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 June 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.


(Name
of Small Business Issuer 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)


Issuer’s
telephone number, including area code (901) 365-7650




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


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 August
13, 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
      Statemenets of Cash Flows
            F-5Notes to Condensed Consolidated
      Financial Statements
            F-6Item
      2.        Management’s Discussion
      and Analysis of Financial ConditionAnd
      Results of Operations
            1Item
      3.        Quantitative and
      Qualitative Disclosures About Market Risk
            4Item
      4.        Controls and
      Procedures
            4PART
      II.                OTHER
      INFORMATIONItem
      1.        Legal
      Proceedings
            5Item
      1A.     Risk Factors
            5Item
      2.         Unregistered Sales
      of Equity Securities and Use of Proceeds
            5Item
      3.         Defaults Upon
      Senior Securities
            5Item
      4.         Submission of
      Matters to a Vote of Security Holders
            5Item
      5.         Other
      Information
            5Item
      6.         Exhibits
            5SIGNATURES
            6










F-1


PART
I.





ITEM
      1.
            FINANCIAL
      STATEMENTS.








Index
to Financial Statements














Condensed
Consolidated Balance
Sheets........................................................................................................................................................................................................................F-2


Condensed
Consolidated Statements of
Operations......................................................................................................................................................................................................F-4


Condensed
Consolidated Statements of Cash
Flows.....................................................................................................................................................................................................F-5


Notes to
Condensed Consolidated Financial
Statements..............................................................................................................................................................................................F-6





























































F-1


Diversified
Thermal Solutions, Inc.





Condensed
Consolidated Balance Sheets











June
      30
              2008
            
            
            December
      31
              2007(Unaudited)AssetsCurrent
      assets:Cash
            
            $
            3,712
            
            
            $
            1,445Accounts
      receivable:Trade
            
            
            1,246,522
            
            
            
            865,056Related
      companies
            
            
            –
            
            
            
            84,980Insurance
      claim
            
            
            –
            
            
            
            128,485Total
      accounts receivable
            
            
            1,246,522
            
            
            
            1,078,521Inventories,
      net
            
            
            2,531,205
            
            
            
            3,472,744Prepaid
      expenses
            
            
            96,183
            
            
            
            59,544Deferred
      income taxes
            
            
            60,320
            
            
            
            65,021Total
      current assets
            
            
            3,937,942
            
            
            
            4,677,275Property,
      plant and equipment:Land
            
            
            222,303
            
            
            
            222,303Buildings
            
            
            821,248
            
            
            
            821,248Machinery
      and equipment
            
            
            1,323,621
            
            
            
            1,047,6852,367,172
            
            
            
            2,091,236Less
      accumulated depreciation
            
            
            644,583
            
            
            
            535,3831,722,589
            
            
            
            1,555,853Construction
      in progress
            
            
            2,800,458
            
            
            
            1,415,608Net
      property, plant, and equipment
            
            
            4,523,047
            
            
            
            2,971,461Total
      assets
            
            $
            8,460,989
            
            
            $
            7,648,736








F-2


Diversified
Thermal Solutions, Inc.





Condensed
Consolidated Balance Sheets (continued)











June
      30
              2008
            
            
            December
      31
              2007(Unaudited)Liabilities
      and shareholders’ equityCurrent
      liabilities:Checks
      outstanding in excess of bank balance
            
            $
            3,720
            
            
            $
            25,829Line
      of credit
            
            
            2,453,728
            
            
            
            2,136,811Accounts
      payable and accrued expenses:Trade and other
            
            
            1,773,515
            
            
            
            1,651,800Related
companies
            
            
            306,390
            
            
            
            268,546Total
      accounts payable and accrued expenses
            
            
            2,079,905
            
            
            
            1,920,346Deferred
      revenue
            
            
            35,396
            
            
            
            288,984Current
      portion of long-term debt
            
            
            584,221
            
            
            
            735,747Current
      portion of capital lease obligations
            
            
            35,713
            
            
            
            33,458Total
      current liabilities
            
            
            5,192,683
            
            
            
            5,141,175Advances
      from shareholders
            
            
            34,899
            
            
            
            34,899Advances
      from related company
            
            
            705,236
            
            
            
            –Deferred
      income taxes
            
            
            189,783
            
            
            
