##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-KSB
  þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from  to
 Commission File Number: 000-28047
 DIVERSIFIED THERMAL SOLUTIONS, INC.
 
 (Name of Small Business Issuer in Its Charter)
 Nevada
    
    94-3342064(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (IRS Employer
Identification No.)
 4126 Delp Street, Suite 200, Memphis, TN 38118
 
 (Address of Principal Executive Offices)
Issuers telephone number, including area code (901) 365-7650
 Securities registered pursuant to Section 12(b) of the Act:
    NoneSecurities registered pursuant to Section 12(g) of the Act:
    Common
Stock par value, $0.0001
 o
 þ o
 þ
 o þ
    DOCUMENTS INCORPORATED BY REFERENCE
 o þ




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##### 



TABLE OF CONTENTS
 Page No.PART IITEM 1.
    
    DESCRIPTION OF BUSINESS
    
    
    1ITEM 2.
    
    DESCRIPTION OF PROPERTY
    
    
    3ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    3ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    4PART IIITEM 5.
    
    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    4ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    5ITEM 7.
    
    FINANCIAL STATEMENTS
    
    
    7ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    7ITEM 8A.
    
    CONTROLS AND PROCEDURES
    
    
    9PART IIIITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
    
    
    9ITEM 10.
    
    EXECUTIVE COMPENSATION
    
    
    11ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    13ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
    
    
    14ITEM 13.
    
    EXHIBITS
    
    
    14ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    15SIGNATURES, POWER OF ATTORNEY, EXHIBIT INDEX
    
    
    16EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFOEX-33.1 CHANGE IN ACCOUNTING PRINCIPLES




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PART I.
 
 Item 1. DESCRIPTION OF BUSINESS
 General
      Refractory Industry
    1




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
    
    Monolithic- a furnace lining without joints, formed of material which is rammed, cast,
gunned or sintered into place;
    
    Brick- low grade, low alumina to high grade, high alumina straight and shaped brick;
or
    
    Pre-Cast Shapes- special shapes designed to the customers specifications, such as a
doorjamb in a furnace.
   Strategy
     Competition
  2




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Employees
  Additional Information
  
 Item 2. DESCRIPTION OF PROPERTY
  
 Item 3. LEGAL PROCEEDINGS
   3




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II.
 
 Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
 Market Information
  Low
    
    HighQuarter ended March 31, 2006
    
    $
    0.22
    
    
    $
    0.27Quarter ended June 30, 2006
    
    
    0.20
    
    
    
    0.27Quarter ended September 30, 2006
    
    
    0.15
    
    
    
    0.25Quarter ended December 31, 2006
    
    
    0.11
    
    
    
    0.15Quarter ended March 31, 2005
    
    $
    0.25
    
    
    $
    0.45Quarter ended June 30, 2005
    
    
    0.23
    
    
    
    0.32Quarter ended September 30, 2005
    
    
    0.19
    
    
    
    0.28Quarter ended December 31, 2005
    
    
    0.16
    
    
    
    0.42
  Holders
  Dividends
  4




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Equity Compensation Plan
  Number of securitiesremaining available forNumber of securities to be
    
    
    
    
    
    future issuance underissued upon exercise of
    
    Weighted-average exercise
    
    equity compensation plansoutstanding options,
    
    price of outstanding options,
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    
    
    
    
    
    
    
    
    1,205,000Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    1,205,000
 
 Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 The following information specifies certain forward-looking statements that are not historical
facts. These statements represent our expectations or beliefs, including but not limited to,
statements concerning future acquisitions, future operating results, statements concerning industry
performance, capital expenditures, financings, as well as assumptions related to the foregoing.
Forward-looking statements may be identified by the use of forward-looking terminology such as
may, shall, will, could, expect, estimate, anticipate, predict, should,
continue or similar terms, variations of those terms or the negative of those terms.
Forward-looking statements are based on current expectations and involve various risks and
uncertainties that could cause actual results and outcomes for future periods to differ materially
from any forward-looking statement or view expressed herein. Our financial performance and the
forward-looking statements contained in this report are further qualified by other risks including
those set forth from time to time in documents filed by us with the SEC.
 Introduction
    5




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Balance Sheets
  st
    6




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Results of Operations
     7




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Liquidity and Capital Resources
  Other Significant Events
     Off Balance Sheet Arrangements
  8




