UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549


________________________





FORM
10-Q


(Mark
One)





[X]
            QUARTERLY REPORT UNDER SECTION
      13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
  1934





For the
quarter ended September 30, 2008





[   ]
            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.


(Exact
Name of Registrant as Specified in Its Charter)





Nevada
            94-3342064--------------------------------------
            --------------------------------------(State
      or Other Jurisdiction of
            (IRS
      EmployerIncorporation
      or Organization)
            Identification
      No.)





4126
Delp Street, Suite 200, Memphis, TN  38118


(Address
of Principal Executive Offices)(Zip Code)


(901)
365-7650


(Registrant’s
telephone number, including area code)





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





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





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
            Smaller
      Reporting Company þ(Do
      not check if a smaller reporting company)


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   ̈Yes  þ No





Number of
shares outstanding of each of the issuer’s classes of common stock, as of
November 3, 2008:





Title                                                                               Outstanding


Common Stock, $0.0001 par
value                                                                                                18,974,238










TABLE
OF CONTENTS


Page
      No.PART
      I.    FINANCIAL INFORMATIONItem
      1.  Financial Statements (Unaudited)Condensed
      Consolidated Balance Sheet
            F-2Condensed
      Consolidated Statements of Operations
            F-4Condensed
      Consolidated Statements of Cash Flows
            F-5Notes
      to Condensed Consolidated Financial Statements
            F-6Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            1Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
            5Item
      4.  Controls and Procedures
            5PART
      II.  OTHER INFORMATIONItem
      1.  Legal Proceedings
            6Item
      1A.  Risk Factors
            6Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
            6Item
      3.  Defaults Upon Senior Securities
            6Item
      4.  Submission of Matters to a Vote of Security
      Holders
            6Item
      5.  Other Information
            6Item
      6.  Exhibits
            6SIGNATURES
            7










F-1







PART
I. – FINANCIAL INFORMATION





ITEM
      1.
            FINANCIAL
      STATEMENTS.








Index
to Financial Statements





Condensed
      Consolidated Balance
      Sheets......................................................................................................................................................
            F-2Condensed
      Consolidated Statements of
      Operations.....................................................................................................................................
            F-4Condensed
      Consolidated Statements of Cash
      Flows....................................................................................................................................
            F-5Notes
      to Condensed Consolidated Financial
      Statements...............................................................................................................................
            F-6













































F-1





Diversified
Thermal Solutions, Inc.





Condensed
Consolidated Balance Sheets











September
      30
              2008
            
            
            December
      31 2007(Unaudited)AssetsCurrent
      assets:Cash
            
            $
            291,248
            
            
            $
            1,445Accounts
      receivable:Trade
            
            
            1,374,826
            
            
            
            865,056Related
      companies
            
            
            2,638
            
            
            
            84,980Insurance
      claim
            
            
            –
            
            
            
            128,485Total
      accounts receivable
            
            
            1,377,464
            
            
            
            1,078,521Inventories,
      net
            
            
            2,152,715
            
            
            
            3,472,744Prepaid
      expenses
            
            
            143,976
            
            
            
            59,544Deferred
      income taxes
            
            
            36,897
            
            
            
            65,021Total
      current assets
            
            
            4,002,300
            
            
            
            4,677,275Property,
      plant and equipment:Land
            
            
            222,303
            
            
            
            222,303Buildings
            
            
            821,248
            
            
            
            821,248Machinery
      and equipment
            
            
            1,336,317
            
            
            
            1,047,6852,379,868
            
            
            
            2,091,236Less
      accumulated depreciation
            
            
            700,062
            
            
            
            535,3831,679,806
            
            
            
            1,555,853Construction
      in progress
            
            
            3,361,536
            
            
            
            1,415,608Net
      property, plant, and equipment
            
            
            5,041,342
            
            
            
            2,971,461Total
      assets
            
            $
            9,043,642
            
            
            $
            7,648,736








F-2


Diversified
Thermal Solutions, Inc.





