divisional officers shall act under the direction of, and shall have such duties as may be granted by, the board of directors of the corporation, or by such officer or officers of the corporation to whom the board of directors shall delegate the supervision of such divisional officers.  Unless otherwise designated by the board of directors of the corporation, divisional officers are not officers of the corporation, but may be delegated such powers of an officer of the corpo ration as may from time to time be granted by the board of directors or by an officer of the corporation to whom the board of directors has delegated the supervision of such divisional officer.  

ARTICLE VI

Corporate Divisions

Section 1.  The board of directors may determine that it is necessary or convenient for one or more of the lines of business of the corporation (as such term is hereinafter defined) to be carried by a separately identified unincorporated division of the corporation (hereinafter, an “operating division”).  Among other things, the board of directors may:  create divisional officers for such operating divisions pursuant to the provisions of Section 9 of Article V of these by-laws; authorize the creation and use by an operating division of such trade names, logo types, service marks, brand names, and other similar symbols as shall be considered necessary or convenient for the transaction of the operating division’s business by the board of directors or officer of the corporation to whom the board of directors has delegated the supervisi on of such operating division; and do such other acts and things as may be necessary or convenient in the conduct of the business of the operating division.  For purposes hereof, the term “line of business” means the sale of any product or class of related products of the corporation accounting for 10% or more of the gross sales of the corporation or which otherwise are considered significant to the corporation by the board of directors.

ARTICLE VII

Miscellaneous

Record Date

Section 1.  The board of directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares.  The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of any meeting, nor more than sixty (60) days prior to any other event for the purposes of which it is fixed.  When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at any such meeting, to give consent without a meeting, to receive any report, to rec eive a dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided by statute or in the articles of incorporation or by-laws.  

If the board of directors does not so fix a record date:

(a)

The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held.

(b)

The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the board has been taken, shall be the day on which the first written consent is given.

(c)

The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60^th) day prior to the date of such other action, whichever is later.  

Inspection of Corporate Records

Section 2.  The accounting books and records, the record of shareholders, and minutes of proceedings of the shareholders and the board and committees of the board of this corporation and any subsidiary of this corporation shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder’s interests as a shareholder or as the holder of such voting trust certificate.  Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts.   

A shareholder or shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent (1%) of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have (in person, or by agent or attorney) the right to inspect and copy the record of shareholders’ names and addresses and shareholdings during usual business hours upon five (5) business days’ prior to written demand upon the corporation and to obtain from the transfer agent for the corporation, upon written demand and upon the tender of its usual charges, a list of the shareholders’ names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record d ate for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand.  The list shall be made available on or before the later of five (5) business days after the demand is received or the date specified therein as the date as of which the list is to be compiled.

Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation.  Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts.  

Annual and Other Reports

Section 3.  The board of directors of the corporation shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year of the corporation.  Such report shall be sent at least fifteen (15) days prior to the annual meeting of shareholders to be held during the next fiscal year.  Such report shall contain a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation.

A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the annual report for the last fiscal year.  The corporation shall use its best efforts to deliver the statement to the person making the request within thirty (30) days thereafter.  A copy of any such statements shall be kept on file in the principal executive office of the corporation for twelve (12) months and they shall be exhibited at all reason able times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder.

The corporation shall, upon the written request of any shareholder, mail to the shareholders a copy of the last annual, semiannual or quarterly income statement, which it has prepared and a balance sheet as of the end of the period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation.

Certificates for Shares

Section 4.  Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the chairman or vice chairman of the board or the president or a vice president and by the treasurer or an assistant treasurer or the secretary of an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder.  Any or all of the signatures on the certificate may be facsimile.  In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue.  

Any such certificate shall also contain such legend or other statement as may be required by section 418 of the General Corporation Law, the Corporate Securities Law of 1968, the Federal securities laws, and any agreement between the corporation and the issuee thereof.

Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the board of directors or the by-laws may provide; provided, however, that any such certificate so issued prior to full payment shall state on the fact thereof the amount remaining unpaid and the terms of payment thereof.  

No new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered and cancelled at the same time; provided, however, that a new certificate will be issued without the surrender and cancellation of the old certificates if (1) the old certificate is lost, apparently destroyed or wrongfully taken; (2) the request for the issuance of the new certificate is made within a reasonable time after the owner of the old certificate has notice of its loss, destruction, or theft; (3) the request for the issuance of a new certificate is made prior to the receipt of notice by the corporation that the old certificate has been acquired by a bona fide purchaser; (4) the owner of the old certificate files a sufficient indemnity bond with or provides other adequate security to the corporation; and (5) the owner satisfies any other reasonable requi rements imposed by the corporation.  In the event of the issuance of a new certificate, the rights and liabilities of the corporation, and of the holders of the old and new certificates, shall be governed by the provisions of section 8104 and 8405 of the California Commercial Code.

Representation of Shares of Other Corporations

Section 5.  The president or any vice-president or the secretary or any assistant secretary of this corporation are authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation.  The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers.

Inspection of By-Laws

Section 6.  The corporation shall keep in its principal executive office in California, or if its principal executive office is not in California then at its principal business office in California (or otherwise provide upon written request of any shareholder) the original or a copy of the by-laws as amended or otherwise altered to date, certified by the secretary, which shall be open to inspection by the shareholders at all reasonable times during the office hours.

Construction and Definitions

Section 7.  Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the California General Corporation Law shall govern the construction of these by-laws.  Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term “person” includes a corporation as well as a natural person.  

ARTICLE VIII

Amendments

Section 1.  New by-laws may be adopted or these by-laws may be amended or repealed by the affirmative vote or written consent of a majority of the outstanding shares entitled to vote, except as otherwise provided by law or by the articles of incorporation or these by-laws.

Section 2.  Subject to the right of shareholders as provided in section 1 of this Article to adopt, amend or repeal by-laws, and except as otherwise provided by law or by the articles of incorporation, by-laws, other than a by-law or amendment thereof changing the authorized number of directors, may be adopted, amended or repealed by the board of directors.

CERTIFICATE OF CORPORATE SECRETARY

I, the undersigned, hereby certify:

1.

That I am a duly, elected, acting and qualified Secretary of Diatect International, a California corporation; and

2.

That the foregoing by-laws, comprising 20 pages, constitute the by-laws of such corporation as duly adopted by the board of directors of the corporation by action duly taken as December 1, 2003.  

DATED:  December 1, 2003

_________________________

Margie Humphries

Corporate Secretary

EX-2

Exhibit 10.1

SALE AND PURCHASE AGREEMENT

BETWEEN:

Diatect International Corporation,

825 South Industrial Parkway

Heber City, Utah 84032

SELLER

AND:

Diatomaceous Earth Deposits of Virginia, LLC

30 Courthouse Road

Richmond, VA 23236

BUYER

Regarding the purchase and sale of certain drilled and blocked unpatented diatomaceous earth mining claims located in Malheur County, Oregon, and the conduct of mining operation thereon.

SALE AND PURCHASE AGREEMENT

This Sale and Purchase Agreement (“Agreement”) is hereby entered into and made affective as of the ______ day of ____________, 2003, by and between Diatect International Corporation, a California Corporation with its principal place of business located at 875 South Industrial Parkway, Heber City, UT 84032, hereinafter referred “Seller”, and Diatomaceous Earth Deposits of Virginia, LLC, a Virginia Limited Liability Company, with its principal place of business at 30 Courthouse Rd., Richmond, VA 23236, hereinafter referred to as “Buyer”.