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Item 7. FINANCIAL STATEMENTS
  
 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 Item 8A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  
 PART III
 
 Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
  Name
    
    Age
    
    PositionB. Grant Hunter
    
    43
    
    President, Chief Executive Officer, and DirectorJ. Terry Medovitch
    
    55
    
    Chief Financial OfficerJohn F. Curry
    
    48
    
    Secretary/Treasurer and DirectorEd H. Gatlin
    
    66
    
    DirectorD. Michael Hartley
    
    61
    
    DirectorJerry W. Hunter
    
    69
    
    Director
 B. Grant Hunter
 9




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J. Terry Medovitch
 John F. Curry
 Ed Gatlin
 D. Michael Hartley
 Jerry W. Hunter
 Audit Committee
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
  10




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Item 10. EXECUTIVE COMPENSATION
 Summary Compensation Table
 Change inPension Valueand NonqualifiedNon-Equity
    
    DeferredStock
    
    Option
    
    Incentive Plan
    
    Compensation
    
    All OtherSalary
    
    Bonus
    
    Awards
    
    Awards
    
    Compensation
    
    Earnings
    
    CompensationName and
    
    
    
    ($)
    
    ($)
    
    ($)(1)
    
    ($)
    
    ($)
    
    ($)
    
    ($)(2)
    
    Total ($)Principal Position
    
    Year
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)B. Grant Hunter
President and Chief
Executive Officer
    
    2006
    
    $
    70,000
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    2,038
    
    
    $
    72,038J. Terry Medovitch
Chief Financial
Officer
    
    2006
    
    $
    117,905
    
    
    $
    0
    
    
    $
    1,600
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    15,731
    
    
    $
    135,236
 
 1.
    
    Represents the proportionate amount of the total value of restricted stock and/or
restricted stock unit awards to named executive officers recognized as an expense during
2006 for financial accounting purposes under SFAS 123R.2.
    
    The amount shown in column (i) reflects for each named executive officer the cost of
company contributions to a defined contribution benefit plan, health insurance, group term
life insurance, short term disability insurance and long term disability insurance. The
amount attributable to each such perquisite or benefit for each named executive officer
does not exceed the greater of $25,000 or 10% of the total amount of perquisites received
by such named executive officer. 2003 Equity Incentive Plan
  Share Reserve.
  Administration.
 11




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Nonstatutory Stock Options.
    Restricted Stock Awards.
 Stock Appreciation Rights.
  Phantom Stock Awards.
 Other Equity Awards.
 12




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Changes in Control.
 Employee Benefit Plan.
 
 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Number of Shares of Common Stock
    
    PercentName and Address(1)
    
    Beneficially Owned as of December 31, 2006
    
    of ClassB. Grant Hunter(2)
    
    
    10,785,539
    
    
    
    39
    %John F. Curry
    
    
    3,697,197
    
    
    
    20
    %Ed Gatlin
    
    
    131,452
    
    
    
    *D. Michael Hartley
    
    
    0
    
    
    
    *Jerry W. Hunter(2)
    
    
    4,136,654
    
    
    
    4
    %J. Terry Medovitch
    
    
    18,600
    
    
    
    *(1) The address is 4126 Delp Street,
Named executive officers and
directors as a group (6 individuals)
    
    
    15,399,599
    
    
    
    63
    %
  (2)
    
    Includes 3,369,843 shares owned by Lynn Whitsett Corporation with those shares owned by
Messrs. Grant Hunter and Jerry Hunter.
 *
    
    Less than 1% of the outstanding shares of our common stock.
  13




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Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 Certain Relationships and Related Transactions
      Director Independence
  
 Item 13. EXHIBITS
  31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to 18. U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 14




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33.1
    
    Change in Accounting Principles
  
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   Audit Fees
    
    Audit-Related Fees
    
    Tax Fees
    
    All Other Fees2006
    
    $
    92,213
    
    
    $
    0
    
    
    $
    8,176
    
    
    $
    02005
    
    $
    71,578
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
 15




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SIGNATURES
  DIVERSIFIED THERMAL SOLUTIONS, INC.Date: March 30, 2007
    By:
    /s/ B. Grant HunterB. Grant HunterChief Executive Officer and Director  Signature
    
