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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 June 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 ____________________
 000-28047
 DIVERSIFIED THERMAL SOLUTIONS, INC.
  Nevada
    
    94-3342064(State or other jurisdiction
    
    (I.R.S. Employerof incorporation)
    
    Identification No.)
 4126 Delp Street, Memphis, Tennessee 38118
 (901) 365-7650
 x o
 o x
  
 Common Stock, $0.0001 Par value
    
    18,834,238 shares(Class of Stock)
    
    (Shares outstanding as of August 8, 2006)
 o x




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INDEX TO FORM 10-QSB
 PagePart I. Financial InformationItem 1. 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-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
    
    
    3Item 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 Certification of the CEOEx-31.2 Section 302 Certification of the CFOEx-32.1 Section 906 Certification of the CEOEx-32.2 Section 906 Certification of the CFO




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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-7
 F-1




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June 30
    
    
    December 312006
    
    
    2005(Unaudited)AssetsCurrent assets:Cash
    
    $
    8,054
    
    
    $
    Accounts receivables, net of
reserve for doubtful accounts
of $5,000 in 2006 and 2005
    
    
    1,301,230
    
    
    
    1,065,779Inventories, net
    
    
    3,433,262
    
    
    
    3,396,590Prepaid expenses
    
    
    173,750
    
    
    
    92,252Total current assets
    
    
    4,916,296
    
    
    
    4,554,621Property, plant and equipment:Land
    
    
    212,312
    
    
    
    104,498Buildings
    
    
    846,249
    
    
    
    832,136Machinery and equipment
    
    
    974,343
    
    
    
    731,9352,032,904
    
    
    
    1,668,569Less accumulated depreciation
    
    
    271,305
    
    
    
    151,880Net property, plant and equipment
    
    
    1,761,599
    
    
    
    1,516,689Total assets
    
    $
    6,677,895
    
    
    $
    6,071,310
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-2




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June 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
    
    
    2,136,989
    
    
    
    1,300,808Due to seller of business acquired
    
    
    81,818
    
    
    
    150,000Current portion of long-term debt
    
    
    1,143,362
    
    
    
    1,278,259Current portion of capital lease obligations
    
    
    30,737
    
    
    
    29,880Total current liabilities
    
    
    5,728,679
    
    
    
    4,998,170Advances from shareholders
    
    
    34,898
    
    
    
    39,899Long-term debt, less current portion
    
    
    22,238
    
    
    
    31,852Capital lease obligation, less current portion
    
    
    71,034
    
    
    
    87,001Notes payable to related companies
    
    
    1,600,000
    
    
    
    1,600,000Total liabilities
    
    
    7,456,849
    
    
    
    6,756,922Shareholders deficit:Common stock, par value $0.0001:Authorized100,000,000 sharesIssued 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
    
    
    (12,015,156
    )
    
    
    (11,920,214
    )Net shareholders deficit
    
    
    (778,954
    )
    
    
    (685,612
    )Total liabilities and shareholders deficit
    
    $
    6,677,895
    
    
    $
    6,071,310
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-3




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Three months ended
    
    
    Six months endedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    2,316,340
    
    
    $
    2,607,503
    
    
    $
    5,604,011
    
    
    $
    4,389,090Costs of goods sold
    
    
    1,930,015
    
    
    
    1,906,611
    
    
    
    4,715,791
    
    
    
    3,556,485Gross profit
    
    
    386,325
    
    
    
    700,892
    
    
    
    888,220
    
    
    
    832,605Operating expenses:Professional and
consulting services
    
    
    53,761
    
    
    
    43,107
    
    
    
    104,815
    
    
    
    89,089Marketing and advertising
    
    
    84,377
    
    
    
    92,281
    
    
    
    188,781
    
    
    
    150,172Office and administrative
    
    
    235,547
    
    
    
    235,986
    
    
    
    474,647
    
    
    
    383,817Total operating expenses
    
    
    373,685
    
    
    
    371,374
    
    
    
    768,243
    
    
    
    623,078Operating income
    
    
    12,640
    
    
    
    329,518
    
    
    
    119,977
    
    
    
    209,527Other income (expenses):Miscellaneous income
    
    
    1,396
    
    
    
    9,365
    
    
    
    3,816
    
    
    
    15,264Interest expense
    
    
    (111,269
    )
    
    
    (96,007
    )
    
    
    (218,735
    )
    
    
    (148,865
    )Total other expenses
    
    
    (109,873
    )
    
    
    (86,642
    )
    
    
    (214,919
    )
    
    
    (133,601
    )Net (loss) income
    
    $
    (97,233
    )
    
    $
    242,876
    
    
    $
    (94,942
    )
    
    $
    75,926Basic net (loss) earnings
per share
    
    $
    ( 0.01
    )
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-4




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Six months ended June 302006
    
    
    2005Operating activitiesNet (loss) income
    
    $
    (94,942
    )
    
    $
    75,926Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation
    
    
    119,425
    
    
    
    52,714Stock issued for services
    
    
    1,600
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (235,451
    )
    
    
    (283,977
    )Inventories
    
    
    (36,672
    )
    
    
    361,347Prepaid expenses
    
    
    (81,498
    )
    
    
    (70,185
    )Deferred loan and acquisition costs
    
    
    
    
    
    
    100,568Checks outstanding in excess of bank balance
    
    
    (3,450
    )
    
    
    (1,049
    )Accounts payable and accrued expenses
    
    
    836,181
    
    
    
    60,455Net cash provided by operating activities
    
    
    505,193
    
    
    
    295,799Investing activitiesPurchases of property, plant, and equipment
    
    
    (364,335
    )
    
    
    (126,128
    )Acquisition of business, net of noncash transactions
related to amount owed to seller and stock issued for
acquisition
    
    
    
    
    
    
    (4,392,561
    )Net cash used in investing activities
    
    
    (364,335
    )
    
    
    (4,518,689
    )Financing activitiesNet borrowings on line of credit
    
    
    100,000
    
    
    
    1,896,773Proceeds from borrowings of long-term debt
    
    
    
    
    
    
    1,500,000Net borrowings from related parties
    
    
    
    
    
    
    1,010,486Net payments on advances from shareholders
    
    
    (5,001
    )
    
    
    (1,085
    )Principal repayments on long-term debt
    
    
    (144,511
    )
    
    
    (113,846
    )Principal repayments on capital lease obligation
    
    
    (15,110
    )
    
    
    (5,934
    )Payments on amount due to seller
    
    
    (68,182
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (132,804
    )
    
    
    4,286,394Net increase in cash
    
    
    8,054
    
    
    
    63,504Cash at beginning of period
    
    
    
    
    
    
    Cash at end of period
    
    $
    8,054
    
    
    $
    63,504
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-5




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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




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




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3. Contingencies (continued)
  4. Debt Covenants
  5. Earnings Per Share Data
   Three months ended
    
    
    Six months endedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Average shares outstanding
    
    
    18,834,238
    
    
    
    18,664,238
    
    
    
    18,832,571
    
    
    
    18,464,794Net income (loss) per share
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    
 F-8




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. Subsequent Event
  7. Going Concern
  F-9




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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




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Results of Operations
     Liquidity and Capital Resources
  Other Significant Events
  2




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Item 3. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 3. Defaults Upon Senior Securities
  3




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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
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SIGNATURES
  DIVERSIFIED THERMAL SOLUTIONS, INC.
RegistrantDate:  August 14, 2006
    /s/ B. Grant HunterB. Grant HunterPresident and Chief Executive Officer Date: August 14, 2006
    /s/ J. Terry MedovitchJ. Terry MedovitchChief Financial Officer 5