RECITALS

A.  Seller is the beneficial and recorded owner of an undivided one hundred percent interest in the certain unpatented mineral claims located in Malheur County, Oregon, more particularly described in Exhibit “A” hereto (said claims hereinafter referred to in the aggregate as the “Claims”);

B.  The Claims contain drilled, blocked and proven reserves of diatomaceous earth as set forth in the Ore Reserve Valuation Report for the White Mountain Diatomite Project, Malheur County, Oregon, March 1991, by geologist Peter S. Winn, a copy of which report is attached hereto as Exhibit “B” (said report being hereinafter referred to as the “DE Valuation Report”);

C.  The Buyer, having completed its due diligence regarding the Claims and their ownership, desires to purchase a 90% interest in said claims under the terms and conditions set forth herein below;

D.  Seller wishes to sell 90% of its ownership interest in the Claims in accordance with the terms and conditions set forth herein below.

NOW, THEREFORE, IN CONSIDERATION OF THE FOREGOING RECITALS AND OF THE TERMS AND CONDITIONS HEREINAFTER SET FORTH, THE PARTIES HERETO AGREE AS FOLLOWS:

I.  SALE AND PURCHASE.

1.  Seller hereby sells to Buyer and Buyer hereby purchases from Seller a 90% interest in the Claims, free of all liens, charges and encumbrances, subject to the terms and conditions of this agreement.

2.  In consideration of and for the sale of the 90% interest in the Claims, the Buyer shall pay to Seller a sum of thirty-one million one hundred and twenty five thousand six hundred dollars ($31,125,600) in lawful currency of the United States payable as follows:

     (a)  A minimum annual payment in the sum of one million nine hundred forty-five thousand three hundred and fifty dollars ($1,945,350) shall be paid beginning September 1, 2005, and annually thereafter on September 1, until such time as the full amount of the purchase price has been paid.

    (b)  In addition to the above minimum payments, an additional amount shall be paid on a quarterly based on a percentage of receivables from gross sales of diatomaceous earth from the mine as follows:

1.  If receipts from gross sales exceed _________, but are less than, then _________ percent of said receivables shall be paid to Seller;

2.  If receipts from gross sales exceed _________, but are less than, then ________ percent of said receivables shall be paid to Seller;

3.  If receipts from gross sales exceed _________, then ________ percent of said receivables shall be paid to Seller.

3.  Buyer shall issue and deliver to Seller a promissory note for the purchase price and the minimum payments in the form attached hereto as Exhibit “C”

II.  BUYERS RIGHT TO MINE.

1.  Buyer shall have the unfettered right to enter and develop the Claims and commence mining operations to the full extent allowed by law, subject to the terms, conditions, covenants and indemnities set forth herein below.

2.  Buyer shall restrict its use and exploitation of the claims to the mining and processing of diatomaceous earth.  

3.  Buyer covenants and warrants.  That all mining and processing operations conducted on the claims would at all times be in compliance with the Federal and State laws applicable to that jurisdiction, and in compliance with all lawful acts, rules, regulations and orders or any commissions, boards or other legislative, executive or judicial bodies or officers having power to regulate or supervise the use of such property; provided, however, the Buyer may in good faith contest in any reasonable manner the application of any such rule, regulation or order.

III.  OBLIGATIONS OF SELLER.

1.  Recording of this Agreement.  Seller shall cause an executed copy of this Agreement recorded in the records of Malheur County, Oregon.

2.  Claim kept in Good Standing.  During the term of this Agreement, the Seller shall keep the Claims in good standing and not permit any liens, charges, or encumbrances to arise against the Claims, except as may be agreed to in writing by Buyer from its exploration or mining operations.  On or before August 15^th of each year during the term of this Agreement, Seller shall, with regard to the Claims, pay the annual maintenance fee to the U.S. Bureau of Land Management, pay any other Federal, State or County fees necessary to maintain the claims, and shall complete any and all assessment and or location work that may be required by the State of Oregon.  

3.  Notice to Buyer.  Seller shall give Buyer written notice and copies of its payment of any and all such fees and of any and all such assessment and/or location work, if such work is required.  

4.  Power of Attorney to Buyer.  In the event that said fees are not paid or said work completed by August 15^th of any year, Seller hereby makes and appoints Buyer as its attorney-in-fact to pay said fees and/or complete such required assessment or location work.  If Buyer pays any of said fees or does any of said work, it shall be entitled to immediate reimbursement from Seller of an amount equal to three times the cost to Buyer in paying said fees and/or doing said work.

5.  Documents.  Upon request of Buyer, Seller shall provide to Buyer any and all documents, and written evidence of Seller’s permission and or authority to allow Buyer to enter upon the Claims and commence mining operations to the extent permitted by law.

6.  Quit Claim Deeds.  During the term of this agreement, Seller shall execute and deliver to Buyer Quitclaim Deeds representing a ten percent (10%) interest ownership in the Claims at such time as payments on the purchase price accumulate to ten percent of the total purchase price, said quit claim deeds being in the form as set forth in Exhibit “D” hereto.  At such time as the total purchase price has been paid, Seller shall have executed and delivered nine (9) such quit claim deeds to Buyers..

IV.  OBLIGATIONS OF BUYER.

1.  Buyer shall give purchase orders from Seller priority over all other purchase orders and over all other customers of Buyer and shall make every effort in good faith to meet the requirements of Seller for diatomaceous earth.

2.  Buyer shall provide seller with Quarterly reports regarding all of Buyer’s development of the Claims and mining operations conducted on the Claims.  Included in such reports shall be copies of any and all and/or administrative decisions, orders, requirements and instructions from any local, state, or federal administrative agencies or courts known to Buyer that relate to the Claims.

3.  Books, Records and Reports.  Buyer shall maintain proper books of accounts and other records and shall maintain its financial statements which shall fairly present the financial condition of Buyer and of the mining operation and cash flows in accordance with generally accepted accounting principals consistently applied.  Commencing with the first calendar quarter of the year 2004, Buyer will furnish to Seller the following:

(a).  Quarterly Statements.  Buyer shall furnish to Seller quarterly statements as soon as practicable after the end of the first, second and third quarterly fiscal periods in each fiscal year of the Buyer, and in any event within sixty (60) days thereafter, duplicate copies of a balance sheet for the end of such quarter, and statements of income and cash flows for such quarter setting forth in each case in comparative form the amount for the corresponding periods of the preceding fiscal year, all in reasonable detail and attested as complete and correct in all material respects, subject to changes resulting from fiscal year-end adjustments, by the financial officer of Buyer;

(b).  Annual Statements.  Buyer shall furnish to Seller as soon as practicable after the end of each fiscal year, and in any event within one hundred twenty (120) days thereafter, duplicate copies of a balance sheet for the end of such fiscal year, and statements of income, cash flows, setting forth in each case comparative form the figures for the previous fiscal year and accompanied by an opinion of a firm of independent certified public accountants that such fiscal statements present fairly the financial condition of Buyer and have been prepared in accordance with generally accepted accounting principals consistently applied;

3.  Notice of default or claimed default.  Buyer shall immediately give written notice to Seller upon becoming aware of the existence of a default or an event of default, such as the filing of a petition in bankruptcy, which might reasonably have a negative impact on mining operations located on the claims.  The original notice should specify the nature of the default or event of default or claims default and what action the Buyer is taking or proposes to take with respect thereto.

4.  Notice of serious damage or catastrophic event.  Buyer shall give written notice to Seller of any damage or catastrophic event occurring to the equipment or improvements of the mining operation on the claims which could reasonably have a material negative effect to the mining operation.

5.  Notice of litigation or claims for damages.  Immediately upon being served summons and complaint in litigation or administrative proceedings or notice of a damage claim where the amount complained of or claimed exceeds $10,000.00, Buyer shall immediately give notice to Seller of such complaint or claim and provide Seller with copies of the relevant documents appertaining thereto.