    Title
    
    Date/s/ John F. Curry
John F. Curry
    
    Secretary/Treasurer and Director
    
    March 30, 2007/s/ J. Terry Medovitch
J. Terry Medovitch
    
    Chief Financial Officer
    
    March 30, 2007/s/ Ed H. Gatlin
Ed H. Gatlin
    
    Director
    
    March 30, 2007/s/ D. Michael Hartley
D. Michael Hartley
    
    Director
    
    March 30, 2007/s/ Jerry W. Hunter
Jerry W. Hunter
    
    Director
    
    March 30, 2007
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Report of Independent Registered Public Accounting Firm
    
    
    18Audited Consolidated Financial StatementsConsolidated Balance Sheets
    
    
    19Consolidated Statements of Operations
    
    
    21Consolidated Statements of Shareholders Equity (Deficit)
    
    
    22Consolidated Statements of Cash Flows
    
    
    23Notes to Consolidated Financial Statements
    
    
    25
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Diversified Thermal Solutions, Inc.
 
 Consolidated Balance Sheets
 December 312006
    
    2005AssetsCurrent assets:Cash
    
    $
    122,835
    
    
    $
    Accounts receivable:Trade, net of reserve for doubtful
accounts of $5,000 in 2006 and 2005
    
    
    1,130,065
    
    
    
    1,010,669Related party
    
    
    
    
    
    
    55,110Insurance claim
    
    
    128,485
    
    
    
    Total accounts receivable
    
    
    1,258,550
    
    
    
    1,065,779Inventories, net
    
    
    2,463,230
    
    
    
    3,396,590Prepaid expenses
    
    
    69,197
    
    
    
    92,252Deferred income taxes
    
    
    65,375
    
    
    
    Total current assets
    
    
    3,979,187
    
    
    
    4,554,621Property, plant and equipment:Land
    
    
    217,950
    
    
    
    104,498Buildings
    
    
    821,248
    
    
    
    832,136Machinery and equipment
    
    
    937,353
    
    
    
    711,5181,976,551
    
    
    
    1,648,152Less accumulated depreciation
    
    
    325,500
    
    
    
    151,8801,651,051
    
    
    
    1,496,272Construction on progress
    
    
    42,128
    
    
    
    20,417Equipment not in service
    
    
    75,065
    
    
    
    Net property, plant, and equipment
    
    
    1,768,244
    
    
    
    1,516,689Total assets
    
    $
    5,747,431
    
    
    $
    6,071,310
 See accompanying Notes to Consolidated Financial Statements.
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Diversified Thermal Solutions, Inc.
 Consolidated Balance Sheets (continued)
 December 312006
    
    2005Liabilities and shareholders equity (deficit)Current liabilities:Checks outstanding in excess of bank balance
    
    $
    
    
    
    $
    3,450Line of credit
    
    
    856,389
    
    
    
    2,235,773Accounts payable and accrued expenses
    
    
    1,052,943
    
    
    
    1,300,808Due to seller of business acquired
    
    
    
    
    
    
    150,000State income taxes payable
    
    
    53,094
    
    
    
    Current portion of long-term debt
    
    
    1,004,132
    
    
    
    1,278,259Current portion of capital lease obligations
    
    
    31,618
    
    
    
    29,880Total current liabilities
    
    
    2,998,176
    
    
    
    4,998,170Advances from shareholders
    
    
    34,899
    
    
    
    39,899Long-term debt, less current portion
    
    
    12,220
    
    
    
    31,852Capital lease obligations, less current portion
    
    
    55,383
    
    
    
    87,001Notes payable to related companies
    
    
    1,000,000
    
    
    
    1,000,000Note payable to shareholder
    
    
    600,000
    
    
    
    600,000Deferred income taxes
    
    
    403,129
    
    
    
    Total liabilities
    
    
    5,103,807
    
    
    
    6,756,922Shareholders equity (deficit):Common stock, par value $0.0001:Authorized100,000,000 sharesIssued and outstanding18,834,238 shares in
2006 and 18,824,238 shares in 2005
    
    
    1,884
    
    
    
    1,883Additional paid-in capital
    
    
    11,234,318
    
    
    
    11,232,719Accumulated deficit
    
    
    (10,592,578
    )
    
    
    (11,920,214
    )Net shareholders equity (deficit)
    
    
    643,624
    
    
    
    (685,612
    )Total liabilities and shareholders equity (deficit)
    
    $
    5,747,431
    
    
    $
    6,071,310
 See accompanying Notes to Consolidated Financial Statements.
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Diversified Thermal Solutions, Inc.
 