            262,110Long-term
      debt, less current portion
            
            
            252,852
            
            
            
            8,829Capital
      lease obligations, less current portion
            
            
            18,373
            
            
            
            21,926Notes
      payable to related companies
            
            
            1,000,000
            
            
            
            1,000,000Note
      payable to shareholder
            
            
            592,000
            
            
            
            592,000Total
      liabilities
            
            
            7,985,826
            
            
            
            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
            
            
            (10,787,639
            )
            
            
            (10,675,005
            )Net
      shareholders’ equity
            
            
            475,163
            
            
            
            587,797Total
      liabilities and shareholders’ equity
            
            $
            8,460,989
            
            
            $
            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
              June
      30
            
            
            Six
      months ended
              June
      302008
            
            
            2007
            
            
            2008
            
            
            2007Revenues:Trade
            
            $
            3,071,440
            
            
            $
            2,860,258
            
            
            $
            6,222,613
            
            
            $
            5,116,744Related
      companies
            
            
            50,792
            
            
            
            64,019
            
            
            
            144,235
            
            
            
            453,608Total
      revenues
            
            
            3,122,232
            
            
            
            2,924,277
            
            
            
            6,366,848
            
            
            
            5,570,352Costs
      of goods sold
            
            
            2,740,120
            
            
            
            2,440,284
            
            
            
            5,556,589
            
            
            
            4,922,042Gross
      profit
            
            
            382,112
            
            
            
            483,993
            
            
            
            810,259
            
            
            
            648,310Operating
      expenses:Professional
      and consulting services
            
            
            54,533
            
            
            
            91,526
            
            
            
            135,957
            
            
            
            116,426Marketing
      and advertising
            
            
            113,537
            
            
            
            133,799
            
            
            
            218,966
            
            
            
            230,318Office
      and administrative
            
            
            257,913
            
            
            
            227,248
            
            
            
            505,858
            
            
            
            450,357Total
      operating expenses
            
            
            425,983
            
            
            
            452,573
            
            
            
            860,781
            
            
            
            797,101Operating  income
      (loss)
            
            
            (43,871
            )
            
            
            31,420
            
            
            
            (50,522
            )
            
            
            (148,791
            )Other
      income (expenses):Miscellaneous
      income
            
            
            18,992
            
            
            
            14,575
            
            
            
            21,422
            
            
            
            16,257Interest
      expense
            
            
            (70,530
            )
            
            
            (90,945
            )
            
            
            (151,160
            )
            
            
            (166,447
            )Net
      other expenses
            
            
            (51,538
            )
            
            
            (76,370
            )
            
            
            (129,738
            )
            
            
            (150,190
            )Net
      loss before income taxes
            
            
            (95,409
            )
            
            
            (44,950
            )
            
            
            (180,260
            )
            
            
            (298,981
            )Deferred
      income tax benefit
            
            
            31,373
            
            
            
            18,209
            
            
            
            67,626
            
            
            
            121,321Net
      loss
            
            $
            (64,036
            )
            
            $
            (26,741
            )
            
            $
            (112,634
            )
            
            $
            (177,660
            )Net
      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)











Six
      months ended June 302008
            
            
            2007Operating
      activitiesNet
      loss
            
            $
            (112,634
            )
            
            $
            (177,660
            )Adjustments
      to reconcile net loss to net cash provided by(used
      in) operating activities:Depreciation
            
            
            109,200
            
            
            
            101,982Deferred
      income tax benefit
            
            
            (67,626
            )
            
            
            (121,321
            )Stock
      issued for services
            
            
            –
            
            
            
            26,600Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (168,001
            )
            
            
            (127,231
            )Inventories
            
            
            941,539
            
            
            
            (63,336
            )Prepaid
      expenses
            
            
            (36,639
            )
            
            
            (413,668
            )Checks
      outstanding in excess of bank balance
            
            
            (22,109
            )
            
            
            –Deferred
      revenue
            
            
            (253,588
            )
            
            
            –Accounts
      payable and accrued expenses
            
            
            159,559
            
            
            
            (114,858
            )Net
      cash provided by (used in) operating activities
            
            
            549,701
            
            
            
            (889,492
            )Investing
      activitiesPurchases
      of property, plant, and equipment
            