6.  Requested Information.  Buyer shall furnish any information or documents regarding the development or mining operation on the Claims reasonably requested by Seller.

7.  Inspection.  Subject to Buyer’s reasonable safety and security requirements, Buyer shall permit any representative of Seller to visit and inspect the mining operation at reasonable times and upon reasonable notice.  Said representative may bring with him up to five other persons on any such visit and inspections of mining operations or any other activity or development upon or associated with the Claims.

V.  COVENANT.

Seller hereby covenants and guarantees to Buyer that the Claims are valid, existing unpatented mineral claims which have been duly and legally located and filed with the office of the county recorder of Malheur County, Oregon, and that said filing is current for the year 2003-2004 until the end of August, 2004, and that the annual maintenance for the same period has been paid to the U.S. Bureau of Land Management.

VI.  REPRESENTATIONS AND WARRANTIES.

1.  The Seller warrants and represents that:

(a).  It is a body corporate which is duly incorporated, validly exists, and is in good standing with respect to the filing of annual reports under the laws of the State of California, with full power and absolute authority and capacity to enter into this agreement and to carry out the transaction contemplated hereby;

(b).  It is the beneficial owner of an undivided one hundred percent interest in the Claims;

(c).  The Claims are free and clear of all liens, charges and encumbrances; and,

(d).  It has the sole right to convey its interest in the Claims to the Buyer notwithstanding any prior act.

2.  Buyer warrants and represents that:

(a).  It is a limited liability company which is duly formed and validly existing and is in good standing with respect to the filing of annual reports under the laws of the State of Virginia, which full power and absolute authority and capacity to enter into this agreement and to carry out to the transaction contemplated hereby;

(b).  It has made competent arrangements for the acquisition of sufficient funds to capitalize, develop, and operate a diatomaceous mine on the Claims.  Buyer will disclose the details of said funding and the parties involved on or before ___________.  

(c).  It shall obtain all necessary environmental permits and licenses to conduct mining activities and operations on the claims and provide the necessary security or performance bonds which may be required by Federal, State, and local governmental authorities.

(d).  During the term of this agreement to the extent Buyer occupies or works on the Claims, it shall maintain the claims in good physical condition and not permit any liens, charges or encumbrances to arise against the Claims from its exploration or mining operations, except as may be agreed to buy Seller in writing.

VII.  ABANDONMENT.

1.  In the event, after Buyer has begun to supply diatomaceous earth requirements on a best effort basis to Seller, buyer ceases mining operations and is no longer able to meet such requirements then, in that event, the claims shall be deemed to have been abandoned by Buyer.  

2.  The parties hereto agree, and do hereby, appoint ___(title company, address and telephone number) as escrow holder of the Quit Claim Deed to be deposited in escrow following execution among the parties and the escrow holder of the escrow instructions, which shall be executed as soon as reasonably possible after the signing of this agreement.  The escrow instructions shall provide, inter alia, that, in the event of abandonment, the Quit Claim Deed delivered into escrow by Buyer shall be forthwith be delivered to Seller.  Both parties shall indemnify and hold Seller harmless from any and all liability for delivering such deed to Seller upon Seller’s written confirmation of abandonment to the escrow holder.  All fees and costs associated with the esc row should be born by Seller.

3.  Immediately following execution of the escrow instructions, Buyer shall execute and deliver to escrow holder a Quit Claim Deed conveying to Seller all of Buyer’s right, title and interest in the Claims.

VIII.  FIRST RIGHT OF REFUSAL.

In the event Buyer intends to sell any or all of its interest in the Claims or any or all of its interest in its mining operation located on the Claims, Buyer shall first give notice in writing (“the offer”) to the Seller of such intention together with the terms and conditions on which the Buyer intends to dispose of such designated interest.  The Seller shall have a period of sixty (60) days from the date of receipt of the offer to elect to accept the terms and conditions contained in the offer, and such acceptance shall constitute a binding agreement of purchase and sell between these parties.  If the Seller does not accept the offer within the sixty (60) day period, or does accept but fails to close the transaction contemplated thereby within ninety (90) days fol lowing receipt of the offer, the Buyer may complete the sell of the designated interest on terms and conditions not less favorable than those set out in the offer, and, in any event, such sell shall be completed within ninety (90) days from the expiration of the right of purchaser to accept the offer or the Buyer must again comply with the provisions of this section.

IX.  INDEMNITY.

1.  Seller hereby indemnifies and holds buyer harmless from any and all liability, claims, and causes of action whatsoever arising out of or relating to the sale of the Claims by Seller to Buyer.

2.  Buyer hereby indemnifies and holds Seller harmless from any and all liability, claims, and causes of action whatsoever arising out of or relating to any and all uses and exploitation of the Claims by Buyer, including, but not limited to, mine exploration work, mining operations, and the installation of improvements on the Claims.

X.  DEFAULT.

1.  Events of Default.  Any of the following occurrences or acts shall constitute an “event of default” under this agreement:

(a)  Failure to make any payment required to be made under this agreement when and as the same shall be due and payable, whether at the due date thereof or at a date fixed by the parties in writing, or by acceleration, shall constitute default of this agreement, when such failure shall continue un-remedied for more than ten (10) calendar days.

(b)  Continued breech by a party following thirty (30) days notice of default from the other party and the observance and/or performance of any other covent, term, condition, or representation or warranty to be observed or performed by a party under this agreement shall constitute default of this agreement.

        (c)  Default shall occur if an involuntary case or other proceedings shall be commenced against Buyer under Chapter 7 of the Bankruptcy Act or any other insolvency law now or hereafter in effect, or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property when such involuntary case or other proceeding shall remain un-dismissed and un-stayed for a period of sixty (60) days.  A Chapter 11 reorganization shall not constitute default, provided that such reorganization does not diminish or in any other way effect the annual payments due and payable by Buyer to Seller.  If such annual payments are lessened or stretched out without Seller’s written consent, the n any such Chapter 11 reorganization shall constitute a default of this agreement.

2.  Acceleration.  In the event any annual payment due and payable under the terms of this agreement is not paid within ten (10) days of its due date all payments for the total purchase price set forth under this agreement shall at once become and be immediately due and payable and Seller shall be entitled to use the promissory note issued pursuant to this agreement for collection for the total face amount of the note.

3.  Cumulative Remedies.  No delay or omission on the part of either party to exercise any right or power arising from any default shall exhaust or impair any such right or power or prevent its exercise during the continuance of such default.  No remedy hereunder is intended to be exclusive of any other remedy, but each and every remedy shall be cumulative and in addition to any and every other remedy given hereunder or otherwise existing at law or in equity.  Further, the giving, taking or enforcement of any other or additional security, collateral or guarantee for the payment of the indebtedness shall not operate to prejudice, waive or affect any other rights or remedies hereunder.

XI.  NOTICE.

All documentary transmissions and notices required by the agreement, as well as any other notice to either party hereto materially effecting this agreement, shall be in writing and transmitted by certified or registered mail or by Federal Express (or equivalent), to the respective parties as required under this agreement to the following addresses indicated below or to any change of address given by a party to the other party pursuant to written notice:

Seller:

Buyer:

Diatect International Corporation

Diatomaceous Earth Deposits

825 South Industrial Parkway

            of Virginia, LLC

Heber City, UT  84032

30 Courthouse Road

Richmond, VA  23236

XII.  GENERAL PROVISIONS.

1

Entire Agreement.  This Agreement constitutes the total and complete agreement between the parties, superseding all other prior agreements concerning the transaction herein described and contemplated.

2

Assignment.  Neither party to this Agreement shall be entitled to assign its interest in this Agreement, unless so authorized by written consent of all of the parties hereto.

3

Execution of Other Documents.  Each of the parties hereto agrees to execute any other documents reasonably required to fully perform the intent of this Agreement.

