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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-QSB
 Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
 (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, 2005
 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
    
    (I.R.S. Employerof incorporation)
    
    Identification No.)
 4126
Delp Street, Memphis, Tennessee 38118
 (901) 365-7650
 þ o
 o þ
  
 Common Stock, $0.0001 Par value
    
    18,714,238 shares(Class of Stock)
    
    (Shares outstanding as of November 8, 2005)
 o þ




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INDEX TO FORM 10-QSB
  PageItem 1.
    
    Financial Statements.Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    3Condensed Consolidated Statements of Cash Flows
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    11Item 3.
    
    Controls and Procedures
    
    
    12Part II. Other InformationItem 6.
    
    ExhibitsCertification Pursuant to Section 302 of the Sarbanes  Oxley Act of 2002
    
    
    14Certification Pursuant to Section 302 of the Sarbanes  Oxley Act of 2002
    
    
    15Certification Pursuant to Section 906 of the Sarbanes  Oxley Act of 2002
    
    
    16Certification Pursuant to Section 906 of the Sarbanes  Oxley Act of 2002
    
    
    17EX-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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September 30
    
    
    December 312005
    
    
    2004(Unaudited)AssetsCurrent assets:Cash
    
    $
    38,351
    
    
    $
    Receivables:Trade, net of reserve for doubtful accounts of $47,381 in 2005
    
    
    1,059,291
    
    
    
    Related party
    
    
    
    
    
    
    27,116Total receivables
    
    
    1,059,291
    
    
    
    27,116Inventories, net
    
    
    3,414,772
    
    
    
    4,148Prepaid expenses
    
    
    137,229
    
    
    
    Total current assets
    
    
    4,649,643
    
    
    
    31,264Property, plant and equipment:Land
    
    
    99,229
    
    
    
    Buildings
    
    
    793,374
    
    
    
    Machinery and equipment
    
    
    614,573
    
    
    
    59,8431,507,176
    
    
    
    59,843Less accumulated depreciation
    
    
    99,188
    
    
    
    11,969Net property, plant and equipment
    
    
    1,407,988
    
    
    
    47,874Deferred acquisition costs
    
    
    
    
    
    
    100,568Total assets
    
    $
    6,057,631
    
    
    $
    179,706
 See accompanying Notes to Condensed Consolidated Financial Statements.
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September 30
    
    
    December 312005
    
    
    2004(Unaudited)Liabilities and shareholders deficitCurrent liabilities:Checks outstanding in excess of bank balance
    
    $
    
    
    
    $
    1,049Accounts payable and accrued expenses
    
    
    1,171,401
    
    
    
    283,947Due to seller
    
    
    282,524
    
    
    
    Current portion of long-term debt to
financial institution
    
    
    289,902
    
    
    
    Current portion of capital lease obligation
    
    
    24,952
    
    
    
    Total current liabilities
    
    
    1,768,779
    
    
    
    284,996Advances from shareholders
    
    
    44,899
    
    
    
    80,984Long-term debt, less current portion
    
    
    1,090,142
    
    
    
    Capital lease obligation, less current portion
    
    
    73,909
    
    
    
    Note payable to financial institution
    
    
    1,985,773
    
    
    
    Notes payable to related companies
    
    
    1,600,000
    
    
    
    589,514Total liabilities
    
    
    6,563,502
    
    
    
    955,494Shareholders deficit:Common stock, par value $0.0001:Authorized100,000,000 sharesIssued and outstanding18,714,238 in 2005
and 17,467,571 shares in 2004
    
    
    1,872
    
    
    
    1,747Additional paid-in capital
    
    
    11,215,130
    
    
    
    10,966,587Accumulated deficit
    
    
    (11,722,873
    )
    
    
    (11,744,122
    )Net shareholders deficit
    
    
    (505,871
    )
    
    
    (775,788
    )Total liabilities and shareholders deficit
    
    $
    6,057,631
    
    
    $
    179,706
 See accompanying Notes to Condensed Consolidated Financial Statements.
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Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Unrelated companies
    
    $
    2,007,747
    
    
    $
    
    
    
    $
    6,357,020
    
    
    $
    15,611Related companies
    
    
    12,339
    
    
    
    39,921
    
    
    
    52,156
    
    
    
    64,384Total revenues
    
    
    2,020,086
    
    
    
    39,921
    
    
    
    6,409,176
    
    
    
    79,995Costs of goods sold
    
    
    1,632,031
    
    
    
    25,612
    
    
    
    5,188,516
    
    
    
    60,795Gross profit
    
    
    388,055
    
    
    
    14,309
    
    
    
    1,220,660
    
    
    
    19,200Operating expenses:Professional and consulting
services
    
    
    39,320
    
    
    
    16,831
    
    
    
    128,409
    
    
    
    91,049Marketing and advertising
    
    
    88,512
    
    
    
    
    
    
    
    238,684
    
    
    
    Office and administrative
    
    
    219,577
    
    
    
    5,756
    
    
    
    603,394
    
    
    
    23,006Total operating expenses
    
    
    347,409
    
    
    
    22,587
    
    
    
    970,487
    
    
    
    114,055Operating income (loss)
    
    
    40,646
    
    
    
    (8,278
    )
    
    
    250,173
    
    
    
    (94,855
    )Other income (expenses):Miscellaneous income
    
    
    2,557
    
    
    
    
    
    
    