Condensed
Consolidated Balance Sheets (continued)











September
      30
              2008
            
            
            December
      31
              2007(Unaudited)Liabilities
      and shareholders’ equityCurrent
      liabilities:Checks
      outstanding in excess of bank balance
            
            $
            18,229
            
            
            $
            25,829Line
      of credit
            
            
            2,453,728
            
            
            
            2,136,811Accounts
      payable and accrued expenses:Trade and other
            
            
            1,388,104
            
            
            
            1,651,800Related
companies
            
            
            307,925
            
            
            
            268,546Total
      accounts payable and accrued expenses
            
            
            1,696,029
            
            
            
            1,920,346Deferred
      revenue
            
            
            260,285
            
            
            
            288,984Current
      portion of long-term debt
            
            
            542,949
            
            
            
            735,747Current
      portion of capital lease obligations
            
            
            28,780
            
            
            
            33,458Total
      current liabilities
            
            
            5,000,000
            
            
            
            5,141,175Advances
      from shareholders
            
            
            34,899
            
            
            
            34,899Advances
      from related company
            
            
            712,282
            
            
            
            –Deferred
      income taxes
            
            
            150,370
            
            
            
            262,110Long-term
      debt, less current portion
            
            
            555,513
            
            
            
            8,829Capital
      lease obligations, less current portion
            
            
            15,968
            
            
            
            21,926Notes
      payable to related companies
            
            
            1,532,000
            
            
            
            1,000,000Note
      payable to shareholder
            
            
            592,000
            
            
            
            592,000Total
      liabilities
            
            
            8,593,032
            
            
            
            7,060,939Shareholders’
      equity:Common
      stock, par value $0.0001:
              Authorized--100,000,000
      shares
              Issued
      and outstanding--18,974,238 shares in 2008 and 2007
            
            
            1,898
            
            
            
            1,898Additional
      paid-in capital
            
            
            11,260,904
            
            
            
            11,260,904Accumulated
      deficit
            
            
            (10,812,192
            )
            
            
            (10,675,005
            )Net
      shareholders’ equity
            
            
            450,610
            
            
            
            587,797Total
      liabilities and shareholders’ equity
            
            $
            9,043,642
            
            
            $
            7,648,736














See
accompanying Notes to Condensed Consolidated Financial Statements.








F-3


Diversified
Thermal Solutions, Inc.





Condensed
Consolidated Statements of Operations (Unaudited)











Three
      months ended
              September
      30
            
            
            Nine
      months ended
              September
      302008
            
            
            2007
            
            
            2008
            
            
            2007Revenues:Unrelated
      companies
            
            $
            3,313,007
            
            
            $
            3,091,058
            
            
            $
            9,535,620
            
            
            $
            8,207,802Related
      companies
            
            
            53,266
            
            
            
            234,079
            
            
            
            197,501
            
            
            
            687,687Total
      revenues
            
            
            3,366,273
            
            
            
            3,325,137
            
            
            
            9,733,121
            
            
            
            8,895,489Costs
      of goods sold
            
            
            2,904,686
            
            
            
            2,558,366
            
            
            
            8,461,274
            
            
            
            7,480,408Gross
      profit
            
            
            461,587
            
            
            
            766,771
            
            
            
            1,271,847
            
            
            
            1,415,081Operating
      expenses:Professional
      and consulting services
            
            
            48,922
            
            
            
            15,779
            
            
            
            184,879
            
            
            
            132,205Marketing
      and advertising
            
            
            125,230
            
            
            
            178,051
            
            
            
            344,195
            
            
            
            408,369Office
      and administrative
            
            
            258,444
            
            
            
            243,116
            
            
            
            764,302
            
            
            
            693,473Total
      operating expenses
            
            
            432,596
            
            
            
            436,946
            
            
            
            1,293,376
            
            
            
            1,234,047Operating
      income (loss)
            
            
            28,991
            
            
            
            329,825
            
            
            
            (21,529
            )
            
            
            181,034Other
      income (expenses):Miscellaneous
      income
            
            
            4,710
            
            
            
            6,852
            
            
            
            26,131
            
            
            
            23,109Interest
      expense
            
            
            (74,244
            )
            
            
            (100,163
            )
            
            
            (225,405
            )
            
            
            (266,610
            )Net
      other expenses
            
            
            (69,534
            )
            
            
            (93,311
            )
            