3

Binding Effect.  This Agreement shall inure to and be binding upon the parties hereto, their agents, employees, heirs, personal representatives, successors, and assigns.

5

No Waiver of Future Breach.  The failure of one party to insist upon strict performance or observance of this Agreement shall not be a waiver of any future breach or of any terms or conditions of this Agreement.

6

Attorney’s Fees.  In the event of any litigation arising out of this Agreement, among or between any of the parties hereto, their heirs, personal representatives, agents, successors or assigns, the prevailing party or parties shall be entitled to recover costs and attorney’s fees.

7

Governing Law.  This Agreement shall be construed and enforced in accordance with the laws of the State of Utah, which shall govern the rights of the parties.  Utah shall also be the venue of any litigation under this Agreement.

8

Execution of Multiple Originals.  Four (4) Original counterparts of this Agreement shall be executed by these parties sufficient to provide two (2) such counterparts to each party.

9

Severability. In the event any provision of this Agreement conflicts with the applicable law, such conflicts shall not affect the provisions of this Agreement which can be given effect without the conflicting provision.

SELLER:

Diatect International Corporation

Attest:­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­______________________

By:

Marjorie Humphries, Corp. Secretary

Jay W. Downs, President

BUYER:

DIATOMACEOUS Earth Deposits of Virginia, LLC

Witness:

By:

Michael R. McQuade, Managing Member

EX-3

Exhibit 10.2

EMPLOYMENT AGREEMENT

THIS Employment Agreement ("Agreement") is hereby entered into and made effective this 20th day of September, 2001, by and between Diatect International Corporation, a California corporation, with its principal place of business located in Heber City, Utah (the "Company"), and Jay W. Downs of Midway, Utah, ("Downs").

RECITALS

1.

The Company is engaged in the business of developing, manufacturing and marketing environmentally benign, diatomaceous earth ("DE") based insecticide products, and desires to acquire qualified, experienced leadership in this endeavor.

2.

Downs has had considerable experience as a corporate executive officer including executive responsibilities in major companies and has accumulated considerable executive and corporate expertise. Further, Downs has developed unique expertise regarding the component parts of products manufactured by the Company and has gained valuable knowledge while serving as the Senior Executive President of the Company in charge of marketing and sales.

3.

In view of his effective service to the Company as Senior Vice President of Sales and Marketing and as a director, the Company has determined that it desires to employ Downs as its President and Chief Executive Officer for the period set forth below.

4.

In consideration for the terms of this Agreement, Downs desires to be employed by the Company as its President and Chief Executive Officer.

NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants, promises, terms and conditions hereinafter set forth, the parties hereto agree as follows:

I. EMPLOYMENT. The Company hereby employs, engages and hires Downs as its President and Chief Executive Officer on the terms and conditions hereinafter set forth, and Downs hereby accepts such employment and agrees to perform such services and duties and to carry out such responsibilities as hereinafter set forth.

II. TERMS OF EMPLOYMENT. The term of employment under this Agreement shall be for a period of three (3) years(s) and one hundred three (103) days commencing as of September 20, 2001 and terminating on December 31, 2004, subject, however, to prior termination as hereinafter provided. Unless otherwise agreed in writing, subject to mutual agreement of the parties, continued employment of Downs by the Company after December 31, 2004, shall be for a term and on the conditions to be agreed to by the parities prior to the expiration of the Agreement.

III. SERVICES, DUTIES AND RESPONSABILITIES

1.

Downs will faithfully and to the best of his ability serve the company in his capacity as its President and Chief Executive Officer, subject to the policy direction of the President of the Board of Directors of the Company. Downs shall perform such services and duties as are customarily performed by one holding the position of President and Chief Executive Officer of a public corporation.

2.

As President and Chief Executive Officer, Downs shall be responsible for the overall management of the Company's business. Downs will devote his full time, energy and skill during regular business hours to his employment with the Company. Such duties shall be rendered at Heber City, Utah, and at such other place or places as the Company shall in good faith require or as interests, needs, business or opportunity of the Company shall require. While occupying the office of President and Chief Executive Officer, and as a member of the Board of Directors, Downs shall be willing to occupy the officer of Chairman of the Board of Directors and shall be willing to serve as Chairman of the Executive Committee of the Board of Directors.  Downs shall be responsible on a continuing basis for the development, implementation and maintenance of a business plan for the corporation and all activities defined therein. He shall be responsible for coordination of efforts of the corporate and subsidiary officers and management teams and their respective staffs and for the maximization of corporate performance and overall profitability of the corporation and its respective subsidiaries; conditioned, however, upon the Company's providing sufficient funds for Downs to so manage and regulate the Company.

3.

Downs shall be responsible for reporting in writing to the Board of Directors on a regular basis.

4.

As Chief Executive Officer, Downs shall be responsible for the development, coordination and execution of all aspects of the operation as directed by the Board of Directors. Subject to the Company's continuing ability to pay Downs' salary on a regular basis as hereinafter provided, Downs will devote his full time, energy and skill during regular business hours to providing the services and carrying out the duties and responsibilities of his employment with the Company. Such duties shall be rendered at the principal place of business of the Company and at such other places as the Company shall in good faith require or as interests, needs, business or opportunity of the Company shall require.

5.

Downs shall not directly or indirectly represent or be engaged by or be an employee of any other person, firm or corporation or be engaged for his services as an officer, general manager or consultant in any other business or enterprise while he is in the employ of the Company, unless specifically authorized to do so. It is understood, however, that the foregoing in no way prevents Downs from owning stock or having an economic interest in other businesses or enterprises. Furthermore, Downs may serve on the board of directors of other companies so long as such service does not conflict with his interest in and duties of the Company. Also, he may hold the position of corporate officer in any family or personal investment business so long as it does not conflict with his interest in and duties to the Company.

IV.

COMPENSATION

1.

Base Salary. The Company shall pay Downs a base salary at the rate of One Hundred Twenty Thousand Dollars ($120,000) per year, payable twice a month on the first and fifteenth days of each month while this Agreement shall be in force. Said salary payments will be subjected to withholding taxes, e.g., Federal Income Tax, FICA, and State and/or Local Withholding Taxes. Whereas such salary shall not be decreased during the term of this Agreement without the consent of Downs, it shall be subject to increase by the Board of Directors which shall review the salary periodically, and at least annually.

2.

Salary Subject to "Take or Pay". The foregoing salary of Downs shall be subject to "take or pay" provisions, whereby the Company hereby commits to pay said salary (including any increases from date) for the entire term of this Agreement, regardless of whether his employment is terminated hereunder at any earlier date, unless such termination is for cause based on malfeasance, as defined in Section XI(2) herein below.

3.

Incentive Bonus. The Company hereby grants and issues to Downs an incentive bonus of seven hundred fifty thousand (750,000) shares of restricted, lettered stock of the Company.

4.

Performance Bonus. Commencing at the date hereof, Downs shall be granted a bonus equal to one percent (1.00%) of the gross sales receipts determined quarterly based on the filing of the 10Q report with the SEC. Said payment shall occur within thirty (30) days following the filling of the 10Q report.

5.

Incentive Stock Option (ISO). At the next Company annual meeting, the Company shall seek stockholder approval and shall register with the SEC, an Incentive Stock Option Plan meeting the requirements established by Section 422 of the Internal Revenue Code, whereby options granted are not taxed until the stock is sold and they are not deductible as compensation expense by the corporation. The term of said ISOs shall not exceed ten (10) years and the option price shall be equal to or greater than one hundred percent (l00%) of the fair market value at the grant date. Within thirty (30)days after the Incentive Option Plan is in effect, the Company shall grant to Downs ISOs for the purchase of fifty thousand (50,000) free trading shares of the common stock of the Company and ISOs for the same amount of stock shall be granted to Downs on each anniversary date of the fi rst grant during the term of this Agreement, providing he is at the time employed by the Company, subject to the provisions of Section XI 4 (b) herein. The aforesaid number of shares in said ISO grant shall be in post-reverse split shares.

