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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 March 31, 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
    
    (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
    
    18,834,238            shares(Class of Stock)
    
    (Shares outstanding as of May 8, 2006)
 o þ




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##### 



INDEX TO FORM 10-QSB
  PageItem 1. Financial StatementsCondensed 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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March 31
    
    December 312006
    
    2005(Unaudited)AssetsCurrent assets:Cash
    
    $
    12,890
    
    
    $
    Receivables:Trade, net of reserve for doubtful
accounts of $5,000 in 2005 and 2006
    
    
    1,660,581
    
    
    
    1,010,669Related party
    
    
    
    
    
    
    55,110Total receivables
    
    
    1,673,471
    
    
    
    1,065,779Inventories
    
    
    3,044,116
    
    
    
    3,396,590Prepaid expenses
    
    
    172,539
    
    
    
    92,252Total current assets
    
    
    4,890,126
    
    
    
    4,554,621Property, plant and equipment:Land
    
    
    208,987
    
    
    
    104,498Buildings
    
    
    832,136
    
    
    
    832,136Machinery and equipment
    
    
    776,224
    
    
    
    731,9351,817,347
    
    
    
    1,668,569Less accumulated depreciation
    
    
    207,437
    
    
    
    151,880Net property, plant and equipment
    
    
    1,609,910
    
    
    
    1,516,689Total assets
    
    $
    6,500,036
    
    
    $
    6,071,310
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March 31
    
    December 312006
    
    2005(Unaudited)Liabilities and shareholders deficitCurrent liabilities:Checks outstanding in excess of bank balance
    
    $
    
    
    
    $
    3,450Line of credit
    
    
    2,334,773
    
    
    
    2,235,773Accounts payable and accrued expenses
    
    
    1,692,010
    
    
    
    1,300,808Due to seller of business acquired
    
    
    122,727
    
    
    
    150,000Current portion of long-term debt
    
    
    1,212,292
    
    
    
    1,278,259Current portion of capital lease obligation
    
    
    30,305
    
    
    
    29,880Total current liabilities
    
    
    5,392,107
    
    
    
    4,998,170Advances from shareholders
    
    
    39,899
    
    
    
    39,899Long-term debt, less current portion
    
    
    27,095
    
    
    
    31,852Capital lease obligation, less current portion
    
    
    78,888
    
    
    
    87,001Notes payable to related companies and affiliates
    
    
    1,600,000
    
    
    
    1,600,000Total liabilities
    
    
    7,137,989
    
    
    
    6,756,922Shareholders deficit:Common stock, par value $0.0001:Authorized100,000,000 shares
Issued and outstanding18,834,238 and
18,824,238 shares in 2006 and 2005
    
    
    1,884
    
    
    
    1,883Additional paid-in capital
    
    
    11,234,318
    
    
    
    11,232,719Accumulated deficit
    
    
    (11,874,155
    )
    
    
    (11,920,214
    )Net shareholders deficit
    
    
    (637,953
    )
    
    
    (685,612
    )Total liabilities and shareholders deficit
    
    $
    6,500,036
    
    
    $
    6,071,310
 See accompanying Notes to Condensed Consolidated Financial Statements.
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Three months ended March 312006
    
    2005Revenues:Trade
    
    $
    3,287,671
    
    
    $
    1,754,668Related companies
    
    
    
    
    
    
    26,919Total revenues
    
    
    3,287,671
    
    
    
    1,781,587Costs of goods sold
    
    
    2,767,056
    
    
    
    1,586,971Gross profit
    
    
    520,615
    
    
    
    194,616Operating expenses:Professional and consulting services
    
    
    26,006
    
    
    
    45,982Marketing and advertising
    
    
    104,404
    
    
    
    57,891Office and administrative
    
    
    239,100
    
    
    
    147,831Total operating expenses
    
    
    369,510
    
    
    
    251,704Operating income (loss)
    
    
    151,105
    
    
    
    (57,088
    )Other income (expenses):Miscellaneous income
    
    
    2,420
    
    
    
    5,899Interest expense
    
    
    (107,466
    )
    
    
    (52,858
    )Net other expenses
    
    
    (105,046
    )
    
    
    (46,959
    )Net income (loss)
    
    $
    46,059
    
    
    $
    (104,047
    )Net income (loss) per share
    
    $
    0.00
    
    
    $
    (0.01
    )
 See accompanying Notes to Condensed Consolidated Financial Statements.
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Three months ended March 312006
    
    2005Operating activitiesNet income (loss)
    
    $
    46,059
    
    
    $
    (104,047
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation
    
    
    55,557
    
    
    
    16,612Stock issued for service
    
    
    1,600
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    (594,802
    )
    
    
    (217,223
    )Inventories
    
    
    352,474
    
    
    
    401,738Prepaid expenses
    
    
    (80,287
    )
    
    
    (97,161
    )Deferred acquisition costs
    
    
    
    
    
    
    100,568Checks outstanding in excess of cash
    
    
    (3,450
    )
    
    
    (1,049
    )Accounts payable and accrued expenses
    
    
    391,202
    
    
    
    153,283Net cash provided by operating activities
    
    
    168,353
    
    
    
    252,721Investing activitiesPurchases of property, plant, and equipment
    
    
    (148,778
    )
    
    
    (43,896
    )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
    
    
    (148,778
    )
    
    
    (4,436,457
    )Financing activitiesNet borrowings on line of credit
    
    
    99,000
    
    
    
    1,896,773Proceeds from borrowings of long-term debt
    
    
    
    
    
    
    1,500,000Net borrowings from related parties
    
    
    
    
    
    
    1,010,486Advances from shareholders
    
    
    
    
    
    
    3,914Principal repayments on long-term debt
    
    
    (70,724
    )
    
    
    (46,143
    )Principal repayments on capital lease obligations
    
    
    (7,688
    )
    
    
    Payments on amount due to seller
    
    
    (27,273
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (6,685
    )
    
    
    4,365,030Net increase in cash
    
    
    12,890
    
    
    
    181,294Cash at beginning of period
    
    
    
    
    
    
    Cash at end of period
    
    $
    12,890
    
    
    $
    181,294
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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.
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1. Basis of Presentation
     2. Related Party Transaction
  3. Contingencies
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3. Contingencies (continued)
  4. Debt Covenants
  5. Income (Loss) Per Share Data
   Three months ended March 312006
    
    2005Average shares outstanding
    
    
    18,832,571
    
    
    
    17,667,016Net income (loss) per share
    
    $
    0.00
    
    
    $
    (0.01
    )
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6. 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
    Balance Sheets
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Results of Operations
    Liquidity and Capital Resources
  Other Significant Events
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Item 3. Controls and Procedures
   
 PART II. OTHER INFORMATION
 Item 1. Legal Proceedings
  
 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: May 11, 2006
    
    /s/ B. Grant HunterB. Grant HunterPresident and Chief Executive OfficerDate: May 11, 2006
    
    /s/ J. Terry MedovitchJ. Terry MedovitchChief Financial Officer
 -12-