            
            (199,274
            )
            
            
            (243,501
            )Net
      loss before income taxes
            
            
            (40,543
            )
            
            
            236,514
            
            
            
            (220,803
            )
            
            
            (62,467
            )Deferred
      income tax (expense) benefit
            
            
            15,990
            
            
            
            (95,966
            )
            
            
            83,616
            
            
            
            25,355Net
      income (loss)
            
            $
            (24,553
            )
            
            $
            140,548
            
            
            $
            (137,187
            )
            
            $
            (37,112
            )Basic net earnings (loss) per share
            
            $
            -
            
            
            $
            0.01
            
            
            $
            (0.01
            )
            
            $
            -










See
accompanying Notes to Condensed Consolidated Financial Statements.






F-4


Diversified
Thermal Solutions, Inc.





Condensed
Consolidated Statements of Cash Flows (Unaudited)











Nine
      months ended September 302008
            
            
            2007Operating
      activitiesNet
      loss
            
            $
            (137,187
            )
            
            $
            (37,112
            )Adjustments
      to reconcile net loss to net cash providedby
      (used in) operating activities:Depreciation
            
            
            164,679
            
            
            
            165,954Deferred
      income tax benefit
            
            
            (83,616
            )
            
            
            (25,355
            )Stock
      issued for services
            
            
            –
            
            
            
            26,600Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (298,943
            )
            
            
            (405,004
            )Inventories
            
            
            1,320,029
            
            
            
            (481,439
            )Prepaid
      expenses
            
            
            (84,432
            )
            
            
            (337,738
            )Deferred
      revenue
            
            
            (28,699
            )
            
            
            –Checks
      outstanding in excess of bank balance
            
            
            (7,600
            )
            
            
            –Accounts
      payable and accrued expenses
            
            
            (224,317
            )
            
            
            539,322Net
      cash provided by (used in) operating activities
            
            
            619,914
            
            
            
            (554,772
            )Investing
      activitiesPurchases
      of property, plant, and equipment
            
            
            (2,216,305
            )
            
            
            (656,111
            )Financing
      activitiesNet
      borrowings on line of credit
            
            
            316,917
            
            
            
            1,307,627Advances
      from related company
            
            
            712,282
            
            
            
            20,500Net
      payments on note payable to shareholder
            
            
            –
            
            
            
            (6,000
            )Borrowings
      from related companies
            
            
            532,000
            
            
            
            –Borrowings
      of long-term debt
            
            
            607,470
            
            
            
            –Principal
      repayments on long-term debt
            
            
            (253,584
            )
            
            
            (209,249
            )Principal
      repayments on capital lease obligation
            
            
            (28,891
            )
            
            
            (23,547
            )Net
      cash provided by financing activities
            
            
            1,886,194
            
            
            
            1,089,331Net
      increase (decrease) in cash
            
            
            289,803
            
            
            
            (121,552
            )Cash
      at beginning of period
            
            
            1,445
            
            
            
            122,835Cash
      at end of period
            
            $
            291,248
            
            
            $
            1,283








Supplemental
Schedule of Noncash Activities





During
January 2008, the Company entered into a capital lease obligation for certain
equipment with a cost of $18,255.





Advances
from related company at September 30, 2007 included $75,000 for
equipment.










See
accompanying Notes to Condensed Consolidated Financial
Statements.


F-5


Diversified
Thermal Solutions, Inc.







Notes to
Condensed Consolidated Financial Statements (Unaudited)







September
30, 2008











1.  Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements of
Diversified Thermal Solutions, Inc. (the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange
Commission.   Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial
statements.  In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.  Operating results for the three and nine month periods
ended September 30, 2008 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2008.




The
condensed consolidated financial statements include the accounts of Diversified
Thermal Solutions, Inc. and its wholly-owned subsidiaries, DT Solutions, Inc.
and Fuzion Technologies, Inc.  All intercompany balances and
transactions have been eliminated.





The
balance sheet at December 31, 2007, has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by GAAP for complete financial statements.





For
further information, refer to the consolidated financial statements and notes
thereto included in the Company’s annual report on Form 10-KSB for the year
ended December 31, 2007.