6.

Deferred Compensation Plan. As soon as it is economically feasible and appropriate as determined by the Board of Directors of the Company, the Company will establish a Deferred Compensation Plan for its senior executives, including Downs.

7.

Benefits. As soon as it is financially able as determined by the Board of Directors, the Company shall provide the following benefits to Downs:

(a) Participation in a group medical plan;

(b) Comprehensive dental care plan;

(c) Life insurance at the rate of at least four times Downs' annual salary, with the beneficiary of said insurance to be named by Downs;

(d) Disability insurance;

(e) A reasonable car allowance applicable when his personal vehicle is utilized on behalf of Company business.

V. BUSINESS FACILITIES AND EQUIPMENT The Company shall provide Downs, or shall pay for, suitable work facilities and adequate business accommodations, office equipment and devices as may be reasonably necessary for Downs to perform his services and carry out his responsibilities aJ ld duties to the Company.

VI. DIRECTORS AND OFFICERS INSURANCE. As soon as it is financially able, as determined by the Board of Directors, the Company shall purchase and maintain Directors' and Officers' liability insurance, including coverage for Downs, in an amount of not less than five million dollars ($5,000,000).

VII. INDEMNIFICATION. The Company shall indemnify Downs, his heirs, executors, administrators and assigns, against, and he shall be entitled without further act on his part, to be indemnified by the Company for, all expenses, including, but not limited to, amounts of judgments, reasonable settlement of suits, attorney fees and related costs of litigation, reasonably incurred by him in connection with or arising out of any action, suit or cause of action against the Company and/or against Downs as a result of his having been, an officer and. or director of the Company, or, at its request, of any other corporation which the Company owns or of which the Company is a stockholder or creditor, whether or not he continues to be such officer or director at the time of incurring said expenses. Said indemnity shall apply, but not be limited to, expenses incurred in r espect to:

1.

any matter in which he shall be finally adjudged in any such action, suit or proceeding to be liable for gross negligence or intentional misconduct in the performance of his duty as such officer and/or director, or;

2.

any matter in which a settlement is effected to an amount in excess of the amount of reasonable expenses incurred by or on behalf of Downs in such action, suit or proceeding to the point of final settlement and resolution.

Further, nothing in this section regarding indemnification shall be construed to require or authorize the Company to indemnify Downs against any liability to which he would, but for settlement or comprise of such action, suit or proceeding, be otherwise subject by reason of his gross negligence or intentional misconduct in the performance of his duties as an officer and/or director of the company. The foregoing right of indemnification shall not be exclusive of other rights to which Downs may be entitled.

VIII. BUSINESS EXPENSE REIMBURSEMENT. The Company shall reimburse Downs for all reasonable business expenses incurred by him in the performance of his services, duties and responsibilities, including but not limited to, transportation, travel expenses, board and room, entertainment, and other business expenses incurred within the scope of presentation to the Company by Downs of an itemized accounting of said expenses substantiated by account books, receipts, bills and other documentation where applicable. If reimbursement, advances or allowances are based on permitted mileage or per diem rates, then Downs shall submit specification of relevant mileage, destination, dates and other supporting information required doe tax purposes.

IX. VACATION. During the term of this Agreement, Downs shall have the right to six (6) weeks of paid vacation during each year. Vacation time may be taken all at once or in segments as desired by Downs, subject to reasonable notice t_ the Company for the purpose of coordinating work schedules. Such vacation is not cumulative from year to year.

X . RELOCATION OF DOMICILE. At the request of the Company for sound business reasons and upon reasonable notice, the Company may require Downs to relocate his residential domicile. The Company shall pay all relocation expenses, including the following items: a preliminary trip by Downs and his spouse to the relocation destination for the purpose of locating a new home, moving costs, closing costs arising from the real estate transactions, installation costs of utilities, accessories and equipment, new drapes and curtains and other one time expenses uniquely related to relocation of a residence.

XI.  TERMINATION OF EMPLOYMENT.

1.

Termination for Cause, Generally. Under this Agreement, The Company shall have the right to terminate the employment of Downs for cause, which shall consist of two classes: cause involving malfeasance on the part of Downs, and causes not involving malfeasance (no-fault). Upon termination, all Company property and credit cards in the possession and control of Downs must be returned to the Company.

2.

Malfeasance Termination for Cause. In the event the employment of Downs is terminated on the grounds of malfeasance, then, in that event, all compensation, including salary, stock options, bonuses, deferred compensation and benefits cease immediately. Termination for cause on grounds of malfeasance included, but is not limited to, the following conduct:

(1)

Breach of any restrictive covenant contained herein Against competition or disclosure of trade secrets;

(2)

Continued failure and refusal to carry out the duties and Responsibilities of office under this Agreement within a Reasonable time following written notice from the Board of Directors requiring the subject performance;

(3)

Failure to cure a material breach of this Agreement Within ten (10) days after receiving written from the Board of Directors;

(4)

Failure to cease conduct unbecoming the President and CEO of the Company after the receipt of written Notice from the Board of Directors to cease such conduct;

(5)

Commission of a felony.

3.

No-Fault Termination for Cause. At no fault of Downs, termination of employment hereunder for cause can occur as the result of death, disability, sale of the Company (asset or stock sale), merger or consolidation, "takeover" of control and operation of the business by an outside entity or group, or termination of the business for any reason whatsoever.

4.

Rights, Options, and Benefits Surviving No-Fault Termination for Cause. Termination of Downs' employment for cause based upon any of the no-fault reasons or events described in the foregoing subsection 3, shall not effect Downs' right to the following compensation under this Agreement:

(a) Base salary for the entire term of this Agreement.

(b) Right tee the next ISO grant due to Downs under Section IV 5 herein following termination of employment.

(c) Performance bonus for two quarters following termination.

(d) Deferred compensation vested at time of termination.

(e) Company benefits including, but not limited to, group medical insurance, comprehensive dental plan, life insurance, disability insurance, and car allowance shall be continued for a period of six (6) months following such termination of employment.

5.

Sale/Take-Over Termination Bonus. In the event the employment of Downs is terminated because of the sale of the business (either asset or stock sale), merger, consolidation, or by "takeover" by an outside entity or group, then, Downs shall be entitled to a termination bonus equal to three times the amount of bonus he received in the aggregate over the four quarters immediately preceding such termination of employment, but in no event shall said bonus be less than five hundred thousand dollars($500,OOO).

6.

Resignation or Withdrawal. In the event Downs' employment is terminated by his voluntary resignation or withdrawal, then, in that event, the following will apply unless otherwise agreed between the parties in writing:

(a)

If such resignation or withdrawal occurs during the first year of the term of this Agreement, then Downs will be entitled only to two weeks salary following notice of resignation or withdrawal. Company benefits set forth in Section X 1-4( e) shall be terminated at the end of the calendar month next following the date of notice of resignation or withdrawal. All rights to stock options, bonuses or deferred compensation not granted or vested shall be forfeited.

(b)

If such resignation or withdrawal occurs during the second year of the term of his Agreement, then Downs will be entitled only to two months salary following notice of resignation or withdrawal. Company benefits set forth in Section XI­-4( e) shall be terminated at the end of the calendar month next following the date of notice of resignation or withdrawal. All rights to stock options, bonuses or deferred compensation not granted or vested shall be forfeited.