 Consolidated Statements of Operations
 Year ended December 312006
    
    2005Revenues:Unrelated companies
    
    $
    9,322,120
    
    
    $
    8,665,370Related companies
    
    
    986,836
    
    
    
    68,169Total revenues
    
    
    10,308,956
    
    
    
    8,733,539Costs of goods sold
    
    
    9,018,906
    
    
    
    7,275,031Gross profit
    
    
    1,290,050
    
    
    
    1,458,508Operating expenses:Professional and consulting services
    
    
    182,172
    
    
    
    132,925Selling
    
    
    371,644
    
    
    
    342,335General and administrative
    
    
    925,537
    
    
    
    827,297Total operating expenses
    
    
    1,479,353
    
    
    
    1,302,557Operating (loss) income
    
    
    (189,303
    )
    
    
    155,951Other income (expenses):Fire related items:
    
    
    
    
    
    
    Lawsuit settlement
    
    
    2,800,000
    
    
    
    Insurance proceeds
    
    
    561,063
    
    
    
    Excess costs due to fire
    
    
    (1,020,350
    )
    
    
    Net fire related items
    
    
    2,340,713
    
    
    
    Miscellaneous income
    
    
    16,154
    
    
    
    20,080Interest expense
    
    
    (449,080
    )
    
    
    (352,123
    )Net other income (expenses)
    
    
    1,907,787
    
    
    
    (332,043
    )Income (loss) before income taxes
    
    
    1,718,484
    
    
    
    (176,092
    )Income tax expense:Current
    
    
    53,094
    
    
    
    Deferred
    
    
    337,754
    
    
    
    Total income tax expense
    
    
    390,848
    
    
    
    Net income (loss)
    
    $
    1,327,636
    
    
    $
    (176,092
    )Basic earnings (loss) per share
    
    $
    0.07
    
    
    $
    (0.01
    )
 See accompanying Notes to Consolidated Financial Statements.
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Diversified Thermal Solutions, Inc.
 
 Consolidated Statements of Shareholders Equity (Deficit)
 Number ofShares
    
    
    
    
    
    Additional
    
    
    
    
    
    NetIssued and
    
    Common
    
    Paid-in
    
    Accumulated
    
    ShareholdersOutstanding
    
    Stock
    
    Capital
    
    Deficit
    
    Equity (Deficit)Balance at January 1, 2005
    
    
    17,467,571
    
    
    $
    1,747
    
    
    $
    10,966,587
    
    
    $
    (11,744,122
    )
    
    $
    (775,788
    )Stock issued for services
    
    
    1,236,667
    
    
    
    124
    
    
    
    236,144
    
    
    
    
    
    
    
    236,268Sale of stock
    
    
    120,000
    
    
    
    12
    
    
    
    29,988
    
    
    
    
    
    
    
    30,000Net loss for 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176,092
    )
    
    
    (176,092
    )Balance at December 31, 2005
    
    
    18,824,238
    
    
    
    1,883
    
    
    
    11,232,719
    
    
    
    (11,920,214
    )
    
    
    (685,612
    )Stock issued for services
    
    
    10,000
    
    
    
    1
    
    
    
    1,599
    
    
    
    
    
    
    
    1,600Net income for 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,327,636
    
    
    
    1,327,636Balance at December 31, 2006
    
    
    18,834,238
    
    
    $
    1,884
    
    
    $
    11,234,318
    
    
    $
    (10,592,578
    )
    
    $
    643,624
 See accompanying Notes to Consolidated Financial Statements.
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Diversified Thermal Solutions, Inc.
 