2.  Recent
Accounting Pronouncements




During
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value Measurements, which is effective for fiscal years beginning
after November 15, 2007, with earlier adoption encouraged. SFAS 157 defines fair
value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. In February 2008, the FASB issued
FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, which
delayed the effective date of SFAS 157 for all non-financial assets and
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until January 1,
2009.   The Company adopted SFAS 157 on January 1, 2008, for all
financial assets and liabilities, but the implementation did not have a
significant impact on the Company’s financial position or results of
operations.  The Company has not yet determined the impact the
implementation of SFAS 157 will have on the Company’s non-financial assets and
liabilities which are not recognized or disclosed on a recurring
basis.  However, the Company does not anticipate that the full
adoption of SFAS 157 will significantly impact its consolidated financial
statements.







F-6


Diversified
Thermal Solutions, Inc.







Notes to
Condensed Consolidated Financial Statements (Unaudited)













2.  Recent
Accounting Pronouncements (continued)




During
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115, which permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective of SFAS 159 is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The Company adopted SFAS 159 on January 1, 2008, but the
implementation of SFAS 159 did not have a significant impact on the Company's
financial position or results of operations.





3.  Contingencies





The
Company has agreed to guarantee certain indebtedness of two related
companies.  Upon default by the related companies, the Company would
be obligated to pay any outstanding principal and accrued interest on their
behalf.  In addition, if the related companies default on these loans,
the Company’s outstanding loans with the same financial institution will be
considered in default.  At September 30, 2008, the debt guaranteed for
the related companies was $1,342,474 under term loans and up to $6,250,000 under
revolving lines of credit.  These term loans and revolving lines of
credit expire between February 2009 and October 2010.  These loans are
also cross-collateralized by substantially all of the assets of the related
companies and the Company.





4.  Debt
Covenants





As of
December 31, 2007 and September 30, 2008, the Company was not in compliance with
certain financial covenants of the line of credit and long-term debt with a
financial institution, and accordingly, these balances have been classified as
current in the accompanying condensed consolidated balance sheets.





5.  Income
(Loss) Per Share Data





Basic
earnings/loss per share assumes no dilution and is computed by dividing income
(loss) available to common shareholders by the weighted average number of common
stock outstanding during each period.  Diluted earnings per share
reflect, in periods in which they have a dilutive effect, the effect of common
shares issuable upon the exercise of stock options or warrants, using the
treasury stock method of computing such effects and contingent
shares.  As the Company has no outstanding stock options or warrants,
there is no diluted income (loss) per share.








F-7


Diversified
Thermal Solutions, Inc.







Notes to
Condensed Consolidated Financial Statements (Unaudited) (continued)













5.  Income
(Loss) Per Share Data (continued)





The
following table sets forth the computation of basic loss per share for the
periods indicated:





Three
      months ended
              September
      30
            
            
            Nine
      months ended
              September
      302008
            
            
            2007
            
            
            2008
            
            
            2007Average
      shares outstanding
            
            
            18,974,238
            
            
            
            18,974,238
            
            
            
            18,974,238
            
            
            
            18,919,794Net
      income (loss) per share
            
            $
            –
            
            
            $
            0.01
            
            
            $
            (0.01
            )
            
            $
            –





6.  Notes
Payable





During
2008, the Company received approval for two loans through loan programs of the
Commonwealth of Pennsylvania Department of Community and Economic
Development.  The first loan of $291,400 was approved under the
Pennsylvania Industrial Development Authority (“PIDA”).  As of
September 30, 2008, $262,260 of this loan has been received.  The
second loan of $350,850 was approved under the Machinery and Equipment Loan Fund
(“MELF”).  The entire amount of this loan has been received as of
September 30, 2008.  The PIDA loan will be repaid over 15 years and
the MELF loan will be repaid over 7 years.  Both loans bear interest
at 4% and are in a superior position to the Company’s financial institution
debt.





7.  Going
Concern





The
accompanying 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.  The Company’s recent losses and
cash requirements, among other things, may indicate the Company will be unable
to continue as a going concern for a reasonable period of
time.  Management recognizes the Company must achieve profitably in
order to continue as a going concern.  The Company anticipates the
future efficiencies in operations will continue to improve operating cash flows
necessary to continue as a going concern.