(c)

If such resignation or withdrawal occurs during the third year of the term of this agreement, then Downs will be entitled only to three months salary following notice of resignation or withdrawal and company benefits set forth in Section XI-4(e) shall be terminated at the end of the calendar month three months following the date of notice of resignation or withdrawal.  All rights to stock options, bonuses or deferred compensation not granted or vested shall be forfeited.

7.

Death or Disability.

In the event Downs' employment is terminated by death or upon medical certification of total disability ("disability"), then the following will apply in that respective event:

(a)

In the event of Downs' death, the Company shall:

- Pay to Downs' estate an amount equal to Downs' base salary for a three-month period next following his death;

- Grant to Downs' estate the next ISO due to Downs under Section IV-5 herein following the date of his death;

- The company shall pay to Downs' estate an amount equal to the bonus Downs would have received for the next two quarters following termination;

- The Company shall continue providing the medical and dental benefits set forth in Section IV - 3 to Downs' survivors (to the extent applicable) for a period of one year.

(b)

In the Event of Downs' disability, the Company shall:

- Pay to Downs an amount equal to Downs' base salary for a three-month period next following disability;

- Grant to Downs the next ISO due to Downs under Section IV -5 herein following disability;

- The company shall pay to Downs an amount equal to the bonus Downs would have received for the next two quarters following disability; - The Company shall continue providing the medical and dental benefits set forth in Section IV - 7 to Downs for a period of two years following disability.

XII.

RESTRICTIVE COVENANTS

1.

Confidential information. Downs covenants not to disclose the following specified confidential information to competitors or to others outside of the scope of reasonably prudent business disclosure, at any time during or after the termination of his employment by the Company.

a. Customers lists, contracts, and other sales and marketing information;

b. Financial information, cost data;

c. Formulas, trade secrets, processes and devices related to the product and its manufacture;

d. Supply sources, contracts;

e. Business opportunities for the product or new developing business for the Company;

f. Proprietary plans, models and other proprietary information of the Company.

2.

Affirmative Duty to Disclose. Downs shall promptly communicate and disclose to the Company all observations made, information received, and data maintained relating to the business of the Company obtained by him as a consequence of his employment by the Company. All written material, possession during his employment with the Company concerning business affairs of the Company or any of its affiliates, are the sole property of the Company and its affiliates, and Downs is obligated to make reasonably prompt disclosures of such information and documents to the Company, and, further, upon termination of this Agreement, or upon request of the Company, Downs shall promptly deliver the same to the Company or its affiliates, and shall not retain any copies of same.

3.

Covenant Not to Compete. For a period of three (3) years following the termination of his employment with the Company, Downs shall not work, directly or indirectly, for a competitor of the Company, nor shall he himself establish a competitive business. This restrictive covenant shall apply worldwide but shall be limited to businesses that use diatomaceous earth and/or pyrethrum in any of its products which they manufacture, distribute, sell, market or otherwise promote.

4.

Material Harm Upon Breach. The parties acknowledge the unique and secret nature of the Company's formulas for the composition of its DE-based products and related proprietary information, and that material irreparable harm occurs to the Company if these restrictive covenants are breached. Further, the parties hereto acknowledge and agree that injunctive relief is not an exclusive remedy and that an election on the part of the Company to obtain an injunction does not preclude other remedies available to the Company.

5.

Arbitration. Any controversy, claims, or matter in dispute occurring between these parties and arising out of or relating to this Agreement shall be submitted by either or both of the parities to arbitration administered by the American Arbitration Association or its successor and said arbitration shall be final and absolute. The Commercial Arbitration Rules of the American Arbitration Association shall apply subject to the following modifications:

a.

The venue for said arbitration shall be Salt Lake City, Utah, and the laws of the State of Utah relating to arbitration shall apply to said arbitration.

b.

The decision of the arbitration panel may be entered as a judgement in any court of the general jurisdiction in any state of the United States or elsewhere.

XIII. NOTICE. Except as otherwise provided herein, all notices required by this Agreement as well as any other notice to any party hereto shall be given by certified mail (or equivalent), to the respective parties as required under this Agreement or otherwise, to the following addresses indicated below or to any change of address given by a party to the others pursuant to the written notice.

COMPANY:

Diatect International

875 S. Industrial Parkway

Heber City, UT 84032

DOWNS:

Jay W. Downs

910 River Road

Midway, UT 84049

XIV.

GENERAL PROVISIONS

1.

Entire Agreement. This Agreement constitutes and is the entire Agreement of the parities and supersedes all other prior understandings and/or Agreements between the parities regarding the matters herein contained, whether verbal or written.

2.

Amendments. This Agreement may be amended only in writing signed by both parties.

3.

Assignment. No party of this Agreement shall be entitled to assign his or its interest herein without the prior written approval of the other party.

4.

Execution of Other Documents. Each of the parties agree to execute any other documents reasonably required to fully perform the intentions of this Agreement.

5.

Binding Effect. This Agreement shall inure to and be binding upon the parties hereto, their agents, employees, heirs, personal representatives, successors and assigns.

6.

No Waiver of Future Breach. The failure of one party to insist upon strict performance or observation of this Agreement shall not be a waiver of any future breach or of any terms or conditions of this Agreement.

7.

Execution of Multiple Originals. Two (2) original counterparts of this Agreement shall be executed by these parties.

8.

Governing Law. This Agreement shall be governed and interpreted by the laws of the State of Utah.

9.

Severability. In the event any provision or section of this Agreement conflicts with the applicable law, such conflict shall not affect the provisions of the Agreement which can be given effect without the conflicting provisions.

WHEREFORE, this Agreement is hereby executed and made effective the day and year first above written.

COMPANY

DIATECT INTERNATIONAL CORPORATION

BY: ____________________________________

JAY W. DOWNS, Its President

ATTEST:

____________________________________

JOHN L. RUNFT, Secretary

DOWNS

________________________________________

JAY W. DOWNS

EX-4

Exhibit 10.3

EMPLOYMENT AGREEMENT

THIS

Employment Agreement (“Agreement”) is hereby entered into and made effective this 1^st day of July 2001, by and between Diatect International Corporation, a California corporation, with its principal place of business located in Boise, Idaho (the “Company”), and David H. Andrus of Boise, Idaho (“Andrus”).

RECITALS

1.

The Company is engaged in the business of developing, manufacturing and marketing an environmentally benign, diatomaceaceous earth (“DE”) based  insecticide, and desires to acquire qualified, experienced leadership in this endeavor.

2.

Andrus desires to be employed by the Company as its Vice President of Operations with the understanding that for some time he has served the Company on a consulting basis.

3.

In view of his effective service to the Company on a consulting basis, the  Company has determined that it desires to employ Andrus as its Vice President of Operations for the period set forth below.

NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants, promises, terms and conditions hereinafter set forth, the parties hereto agree as follows:

I,

EMPLOYMENT. The Company hereby employs, engages and hires Andrus as its Vice President of Operations on the terms and conditions hereinafter set forth, and Andrus hereby accepts such employment and agrees to perform such services and duties and to carry out such responsibilities as hereinafter set forth.

II,

TERMS OF EMPLOYMENT. The term of employment under this Agreement shall be for a period of three (3) years(s) commencing as of July 1, 2001 and terminating on July 31, 2004, subject, however to the prior termination as hereinafter provided. Unless otherwise agreed in writing, subject to mutual agreement of the parties, continued employment of Andrus by the Company after August 1, 2004, shall be for a term and on the conditions to be agreed to by the parities prior to the expiration of the Agreement.

III,  SERVICES, DUTIES AND RESPONSIBILITIES

1.

Andrus will faithfully and to the best of his ability serve the company in his capacity as its Vice President of Operations, subject to the direction of the President of the Company. Andrus shall perform such services and duties as are customarily performed by one holding the position of Vice President of Operations, as the case may be, of a public corporation.