    17,821
    
    
    
    Write-off of deferred loan and
acquisition costs
    
    
    
    
    
    
    4,987
    
    
    
    
    
    
    
    (410,259
    )Interest expense
    
    
    (97,881
    )
    
    
    (6,493
    )
    
    
    (246,745
    )
    
    
    (6,493
    )Total other expenses
    
    
    (95,324
    )
    
    
    (1,506
    )
    
    
    (228,924
    )
    
    
    (416,752
    )Net income (loss)
    
    $
    (54,678
    )
    
    $
    (9,784
    )
    
    $
    21,249
    
    
    $
    (511,607
    )Basic net earnings (loss)
per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.03
    )
 See accompanying Notes to Condensed Consolidated Financial Statements.
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Nine months ended September 302005


    2004Operating activitiesNet income (loss)
    
    $
    21,249
    
    
    $
    (511,607
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in ) operating activities:Depreciation
    
    
    87,219
    
    
    
    2,992Write-off of deferred loan and acquisition costs
    
    
    
    
    
    
    410,259Stock issued for services
    
    
    8,000
    
    
    
    36,000Changes in operating assets and liabilities:Receivables
    
    
    (25,143
    )
    
    
    1,189Unbilled revenue to related company
    
    
    
    
    
    
    926Inventories
    
    
    (1,039
    )
    
    
    Prepaid expenses
    
    
    (137,229
    )
    
    
    Deferred loan & acquisition costs
    
    
    
    
    
    
    22,288Checks outstanding in excess of cash
    
    
    (1,049
    )
    
    
    Accounts payable and accrued expenses
    
    
    270,551
    
    
    
    (257,994
    )Net cash provided by (used in) operating activities
    
    
    222,559
    
    
    
    (295,947
    )Investing activitiesPurchases of property, plant, and equipment
    
    
    (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
    
    
    (4,479,917
    )
    
    
    Financing activitiesNet borrowings on line of credit
    
    
    1,985,773
    
    
    
    Proceeds from borrowings of long-term debt
    
    
    1,500,000
    
    
    
    Net borrowings from related parties
    
    
    1,010,486
    
    
    
    291,975Net payments on advances from shareholders
    
    
    (6,085
    )
    
    
    Principal repayments on long-term debt
    
    
    (182,511
    )
    
    
    Principal repayments on capital lease obligation
    
    
    (11,954
    )
    
    
    Net cash provided by financing activities
    
    
    4,295,709
    
    
    
    291,975Net increase (decrease) in cash
    
    
    38,351
    
    
    
    (3,972
    )Cash at beginning of period
    
    
    
    
    
    
    4,168Cash at end of period
    
    $
    38,351
    
    
    $
    196
 See accompanying Notes to Condensed Consolidated Financial Statements.
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Supplemental disclosure of noncash activities
      Common stock issued for acquisition costs (see Note 4)
    
    
    210,668Due to seller
    
    
    282,524
  See accompanying Notes to Condensed Consolidated Financial Statements.
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1. Basis of Presentation
     2. Related Party Transactions
  Business Combinations
  -6-




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3. Company Equity Matters
 2003 Diversified Thermal Solutions, Inc. Equity
Incentive Plan
  4. Business Acquisition and Related Financing
  (Note 5)
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4. Business Acquisition and Related Financing (continued)
 Statement of
Financial Accounting Standards No. 141, Business Combinations.
 Accounts receivable
    
    $
    1,007,032Inventories
    
    
    3,409,585Property, plant, and equipment
    
    
    1,259,409Assets acquired
    
    
    5,676,026Accounts payable
    
    
    616,903Long-term debt
    
    
    62,555Capital lease obligations
    
    
    110,815Liabilities assumed
    
    
    790,273Net assets acquired
    
    $
    4,885,753
  Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues
    
    $
    2,020,085
    
    
    $
    2,092,835
    
    
    $
    7,042,187
    
    
    $
    6,852,843Net loss
    
    
    (47,068
    )
    
    
    (302,923
    )
    
    
    (84,268
    )
    
    
    (815,918
    )Net loss per share
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    
    
    
    $
    (0.04
    )Weighted average
shares used in
computing net
loss per share
    
    
    18,714,238
    
    
    
    20,355,071
    
    
    
    18,553,497
    
    
    
    20,355,071
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4. Business Acquisition and Related Financing (continued)
      5. Commitments and Contingencies
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5. Commitments and Contingencies (continued)
  6. Earnings Per Share Data
   Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Average shares outstanding
    
    
    18,714,238
    
    
    
    20,355,071
    
    
    
    18,553,497
    
    
    
    20,355,071Net income (loss) per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.03
    )
 7. Income Tax Provision
  8. Going Concern
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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
  General
    Balance Sheets
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Results of Operations
   Liquidity and Capital Resources
  Other Significant Event
  
 Item 3. Controls and Procedures
 (a)
    
    Evaluation of Disclosure Controls and Procedures.
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PART II. OTHER INFORMATION
 
 Item 6. Exhibits
 (a).
    
    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
 
 SIGNATURES
  DIVERSIFIED THERMAL SOLUTIONS, INC.RegistrantDate: November 14, 2005
    
    /s/ B. Grant HunterB. Grant HunterPresident and Chief Executive OfficerDate: November 14, 2005
    
    /s/ J. Terry MedovitchJ. Terry MedovitchChief Financial Officer
 -13-