F-8


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





Caution regarding Forward-Looking
Statements





The
following information may contain 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





Our
primary business purpose is to acquire businesses related to the manufacturing
and distribution of refractory materials used in industry.  DT
Solutions, Inc., one of our subsidiaries, currently has no
operations.





All of
our current operations are conducted through our subsidiary, Fuzion
Technologies, Inc., or Fuzion.  Fuzion is engaged in the business of
manufacturing refractory products, and dies used in the refractory industry and
precision machining. Fuzion operates the Freeport Brick Division, Kittanning
Brick Division, and Armstrong Precision Manufacturing Division in Pennsylvania
and operates the Memphis Division in Tennessee, which is on a much smaller
scale.





The
Company earns revenue and generates cash principally through the sale of
products manufactured by Fuzion. Products are sold to customers worldwide in the
cement and lime, aluminum, steel, chemical, petroleum, paper and pulp, foundry,
and other non-ferrous industries.





BALANCE
SHEETS





There
have been several significant changes in our assets since December 31, 2007.
Cash has increased $289,803 as compared to December 31, 2007 for two primary
reasons.  We received funding under a loan program through the
Commonwealth of Pennsylvania, which has not yet been expended and we also
received payment from a customer for future shipments, some of which we have
reserved to provide funding for future related expenses. The payments for future
shipments have been appropriately recorded as deferred revenue. Accounts
receivable at September 30, 2008 have increased by approximately $300,000 as
compared to December 31, 2007, mainly due to increased sales in the reporting
period.  Inventories decreased by approximately $1,320,000 at
September 30, 2008 as compared to December 31, 2007 for several reasons.
Production at both the Freeport and Kittanning plants was slowed down several
times in 2008 primarily to reduce the consumption of natural gas, resulting in
less inventory in stock. Additionally, we are stocking less of the manufactured
items that contain bauxite due to the major increase in cost of this raw
material. Also, we have purchased only minimal amounts of raw materials during
2008, thereby reducing the amount of raw materials inventory from what was on
hand at December 31, 2007.  By keeping inventories at reduced levels,
this has helped to direct some funds toward completing our consolidation
project, which is discussed in detail below. These reduced inventory levels have
created some difficulties in manufacturing and shipping products efficiently but
are necessary to achieve our ultimate goal related to plant consolidation. Net
property, plant, and equipment has increased by approximately $2,070,000 since
December 31, 2007 primarily due to expenditures for equipment and construction
related to the plant consolidation.






1





Accounts
payable and accrued expenses have decreased by approximately $224,000 since
December 31, 2007, mainly due to amounts received on loan programs through the
Commonwealth of Pennsylvania and related matching funds from an affiliated
company, which allowed us to reduce amounts owed on construction costs related
to the plant consolidation.





In
conjunction with the plant consolidation project, we have been approved for two
loan programs through the Commonwealth of Pennsylvania. The Lender in the first
program is the Pennsylvania Industrial Development Authority (PIDA). The PIDA
loan of $291,400 represents 40% of the estimated building costs of $728,500 for
one portion of our plant consolidation project. As of September 30, 2008,
$262,260 has been received on this loan and our outstanding balance is $259,052.
The second state loan will be funded through the Machinery & Equipment Loan
Fund (MELF). The MELF loan of $350,850 represents 50% of the estimated equipment
acquisition and installation costs related to another portion of our plant
consolidation project. As of September 30, 2008, our outstanding balance on this
loan is $348,418. The remaining balances of these project segments are being
funded through advances from a related company, advances on our own line of
credit, as well as our own operating funds. As of September 30, 2008, the amount
due on these advances from a related company was $712,282. Advances on our own
line of credit were $316,917 cumulatively.





As of
September 30, 2008, we are in the process of re-structuring one of our notes
payable to a related company in the amount of $750,000.  This
re-structuring is expected to result in lower future interest expense related to
this liability.





Our
shareholders’ equity at September 30, 2008 has decreased by approximately
$140,000 since December 31, 2007, as a result of the net loss for the year to
date.





RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008





Revenues
– Our revenues for the three months ended September 30, 2008 are $3,366,273,
which is fairly consistent with revenues of $3,325,137 for the three months
ended September 30, 2007.  During the three months ended September 30,
2008, we realized a significant increase in our sales to the petro-chemical
industrial due to a large singular order. We also realized increases in our
sales of stiff-mud pavers and runner brick. However, these were offset by a
decrease in sales our customers in the aluminum industry as well as a decrease
in Duro sales when compared to the three months ended September 30, 2007. Sales
in our other  product lines did not vary materially.





Expenses
– Our cost of goods sold for the three months ended September 30, 2008 are
$2,904,686, which is an increase of approximately $350,000 from the three months
ended September 30, 2007.  Our gross profit percentage for the three
months ended September 30, 2008 was 13.7%, which was a decrease of 9.4% from
23.1% for the same period last year. This decrease was a byproduct of an
increase in energy and raw material costs. Due to the increases in the cost of
natural gas over the past several years, it has become our single largest cost
of operations, and this trend has continued into 2008 operations.  Our
natural gas costs in 2008 are significantly higher than it was in 2007. We are
in the process of completing a major improvement in the efficiency of our
production processes by consolidating our refractory product manufacturing
facilities to one site.  This consolidation involves moving production
operations from the Kittanning Brick facility to the Freeport Brick facility.
Unfortunately, the fire that occurred at the Freeport plant on February 2, 2006,
caused a significant delay in the plant consolidation process.  As a
result, we have been delayed realizing the financial benefits of this
consolidation project.  We continue to see major cost increases in
bauxite, which is an important raw material used in manufacturing some of our
products.  While we have passed on some of these cost increases,
either through price increases or surcharges, these rising costs have negatively
impacted our gross margin. In addition, as a result of the fire, all of the clay
used in production at the Freeport plant is still being ground at the Kittanning
plant and subsequently transported to the Freeport facility.  These
extra handling and transportation costs have also had an impact on our raw
material costs.








2




Operating
expenses for the three months ended September 30, 2008 were generally consistent
compared with the same period last year.





All of
the above resulted in an operating income of $28,991 for the three months ended
September 30, 2008 as compared to an operating income of $329,825 for the nine
months ended September 30, 2007.





For the
three months ended September 30, 2008, other income was $4,710, which was a
slight decrease from $6,852 for the same period last year.  However,
interest expense has decreased approximately $25,000 for the three months ended
September 30, 2008 as compared with the same period last year due primarily to
lower interest rates on our line of credit, the capitalization of some interest
in conjunction with the plant consolidation project, and the decreased principal
balance on our term loan with the bank.





RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008





Revenues
– Our revenues for the nine months ended September 30, 2008 are $9,733,121,
which is an increase of $837,632 from the nine months ended September 30,
2007.  This increase in revenue is due to several sizable orders for
Duro brick, increase in our sales to the petro-chemical industrial and improved
sales in our stiff-mud pavers and red shale product lines. Sales of our other
product lines remained relatively consistent. Finally, due to major price
increases in some of our critical raw materials, we imposed surcharges on
several product lines.





Expenses
– Our cost of goods sold for the nine months ended September 30, 2008 are
$8,461,274, which is an increase of approximately $981,000 from the nine months
ended September 30, 2007, due partially to the increase in costs directly
related to the increase in sales. However, our gross profit percentage for the
nine months ended September 30, 2008 was 13.1%, which was a decrease of 2.8% to
15.9% for the same period last year.  This decrease was a byproduct of
an increase in energy and raw material costs, and the delays in the plant
consolidation process, which are discussed in more detail above.





Operating
expenses for the nine months ended September 30, 2008 are approximately $59,000
higher than the nine months ended September 30, 2007, due to various increases
in costs for professional services as well as other administrative
expenses.





All of
the above resulted in an operating loss of $21,529 for the nine months ended
September 30, 2008 as compared to an operating income of $181,034 for the nine
months ended September 30, 2007.






3





For the
nine months ended September 30, 2008, other income was generally consistent
compared with the same period last year.  However, interest expense
has decreased approximately $41,000 for the nine months ended September 30, 2008
as compared with the same period last year due primairly to lower interest rates
on our line of credit, the capitalization of some interest in conjunction with
the plant consolidation project, and the decreased principal balance on our term
loan with the bank.





