##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-QSB
 (MARK ONE)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 for the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO 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.
  Nevada
    
    94-3342064(State or other jurisdiction 
of incorporation)
    
    (I.R.S. Employer
Identification No.)
 4126 Delp Street, Memphis, Tennessee 38118
  (901) 365-7650
 þ o
 o þ
  
 Common Stock, $0.0001 Par value
    
    18,834,238 shares(Class of Stock)
    
    (Shares outstanding as of November 13, 2006)
 o þ




---



##### 



INDEX TO FORM 10-QSB
 PagePart I. Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets
    
    F-2Condensed Consolidated Statements of Operations
    
    F-4Condensed Consolidated Statements of Cash Flows
    
    F-5Notes to Condensed Consolidated Financial Statements
    
    F-7Item 2.
    
    Managements Discussion and Analysis or Plan of Operation
    
    1Item 3.
    
    Controls and Procedures
    
    3Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    3Item 3.
    
    Defaults Upon Senior Securities
    
    4Item 6.
    
    ExhibitsCertification Pursuant to Section 302 of the Sarbanes  Oxley Act of 2002Certification Pursuant to Section 302 of the Sarbanes  Oxley Act of 2002Certification Pursuant to Section 906 of the Sarbanes  Oxley Act of 2002Certification Pursuant to Section 906 of the Sarbanes  Oxley Act of 2002Ex-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 Certification




---



##### Table of Contents



Index to Financial Statements
 Condensed Consolidated Balance Sheets
    
    
    F-2Condensed Consolidated Statements of Operations (Unaudited)
    
    
    F-4Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    F-5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    F-7
 F-1




---



##### Table of Contents



September 30
    
    December 312006
    
    2005(Unaudited)AssetsCurrent assets:Cash
    
    $
    5,024
    
    
    $
    Trade receivables, net of reserve for
doubtful accounts of $5,000 in 2006
and 2005
    
    
    1,275,447
    
    
    
    1,065,779Inventories, net
    
    
    2,964,859
    
    
    
    3,396,590Prepaid expenses
    
    
    168,442
    
    
    
    92,252Total current assets
    
    
    4,413,772
    
    
    
    4,554,621Property, plant and equipment:Land
    
    
    212,312
    
    
    
    104,498Buildings
    
    
    846,249
    
    
    
    832,136Machinery and equipment
    
    
    1,008,821
    
    
    
    731,9352,067,382
    
    
    
    1,668,569Less accumulated depreciation
    
    
    331,658
    
    
    
    151,880Net property, plant and equipment
    
    
    1,735,724
    
    
    
    1,516,689Total assets
    
    $
    6,149,496
    
    
    $
    6,071,310
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-2




---



##### Table of Contents



September 30
    
    December 312006
    
    2005(Unaudited)Liabilities and shareholders deficitCurrent liabilities:Checks outstanding in excess of bank balance
    
    $
    
    
    
    $
    3,450Line of credit
    
    
    2,335,773
    
    
    
    2,235,773Accounts payable and accrued expenses
    
    
    1,916,564
    
    
    
    1,300,808Due to seller of business acquired
    
    
    40,909
    
    
    
    150,000Current portion of long-term debt to
financial institution
    
    
    1,097,902
    
    
    
    1,278,259Current portion of capital lease obligation
    
    
    31,174
    
    
    
    29,880Total current liabilities
    
    
    5,422,322
    
    
    
    4,998,170Advances from shareholders
    
    
    34,899
    
    
    
    39,899Long-term debt, less current portion
    
    
    17,281
    
    
    
    31,852Capital lease obligation, less current portion
    
    
    63,069
    
    
    
    87,001Notes payable to related companies and affiliates
    
    
    1,725,000
    
    
    
    1,600,000Total liabilities
    
    
    7,262,571
    
    
    
    6,756,922Shareholders deficit:Common stock, par value $0.0001:Authorized100,000,000 shares

Issued and outstanding18,834,238 in 2006
and 18,824,238 shares in 2005
    
    
    1,884
    
    
    
    1,883Additional paid-in capital
    
    
    11,234,318
    
    
    
    11,232,719Accumulated deficit
    
    
    (12,349,277
    )
    
    
    (11,920,214
    )Net shareholders deficit
    
    
    (1,113,075
    )
    
    
    (685,612
    )Total liabilities and shareholders deficit
    
    $
    6,149,496
    
    
    $
    6,071,310
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-3




---



##### Table of Contents



Three months ended
    
    Nine months endedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    2,311,112
    
    
    $
    2,020,086
    
    
    $
    7,915,123
    
    
    $
    6,409,176Costs of goods sold
    
    
    2,139,932
    
    
    
    1,632,031
    
    
    
    6,855,723
    
    
    
    5,188,516Gross profit
    
    
    171,180
    
    
    
    388,055
    
    
    
    1,059,400
    
    
    
    1,220,660Operating expenses:Professional and
consulting services
    
    
    110,449
    
    
    
    39,320
    
    
    
    215,264
    
    
    
    128,409Marketing and advertising
    
    
    70,274
    
    
    
    88,512
    
    
    
    259,055
    
    
    