            
            (1,642,531
            )
            
            
            (283,069
            )Financing
      activitiesNet
      borrowings on line of credit
            
            
            316,917
            
            
            
            1,146,363Net
      advances from related company
            
            
            705,236
            
            
            
            102,500Principal
      repayment on note payable to shareholder
            
            
            –
            
            
            
            (4,000
            )Borrowings
      of long-term debt
            
            
            262,260
            
            
            
            –Principal
      repayments on long-term debt
            
            
            (169,763
            )
            
            
            (154,860
            )Principal
      repayments on capital lease obligation
            
            
            (19,553
            )
            
            
            (15,988
            )Net
      cash provided by financing activities
            
            
            1,095,097
            
            
            
            1,074,015Net
      increase (decrease) in cash
            
            
            2,267
            
            
            
            (98,546
            )Cash
      at beginning of period
            
            
            1,445
            
            
            
            122,835Cash
      at end of period
            
            $
            3,712
            
            
            $
            24,289





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 June 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)







June 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 accounting principles generally accepted
in the United States of America 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 six month periods ended
June 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 accounting principles generally accepted in the United
Sates of America 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 June 30, 2008, the debt guaranteed for the
related companies was $1,832,663 under term loans and up to $5,500,000 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 June 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 endedJune 30
            
            
            Six
      months ended
              June
      302008
            
            
            2007
            
            
            2008
            
            
            2007Average
      shares outstanding
            
            
            18,974,238
            
            
            
            18,950,905
            
            
            
            18,974,238
            
            
            
            18,892,571Net
      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 June
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”).  During August 2008, $235,328 was received.  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 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





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 presently conducted through our other subsidiary,
Fuzion Technologies, Inc. This subsidiary is engaged in the business of
manufacturing refractory products, and dies used in the refractory industry and
precision machining. The subsidiary 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.





We earn
revenue and generate cash principally through the sale of products manufactured
by its Fuzion Technologies, Inc. subsidiary. Products are sold to customers
worldwide in the cement & lime, aluminum, steel, chemical, petroleum, paper
& pulp, foundry, and other non-ferrous industries.





BALANCE
SHEETS





There
have been several significant changes in our assets since December 31,
2007.  Trade and related companies accounts receivable at June 30,
2008 have increased by approximately $296,000 as compared to December 31, 2007,
mainly due to increased sales in the last month of the reporting
period.  Additionally, we collected an insurance claim receivable of
$128,485 during the second quarter of 2008.  Inventories decreased by
approximately $942,000 at June 30, 2008 as compared to December 31,
2007.  This was the result of a slow-down in production at the
Freeport plant for approximately two and one-half months in 2008 as the
inventories of finished goods at the Freeport plant from the beginning of the
year were sufficient enough to allow us to reduce gas consumption by shutting
off the Freeport plant tunnel kiln for this period of
time.  Similarly, production at the Kittanning plant also slowed down
in the month of April 2008. In addition, we have purchased only minimal amounts
of raw materials during the first six months of 2008, thereby reducing the
amount of raw materials inventory from what was on hand at December 31,
2007.  Net property, plant, and equipment has increased by
approximately $1,552,000 since December 31, 2007 primarily due to expenditures
for equipment and construction related to the plant consolidation, which will be
discussed below.










1





Accounts
payable and accrued expenses have increased by approximately $160,000 since
December 31, 2007, mainly due to amounts owed on construction costs related to
the plant consolidation.  In addition, we borrowed an additional
$705,236 from a related company and drew down an additional $316,917 on our line
of credit to fund the plant consolidation projects.





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 June 30, 2008, $262,260
has been advanced on the PIDA loan.  The second 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. The MELF
loan was closed on August 7, 2008, at which time $235,328 was advanced to us.
The remaining balances of these project segments are being funded through
advances from a related company as disclosed above as well as our own internal
funds.





Our
shareholders’ equity at June 30, 2008 has decreased by $112,634 since
December 31, 2007, as a result of the net loss for the quarter.