LIQUIDITY
AND CAPITAL RESOURCES





As of
December 31, 2007 and September 30, 2008, the Company was not in compliance with
certain financial covenants of the line of credit and long-term debt and
accordingly, these balances have been classified as current in the accompanying
condensed consolidated balance sheets.  We recognize that the Company
must achieve profitable operations to continue as a going concern. The Company
anticipates the future efficiencies in operations will continue to improve
operating cash flows necessary to continue as a going concern.





OTHER
SIGNIFICANT EVENTS





We are in
the process of improving the efficiency of our production processes by
consolidating our refractory product manufacturing facilities to one
site.  This consolidation involves moving production operations from
the Kittanning Brick facility to the Freeport Brick facility. We have contracted
with a commercial realtor to sell the Kittanning Brick facility.  We
are aware that we need to finalize this plant consolidation as quickly as
possible in order to improve efficiency.  We have prioritized our
plans to complete the plant consolidation project before rebuilding the
remainder of the grinding department.  As of September 30, 2008, we
have expended approximately $3,400,000 in construction and equipment related to
plant consolidation costs. It is expected that the majority of the plant
consolidation project will be completed in the latter part of this
Fall.





As
discussed above, bauxite is an important and expensive raw material used in
manufacturing some of our products.  However, there is no domestic
supply of refractory grade bauxite and all of it must be imported from
China.  Unfortunately, the cost of this important raw material is
rising at an alarming rate. The most recent price quote that we were provided in
2008 represented a price increase of over 300% as compared to our most recent
bulk purchase in August 2007.  Our competitors are facing this same
cost increase issue. Although we have increased our prices in 2008 to offset
these cost increases, the problem is compounded by the pressure placed on our
cash management in having to purchase raw materials well in advance of the time
that we are able to turn this raw material into a manufactured product, sell the
product, and collect our payments from our customers.  We are
currently researching alternative product mixes to counter this
problem.








4




ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
      applicable.





ITEM
      4.
            CONTROLS
      AND PROCEDURES.





(a)
            Evaluation of Disclosure
      Controls and Procedures.





We have
evaluated the effectiveness of our disclosure controls and procedures in
ensuring that the information required to be disclosed in our filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, including ensuring that such information is accumulated and
communicated to our management as appropriate to allow timely decisions
regarding required disclosure.  Based on such evaluation, our
principal executive and financial officers have concluded that such disclosure
controls and procedures were not effective as of September 30, 2008, (the end of
the period covered by this Quarterly Report on Form 10-Q) as a result of one
material weakness relating to the segregation on duties in the area of preparing
checks.  This material weakness is further described in our Annual
Report on Form 10-KSB for the year ended December 31, 2007.  It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met.  In addition, the design of any control system is
based in part upon certain assumptions about the likelihood of future
events.  Due to these and other inherent limitations of control
systems, there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how
remote.





(b)
            Changes in Internal Control
      over Financial Reporting.





During
the three months ended Septemeber 30, 2008, there were no changes in our
internal control over financial reporting that materially affected, or that are
reasonably likely to materially affect, our internal control over financial
reporting.

























5


PART
II. – OTHER INFORMATION





ITEM
1.    LEGAL PROCEEDINGS.





There are
no material changes to the Legal Proceedings described under the title “Legal
Proceedings” in our Annual Report on Form 10-KSB for the year ended December 31,
2007.




ITEM
1A.    RISK FACTORS.





Not
applicable.








None.






None.




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




None.




ITEM
5.    OTHER INFORMATION.




None.




ITEM
6.    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#
            Indicates
      filed herewith.









6


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





DIVERSIFIED
      THERMAL SOLUTIONS, INC.Date:  November
      4, 2008
            By:  /s/ B. Grant
    HunterB.
      Grant HunterChief
      Executive OfficerDate:  November
      4, 2008
            By:  /s/ J. Terry
      MedovitchJ.
      Terry MedovitchChief
      Financial Officer




























7


EXHIBIT
INDEX





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#
            Filed
      herewith.