    238,684Office and administrative
    
    
    217,258
    
    
    
    219,577
    
    
    
    691,905
    
    
    
    603,394Total operating expenses
    
    
    397,981
    
    
    
    347,409
    
    
    
    1,166,224
    
    
    
    970,487Operating (loss) income
    
    
    (226,801
    )
    
    
    40,646
    
    
    
    (106,824
    )
    
    
    250,173Other income (expenses):Miscellaneous income
    
    
    9,145
    
    
    
    2,557
    
    
    
    12,961
    
    
    
    17,821Interest expense
    
    
    (116,465
    )
    
    
    (97,881
    )
    
    
    (335,200
    )
    
    
    (246,745
    )Total other expenses
    
    
    (107,320
    )
    
    
    (95,324
    )
    
    
    (322,239
    )
    
    
    (228,924
    )Net (loss) income
    
    $
    (334,121
    )
    
    $
    (54,678
    )
    
    $
    (429,063
    )
    
    $
    21,249Basic net (loss) earnings
per share
    
    $
    (.02
    )
    
    $
    
    
    
    $
    (.02
    )
    
    $
    
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-4




---



##### Table of Contents



Nine months ended September 302006
    
    2005Operating activitiesNet (loss) income
    
    $
    (429,063
    )
    
    $
    21,249Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation
    
    
    179,778
    
    
    
    87,219Stock issued for services
    
    
    1,600
    
    
    
    8,000Changes in operating assets and liabilities:Trade receivables
    
    
    (209,668
    )
    
    
    (25,143
    )Inventories
    
    
    431,731
    
    
    
    (1,039
    )Prepaid expenses
    
    
    (76,190
    )
    
    
    (137,229
    )Checks outstanding in excess of bank balance
    
    
    (3,450
    )
    
    
    (1,049
    )Accounts payable and accrued expenses
    
    
    615,756
    
    
    
    270,551Net cash provided by operating activities
    
    
    510,494
    
    
    
    222,559Investing activitiesPurchases of property, plant, and equipment
    
    
    (398,813
    )
    
    
    (187,924
    )Acquisition of business, net of noncash transactions
related to amount owed to seller and stock issued for
acquisition
    
    
    
    
    
    
    (4,291,993
    )Net cash used in investing activities
    
    
    (398,813
    )
    
    
    (4,479,917
    )Financing activitiesNet borrowings on line of credit
    
    
    100,000
    
    
    
    1,985,773Proceeds from borrowings of long-term debt
    
    
    
    
    
    
    1,500,000Net borrowings from related parties
    
    
    125,000
    
    
    
    1,010,486Net payments on advances from shareholders
    
    
    (5,000
    )
    
    
    (6,085
    )Principal repayments on long-term debt
    
    
    (194,928
    )
    
    
    (182,511
    )Principal repayments on capital lease obligation
    
    
    (22,638
    )
    
    
    (11,954
    )Payment on amounts due to seller of business acquired
    
    
    (109,091
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (106,657
    )
    
    
    4,295,709Net increase in cash
    
    
    5,024
    
    
    
    38,351Cash at beginning of period
    
    
    
    
    
    
    Cash at end of period
    
    $
    5,024
    
    
    $
    38,351
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-5




---



##### Table of Contents



Supplemental disclosure of noncash activities
   Common stock issued for acquisition costs
    
    $
    210,668Due to seller
    
    $
    282,524
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-6




---



##### Table of Contents



1. Basis of Presentation
     2. Related Party Transactions
   F-7




---



##### Table of Contents



3. Contingencies
   4. Debt Covenants
  5. Earnings Per Share Data
   Three months ended
    
    Nine months endedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005Average shares outstanding
    
    
    18,834,238
    
    
    
    18,714,238
    
    
    
    18,833,127
    
    
    
    18,553,497Net income (loss) per share
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    
 F-8




---



##### Table of Contents



6. Going Concern
 
 F-9




---



##### Table of Contents



Item 2. Managements Discussion and Analysis or Plan of Operation.
 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
    Balance Sheets
  st
 1




---



##### Table of Contents



Results of Operations
     Liquidity and Capital Resources
  2




---



##### Table of Contents



Other Significant Events
     
 Item 3. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  3




---



##### Table of Contents



Item 3. Defaults Upon Senior Securities
  4




---



##### Table of Contents



Item 6. Exhibits
  31.1
    
    Certification Pursuant to Section 302 of the Sarbanes  Oxley Act of 200231.2
    
    Certification Pursuant to Section 302 of the Sarbanes  Oxley Act of 200232.1
    
    Certification Pursuant to Section 906 of the Sarbanes  Oxley Act of 200232.2
    
    Certification Pursuant to Section 906 of the Sarbanes  Oxley Act of 2002
 5




---



##### Table of Contents



SIGNATURES
  DIVERSIFIED THERMAL SOLUTIONS, INC.RegistrantDate: November 13, 2006
    
    /s/ B. Grant HunterB. Grant HunterPresident and Chief Executive OfficerDate: November 13, 2006
    
    /s/ J. Terry MedovitchJ. Terry MedovitchChief Financial Officer
 6