2.

As Vice President of Operations, Andrus shall be responsible for the development, coordination, and execution of all aspects of the operation as directed by the President of the Company. Andrus will devote his full time, energy and skill during regular business hours to his employment with the Company. Such duties shall be rendered at Boise, Idaho, and at such other place or places as the Company shall in good faith require or as interests, needs, business or opportunity of the Company shall require.

3.

Andrus will not directly or indirectly represent or be engaged by or be an employee of any other person, firm or corporation or be engaged for his services as an officer, general manager or consultant in any other business or enterprise while he is in the employ of the Company, unless specifically authorized to do so. It is understood, however, that the foregoing in no way prevents Andrus from owning stock or having an economic interest in other businesses or enterprises. Furthermore, Andrus may serve on the board of directors of other companies so long as such service does not conflict with his interest in and duties of the Company. Also, he may hold the position of corporate officer in any family or personal investment business so long as it does not conflict with his interest in and duties to the Company.

IV,

COMPENSATION

1.

Base Salary.  The Company shall pay Andrus a base salary at the rate of Ninety Thousand Dollars ($90,000) per year, payable on a twenty-six (26) payday schedule per annum while this Agreement shall be in force. Said salary payments will be subjected to withholding taxes, e.g.,Federal Income Tax, FICA, and State and/or Local Withholding Taxes. Whereas such salary shall not be decreased during the term of this Agreement without the consent of Andrus, it shall be subject to increase by the Board of Directors which shall review the salary periodically, and at least annually.

2.

Signing Stock Incentive.  The Company hereby grants to Andrus 500,000 shares of restricted, lettered stock of the Company.

3.

Bonus.  Commencing at the date hereof, Andrus shall be granted a bonus equal to one percent (1.00%) of the gross sales receipts determined quarterly based on the filing of the 10Q report with the SEC. Said payment shall occur within thirty (30) days following the filling of the 10Q report.

4.

Incentive Stock Option (ISO).  At the next Company annual meeting, the Company shall seek stockholder approval and shall register with the SEC, an Incentive Stock Option Plan meeting the requirements established by Section 422 of the Internal Revenue Code, whereby options granted are not taxed until the stock is sold and they are not deductible as compensation expense by the corporation. The term of said ISOs shall not exceed ten (10) years and the option price shall be equal to or greater than one hundred percent (100%) of the fair market value at the grant date. Within thirty (30)days after the Incentative Option Plan is in effect, the Company shall grant to Andrus ISOs for the purchase of fifty thousand (50,000) free trading shares of the common stock of the Company and ISOs for the same amount of stock shall be granted to Andrus on each anniversary date of the first grant during the term of this Agreement, providing he is at the time employed by the Company, subject to the provisions of Section XI 5 (b) herein. The aforesaid number of shares in said ISO grant shall be in post-reverse split shares.

5.

Benefits.  As soon as it is financially able, the Company shall provide the

following benefits to Andrus:

(a) Participation in a group medical plan;

(b) Comprehensive dental care plan;

(c) Life insurance at the rate of at least four times Andrus’ annual salary, with the beneficiary of said insurance to be named by Andrus;

(d) Disability insurance;

(e) A reasonable car allowance which comes into play when his personal vehicle is utilized on behalf of Company business.

V,  

BUSINESS FACILITIES AND EQUIPMENT  The Company shall provide Andrus, or shall pay for , suitable work facilities and adequate business accommodations, office equipment and devices as may be reasonably necessary for Andrus to perform his services and carry out his responsibilities and duties to the Company.

VI,

INDEMNIFICATION.  The Company shall indemnify, his heirs, directors, officers executors, administrators and assigns, against, and shall be entitled without further act on his part to indemnify from the Company for, all expenses, including , but limited to , amounts of judgements, reasonable settlement of suits, attorney fees and related costs of litigation, reasonably incurred by him in connection with or arising out of any action, suit or having been, an officer and. or director of the Company, or, at its request, of any other corporation which the Company owns or of which the Company is a stockholder or creditor, whether or not he continues to be such officer or director at the time of incurring said expenses incurred in respect to:

1.

any matter in which he shall be finally adjudged in any such action, suit or proceeding to be liable for gross negligence or intentional misconduct in the performance of his duty as such officer and/or director, or;

2.

any matter in which a settlement is effected to an amount in excess of the amount of reasonable expenses incurred by or on behalf of Andrus in such action, suit or proceeding to the point of final settlement and resolution.

Further, nothing in this section regarding indemnification shall be construed to require or authorize the Company to indemnify Andrus against any liability to which he would, but for settlement or comprise of such action, suit or proceeding, be otherwise subject by reason of his gross negligence to intentional misconduct in the performance of his duties as an officer and/or director of the company. The foregoing right of indemnification shall not be exclusive of other rights to which Andrus may be entitled.

VII,  BUSINESS EXPENSE REIMBURSEMENT.  The Company shall reimburse Andrus for all reasonable business expenses incurred by him in the performance of his services, duties and responsibilities, including but not limited to transportation, travel expenses, board and room, entertainment, and other business expenses incurred within the scope of presentation to the Company by Andrus of an itemized accounting of said expenses substantiated by account books, receipts, bills and other documentation where applicable. If reimbursement, advances or allowances are based on permitted mileage or per diem rates, then Andrus shall submit specification of relevant mileage, destination, dates and other supporting information required doe tax purposes.

VIII,  VACATION.  During the term of this Agreement, Andrus shall have the right to six (6) weeks of paid vacation during each year. Vacation time may be taken all at once or in segments as desired by Andrus, subject to reasonable notice to the Company for the purpose of coordinating work schedules.

IX, TERMINATION OF EMPLOYMENT.

Termination Without Cause.  Under this Agreement, the Company does not have the right to terminate the employment of Andrus without cause.

Termination for Cause,  Generally. Under this Agreement, The Company shall have the right to terminate the employment of Andrus for cause, which shall consist of two classes: cause involving malfeasance on the part of Andrus, and causes not involving malfeasance (no-fault), Upon termination, all Company property and credit cards in the possession and control of Andrus must be returned to the Company.

Malfeasance Termination for Cause.  In the event the employment of Andrus terminated on the grounds of malfeasance, then, in that event, all compensation, including salary, stock options, bonuses, deferred compensation and benefits cease immediately.  Termination for cause on grounds of malfeasance included, but is not limited to, the following conduct:

(1)

Breach of any restrictive covenant contained herein against competition or disclosure of trade secrets;

(2)

Continued failure and refusal to carry out the duties and responsibilities of office under this agreement within a reasonable time following written notice from the president requiring the subject performance;

(3)

Failure to cure a material breach of this Agreement within ten (10) days after receiving written from the Company;

(4)

Failure to cease conduct unbecoming the Vice President of Operations of the Company after the receipt of written notice to cease such conduct;

(5)

Commission of a felony.

4.

No-Fault Termination for Cause.  At no fault of Andrus, termination of Employment hereunder for cause can occur as the result of death, disability, sale of the Company (asset or stock sale), merger or consolidation, “takeover” of control and operation of the business by an outside entity or group, or termination of the business for any reason whatsoever.

5.

Resignation.

In the event Andrus’s employment is terminated by his voluntary resignation, all rights and benefits cease upon the last day of his employment.

6.

Sale/Take-Over Termination Bonus.  In the event the employment of Andrus is because of the sale of the business (either asset or stock sale), merger, consolidation, or by “takeover” by an outside entity or group, then, Andrus shall be entitled to a termination bonus equal to three times the amount of bonus he receive in the aggregate over the four quarters immediately preceding such termination of employment, but in no event shall said bonus be less than two hundred fifty thousand dollars($250,000).

7.