RESULTS
OF OPERATIONS





Revenues
– Our revenues for the six months ended June 30, 2008 are $6,366,848, which is
an increase of $796,496 from the six months ended June 30, 2007.  This
is primarily due to several significant orders for Duro brick which accounted
for most of the sales increase.  Sales of runner brick decreased
approximately $196,000 for the six months ended June 30, 2008 as compared to the
same period for 2007.  However, all of this decrease occurred in the
quarter ended March 31, 2008 as runner brick sales increased by approximately
$216,000 in the quarter ended June 30, 2008 compared to the previous
quarter.  Sales of our other product lines were relatively
consistent.  We expect that the current level of Duro sales will
decrease throughout the remainder of the year due to the singular nature of
several of the large orders in the six months ended June 30, 2008.  In
addition, the increase in revenues is due to selective price increases in 2008
as well as the imposition of surcharges in some of our product
lines.





Expenses
– Our cost of goods sold for the six months ended June 30, 2008 is $5,556,589,
which is an increase of approximately $635,000 from the six months ended June
30, 2007, due somewhat to the increase in costs directly related to the increase
in sales. However, our gross profit percentage for the six months ended June 30,
2008 was 12.7%, which compares favorably to 11.6% for the same period last year.
One of the factors contributing to this increase related to improved sales in
some of our better performing product lines along with our price increases.
Other factors that had a significant impact on gross profit relate to energy and
raw material costs. Due to increases in the cost of natural gas over the past
several years, it has become our single largest cost of
operations.  This trend has continued into 2008 operations as our gas
rate in 2008 is 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 plant to the Freeport plant. Unfortunately, the fire that
occurred at the Freeport plant on February 2, 2006, caused a significant delay
in the plant consolidation process and therefore caused a corresponding delay in
realizing the financial benefits of this consolidation project.  Also
as a result of the fire at the Freeport plant, we were unable to grind bauxite
(which is an important and expensive raw material used in our manufacturing of
high alumina products) at our own facilities from February 2006 through March
2008, until we completed the re-installation of our bauxite grinding
equipment.  This enabled us to grind some of the lower cost raw
bauxite that we had on site with our own equipment during the six months ended
June 30, 2008, thereby generating some cost savings.  Prior to the
re-installation of this equipment, we were buying already-ground bauxite from a
third party on an “as-needed basis” as well as out-sourcing the grinding of our
own raw bauxite inventory. In addition, 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 plant.  This also is a direct
result of the fire. These extra handling and transportation costs have also had
an impact on our raw material costs.










2





Operating
expenses for the six months ended June 30, 2008 are approximately $64,000 higher
than the six months ended June 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 $50,522 for the six months ended June
30, 2008 as compared to an operating loss of $148,791 for the six months ended
June 30, 2007. This represents an improvement of $98,269.





For the
six months ended June 30, 2008, other income was generally consistent compared
with the same period last year.  However, interest expense has
decreased approximately $15,000 for the six months ended June 30, 2008 as
compared with the same period last year due to the fact that interest rates are
lower on our line of credit, some interest has been capitalized in conjunction
with the plant consolidation project, and we have continued to pay down the
principal balance on our term loan with the financial institution.





LIQUIDITY
AND CAPITAL RESOURCES





As of
December 31, 2007 and June 30, 2008, we were 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 we must achieve
profitable operations to continue as a going concern. We anticipate that 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 plant to the Freeport plant. We have contracted with a commercial
realtor to sell the Kittanning plant.  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 grinding
department.  As of June 30, 2008, we have expended approximately
$2,800,000 in construction and equipment related to plant consolidation costs.
It is expected that plant consolidation will be completed in the Fall of
2008.





As
discussed earlier, 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 almost 300% as compared to our most recent
purchase in August 2007.  All of 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.
















3





ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.








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 June 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 of 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.  As a result of 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 June 30, 2008, except as described below, 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.  As of May 31, 2008, we now verify
the physical quantity of certain raw materials inventory on a monthly basis,
which rectifies the material weakness first described in our Annual Report on
Form 10-KSB for the year ended December 31, 2007.











































4


PART
II. – OTHER INFOMRATION





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.





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




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




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#
            Filed
      herewith.

























5


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:      August
14, 2008         By:  /s/ B. Grant
Hunter


B. Grant
Hunter


Chief Executive Officer








Date:      August
14, 2008         By:  /s/ J. Terry
Medovitch


J. Terry Medovitch


Chief Financial
Officer








































6


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.