 Consolidated Statements of Cash Flows
 Year ended December 312006
    
    2005Operating activitiesNet income (loss)
    
    $
    1,327,636
    
    
    $
    (176,092
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation
    
    
    173,620
    
    
    
    139,911Loss on equipment due to fire
    
    
    40,778
    
    
    
    Stock issued for services
    
    
    1,600
    
    
    
    25,600Deferred income taxes
    
    
    337,754
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (192,771
    )
    
    
    (31,631
    )Inventories
    
    
    933,360
    
    
    
    (96,406
    )Prepaid expenses
    
    
    23,055
    
    
    
    (92,252
    )Accounts payable and accrued expenses
    
    
    (247,865
    )
    
    
    399,958Income taxes payable
    
    
    53,094
    
    
    
    Net cash provided by operating activities
    
    
    2,450,261
    
    
    
    169,088Investing activitiesPurchases of property, plant, and equipment
    
    
    (465,953
    )
    
    
    (287,786
    )Acquisition of business, net of noncash transactions
related to amount owed to seller and stock issued for
acquisition
    
    
    
    
    
    
    (4,372,499
    )Net cash used in investing activities
    
    
    (465,953
    )
    
    
    (4,660,285
    )Financing activitiesNet (repayments) borrowings on line of credit
    
    
    (1,379,384
    )
    
    
    2,235,773Change in checks outstanding in excess of bank balance
    
    
    (3,450
    )
    
    
    2,401Payments to seller of business acquired
    
    
    (150,000
    )
    
    
    Proceeds from borrowings of long-term debt
    
    
    
    
    
    
    1,500,000Net borrowings from related parties
    
    
    
    
    
    
    1,010,486Proceeds from capital lease obligation
    
    
    
    
    
    
    24,126Payments on advances from shareholders
    
    
    (5,000
    )
    
    
    (11,085
    )Principal repayments on long-term debt
    
    
    (293,759
    )
    
    
    (252,444
    )Principal repayments on capital lease obligations
    
    
    (29,880
    )
    
    
    (18,060
    )Net cash (used in) provided by financing activities
    
    
    (1,861,473
    )
    
    
    4,491,197Net increase in cash
    
    
    122,835
    
    
    
    Cash at beginning of year
    
    
    
    
    
    
    Cash at end of year
    
    $
    122,835
    
    
    $
    
 See accompanying Notes to Consolidated Financial Statements.
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Diversified Thermal Solutions, Inc.
 Consolidated Statements of Cash Flows (continued)
 Supplemental disclosure of cash flow information
 Year ended December 312006
    
    2005Cash paid during the year for interest
    
    $
    384,186
    
    
    $
    305,446
 Supplemental disclosure of noncash activities
 Year ended December 312006
    
    2005Common stock issued for services
    
    $
    1,600
    
    
    $
    236,268Common stock issued to a consultant via
reduction in advances from shareholders
    
    
    
    
    
    
    30,000Due to seller of business acquired
    
    
    
    
    
    
    150,000
 See accompanying Notes to Consolidated Financial Statements.
 24




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##### Table of Contents



Diversified Thermal Solutions, Inc.
 
 Notes to Consolidated Financial Statements
 December 31, 2006
 1. Significant Accounting Policies
 Principles of Consolidation and Description of Business
   Revenue Recognition
  Business Concentrations and Credit Risks
      25




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##### Table of Contents



Diversified Thermal Solutions, Inc.
 Notes to Consolidated Financial Statements (continued)
 1. Significant Accounting Policies (continued)
 Advertising Costs
  Inventories
  Property, Plant and Equipment
  Accounting Changes
and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3
 Estimates
  Reclassifications
  26




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##### Table of Contents



Diversified Thermal Solutions, Inc.
 Notes to Consolidated Financial Statements (continued)
 2. Business Acquisition
  Business
Combinations
 Accounts receivable
    
    $
    1,007,032Inventories
    
    
    3,296,036Property, plant, and equipment
    
    
    1,320,940Assets acquired
    
    
    5,624,008Accounts payable
    
    
    616,903Long-term debt
    
    
    62,555Capital lease obligations
    
    
    110,815Liabilities assumed
    
    
    790,273Net assets acquired
    
    $
    4,833,735
 27




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##### Table of Contents



Diversified Thermal Solutions, Inc.
 Notes to Consolidated Financial Statements (continued)
 2. Business Acquisition (continued)
  Net revenues
    
    $
    9,366,549Net loss
    
    
    (264,789
    )Net loss per share
    
    $
    (0.01
    )Weighted average shares used in computing net loss per share
    
    
    18,610,349
 3. Inventories
  2006
    
    2005Raw materials
    
    $
    466,353
    
    
    $
    1,058,077Work-in-process
    
    
    293,765
    
    
    