Resignation or Withdrawal . In the event Andrus’ employment is terminated by his voluntary resignation or withdrawal, then, in that event, the following will apply unless otherwise agreed between the parties in writing:

(a)

If the resignation or withdrawal occurs during the first year of the term of this Agreement, the Andrus will be entitled only to two weeks salary following notice of resignation or withdrawal and company benefits set forth in Section X1-5(e) Shall be terminated at the end of the calendar month next following the date of notice of resignation or withdrawal. All rights to stock options, bonuses or deferred compensation not granted or vested shall be forfeited.

(b)

If the resignation or withdrawal occurs during the second year of the term of his Agreement, then Andrus will be entitled only to two months salary following Notice of resignation or withdrawal and company benefits set forth in Section XI-5(e) shall be terminated at the end of the calendar month next following the date of notice of resignation or withdrawal. All rights to stock options, bonuses or deferred compensation not granted or vested shall be forfeited.

(c)

If the resignation or withdrawal occurs during the third year of the term of this agreement, then Andrus will be entitled only to three months salary following notice of resignation or withdrawal and company benefits set forth in Section XI-5 (e) shall be terminated at the end of the calendar month three months Following the date of notice of resignation or withdrawal. All rights to stock Options, bonuses or deferred compensation not granted or vested shall be Forfeited.

8.

Death or Disability. In the event of Andrus employment is terminated by death or upon medical certification of total disability (“disability”), then the following will apply in that respective event:

(a)

 In the event of Andrus’ death, the Company shall:

-  Pay to Andrus’ estate an amount equal to Andrus base salary for a three-month

   Period next following his death;

-  Grant to Andrus estate the next ISO due to Andrus under Section IV-5 herein

    Following the date of his death;

-  The company shall pay to Andrus’ estate an amount equal to the bonus Andrus’

    Would have received for the next two quarters following termination;

-  The Company shall continue providing the medical and dental benefits set forth

    in Section IV-8 to Andrus’ survivors (to the extent applicable) for a period of

    one year.

(b.)

In the Event of Andrus disability, the Company shall:

- Pay to Andrus an amount equal to Andrus’ base salary for a three-month period next following disability;

- Grant to Andrus the next ISO due to Andrus under Section IV-5 herein following disability;

- The company shall pay to Andrus an amount equal to the bonus Andrus would have received for the next two quarters following disability;

 - The Company shall continue providing the medical and dental benefits set forth in Section IV 8 to Andrus for a period of one year following disability.

RESTRICTIVE COVENANTS.

1.

Confidential information.  Andrus covenants not to disclose the following specified confidential information to competitors or otherwise outside of the scope of reasonably prudent business disclosure, at any time during or after the termination of his employment by the Company.

1.

Customers lists, contracts, and other sales and marketing information;

2.

Financial information, cost data;

3.

Formulas, trade secrets, processes and devices related to the product and its manufacture;

4.

Supply sources, contracts;

5.

Business opportunities for the product or new developing business for the Company;

6.

Proprietary plans, models and other proprietary information of the Company.

2.

Affirmative Duty to Disclose.  Andrus shall promptly communicate and disclose to the Company all observations made and data maintained relating to the business of the Company obtained by him as a consequence of his employment by the Company. All written material, possession during his employment with the Company concerning business affairs of the Company or any of its affiliates, are the sole property of the Company and its affiliates, and Andrus is obligated to make reasonably prompt disclosures of such information and documents to the Company, and, further, upon termination of this Agreement, or upon request of the Company, Andrus shall promptly deliver the same to the Company or its affiliates.

3.

Covenant Not to Compete.  For a period of three (3) years following the termination of his employment with the Company, Andrus shall not work, directly or indirectly, for a competitor of the Company, nor shall he himself establish a competitive business. This restrictive covenant shall apply worldwide but shall be limited to businesses that use diatomaceous earth and/or pyrethrum in any of its products which they manufacture, distribute, sell, market or otherwise promote. This covenant shall expressly not include a project being pursued by Andrus utilizing a phosphate-DE mixture developed by Andrus fir fertilizer purposes, regardless of the incidental insecticide qualities of such product.

4.

Material Harm Upon Breach.

The parties acknowledge the unique and secret nature of the Company’s formulas for the composition of its DE-based products and related proprietary information, and that material irreparable harm occurs to the Company if these restrictive covenants are breached. Further, the parties hereto acknowledge and agree that injunctive relief is not an exclusive remedy and that an election on the part of the Company to obtain an injunction does not preclude other remedies available to the Company.

5.

Arbitration.  Any differences, claims, or matters in dispute occurring between these parties and arising out of the Agreement or connected herewith shall be submitted by either or both of the parities to arbitration by the American Arbitration Association or is successor shall be final and absolute. The rules and regulations of the National American Arbitration Association shall apply to the following modifications:

1.

Each party shall be required to submit evidence, documents and witness lists one month prior to the arbitration hearing, as part Pf its right of discovery.

2.

Three arbiters shall be designated by the parties as follows: Each party shall select one arbiter and the two arbiters so select in turn a third arbiter.

3.

The laws of the State of Utah relating to arbitration shall apply.

4.

The decision of the arbitration panel may be entered as a judgement in any court of the general jurisdiction in any state of the United States Or elsewhere.

XI.

NOTICE.  Except as otherwise provided herein, all notices required by this Agreement as well as any other notice to any party hereto shall be given by certified mail (or equivalent), to the respective parties as required under this Agreement or otherwise, to the following addresses indicated below or to any change of address given by a party to the others pursuant to the written notice.

COMPANY:

Diatect International

1134 N. Orchard, Suite 206

Boise, Id 83706

ANDRUS

David H. Andrus

1036 Caucus Way

Meridian, Id 83642

XII. GENERAL PROVISIONS

1.

Entire Agreement.  This Agreement constitutes and is the entire Agreement of the parities and supersedes all other prior understandings and/or Agreements between the parities regarding the matters herein contained, whether verbal or written.

2.

Amendments.   This Agreement may be amended only in writing signed by both parties.

3.

Assignment.  No party of this Agreement shall be entitled to assign his or its interest herein without the prior written approval of the other party.

4.

Execution of Other Documents.    Each of the parties agree to execute any other documents reasonably required to fully perform the intentions of this Agreement.

5.

Binding Effect.   This Agreement shall inure to and be binding upon the parties hereto, their agents, employees, heirs, personal representatives, successors and assigns.

6.

No Waiver of Future Breach.   The failure of one party to insist upon strict performance or observation of this Agreement shall not be a waiver of any future breach or of any terms or conditions of this Agreement.

7.

Execution of Multiple Originals.  Two (2) original counterparts of this Agreement shall be executed by these parties.

8.

Governing Law.  This Agreement shall be governed and interpreted by the laws of the State of Utah.

9.

Severability.  In the event any provision or section of this Agreement conflicts with the applicable law, such conflict shall not affect the provisions of the Agreement which can be given effect without the conflicting provisions.

WHEREFORE, this Agreement is hereby executed and made effective the day and year first above written.

COMPANY

DIATECT INTERNATIONAL CORPORATION

By________________________________________

       George H. Henderson, Its President

ATTEST:

___________________________________________

       Jay Downs, Executive Vice President

ANDRUS

____________________________________________

       David H. Andrus

EX-5

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: wwcpa@williams-webster.com

CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS

We consent to the use of our report dated March 28, 2003, except for Note 21 which is dated December 28, 2003, on the financial statements of Diatect International Corp, for the years ended December 31, 2002 and 2001 and the inclusion of our name under the heading “Experts” in the Form SB-2/A Registration Statement filed with the Securities and Exchange Commission.

/s/ Williams & Webster, P.S

Williams & Webster, P.S.

Spokane, Washington

January 21, 2004

.
01/21/2004 #