    313,840Finished goods
    
    
    2,195,945
    
    
    
    2,471,217Less reserve for obsolete inventories
    
    
    (492,833
    )
    
    
    (446,544
    )Net inventories
    
    $
    2,463,230
    
    
    $
    3,396,590
 4. Notes Payable and Long-Term Debt
   28




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##### Table of Contents



Diversified Thermal Solutions, Inc.
 Notes to Consolidated Financial Statements (continued)
 4. Notes Payable and Long-Term Debt (continued)
      29




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##### Table of Contents



Diversified Thermal Solutions, Inc.
 Notes to Consolidated Financial Statements (continued)
 4. Notes Payable and Long-Term Debt (continued)
   2007
    
    $
    290,4072008
    
    
    330,0052009
    
    
    341,2662010
    
    
    151,5852011
    
    
    137,755Thereafter
    
    
    1,365,334$
    2,616,352
 5. Leases
  Equipment
    
    $
    60,199Less accumulated depreciation
    
    
    16,706Net assets under capital lease
    
    $
    43,493
  2007
    
    $
    35,7232008
    
    
    35,7232009
    
    
    18,2582010
    
    
    4,337Total payments
    
    
    94,041Less amounts representing interest
    
    
    7,040Present value of minimum lease payments (including
$31,618 classified as current)
    
    $
    87,001
 30




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##### Table of Contents



Diversified Thermal Solutions, Inc.
 Notes to Consolidated Financial Statements (continued)
 6. Company Equity Matters
 2003 Diversified Thermal Solutions, Inc.
Equity Incentive Plan
    7. Fire Related Matters
  31




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##### Table of Contents



Diversified Thermal Solutions, Inc.
 Notes to Consolidated Financial Statements (continued)
 8. Income Taxes
  2006
    
    2005Deferred tax assets:Net operating loss carryovers
    
    $
    53,628
    
    
    $
    282,422Reserve for doubtful accounts
    
    
    2,030
    
    
    
    2,030Book over tax depreciation
    
    
    
    
    
    
    1,425Capitalized inventory costs
    
    
    43,426
    
    
    
    33,234Accrued expenses
    
    
    34,869
    
    
    
    62,448Total deferred tax assets
    
    
    133,953
    
    
    
    381,559Less valuation allowance for deferred tax assets
    
    
    (53,628
    )
    
    
    (381,559
    )Net deferred tax assets
    
    
    80,325
    
    
    
    Deferred tax liabilities:Tax over book depreciation
    
    
    403,129
    
    
    
    Prepaid expenses
    
    
    14,950
    
    
    
    Total deferred tax liabilities
    
    
    418,079
    
    
    
    Net deferred tax liabilities
    
    
    (337,754
    )
    
    
    Portion classified as current asset
    
    
    65,375
    
    
    
    Portion classified as long-term liability
    
    $
    (403,129
    )
    
    $
    
   2006Current:Federal
    
    $
    State
    
    
    53,094Total current
    
    
    53,094Deferred:Federal
    
    
    282,918State
    
    
    54,836Total deferred
    
    
    337,754Total income tax expense
    
    $
    390,848
 32




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##### Table of Contents



Diversified Thermal Solutions, Inc.
 Notes to Consolidated Financial Statements (continued)
 8. Income Taxes (continued)
  2006
    
    2005Income tax benefit at U.S. statutory rates of 34%
    
    $
    584,285
    
    
    $
    (59,871
    )Impact of state income taxes
    
    
    107,930
    
    
    
    (7,554
    )Change in valuation allowance
    
    
    (327,931
    )
    
    
    74,295Other
    
    
    26,564
    
    
    
    (6,870
    )$
    390,848
    
    
    $
    
 9. Contingent Liabilities
  10. Earnings Per Share Data
   2006
    
    2005Average shares outstanding
    
    
    18,833,831
    
    
    
    20,114,446Net earnings (loss) per share
    
    $
    0.07
    
    
    $
    (0.03
    )
 11. Other Related Party Transactions
  33




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##### Table of Contents



Diversified Thermal Solutions, Inc.
 Notes to Consolidated Financial Statements (continued)
 11. Other Related Party Transactions (continued)
  12. Employee Benefit Plan
  13. Fair Value of Financial Instruments
   14. Going Concern
  34