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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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 for the transition period from April 1, 2007 to June 30, 2007
 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
    
    18,974,238(Class of Stock)
    
    (Shares outstanding as of August 14, 2007)
 o þ




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##### 



INDEX TO FORM 10-QSB
 PagePart I. Financial InformationItem 1. Financial Statements (Unaudited)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-6Item 2. Managements Discussion and Analysis or Plan of Operation
    
    1Item 3. Controls and Procedures.
    
    3Part II. Other InformationItem 1. Legal Proceedings
    
    4Item 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 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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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-6
 F-1




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June 30
    
    
    December 312007
    
    
    2006(Unaudited)AssetsCurrent assets:Cash
    
    $
    24,289
    
    
    $
    122,835Accounts receivable:Trade, net of reserve for doubtful
accounts of $620 in 2007 and $5,000 in
2006
    
    
    1,185,824
    
    
    
    1,008,082Related companies
    
    
    71,472
    
    
    
    121,983Insurance claim
    
    
    128,485
    
    
    
    128,485Total accounts receivable
    
    
    1,385,781
    
    
    
    1,258,550Inventories, net
    
    
    2,526,566
    
    
    
    2,463,230Prepaid expenses
    
    
    482,865
    
    
    
    69,197Deferred income taxes
    
    
    
    
    
    
    65,375Total current assets
    
    
    4,419,501
    
    
    
    3,979,187Property, plant and equipment:Land
    
    
    222,303
    
    
    
    217,950Buildings
    
    
    821,248
    
    
    
    821,248Machinery and equipment
    
    
    988,950
    
    
    
    937,3532,032,501
    
    
    
    1,976,551Less accumulated depreciation
    
    
    427,482
    
    
    
    325,5001,605,019
    
    
    
    1,651,051Construction on progress
    
    
    190,174
    
    
    
    42,128Equipment not in service
    
    
    229,138
    
    
    
    75,065Net property, plant, and equipment
    
    
    2,024,331
    
    
    
    1,768,244Total assets
    
    $
    6,443,832
    
    
    $
    5,747,431
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-2




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June 30
    
    
    December 312007
    
    
    2006(Unaudited)Liabilities and shareholders equityCurrent liabilities:Line of credit
    
    $
    2,002,752
    
    
    $
    856,389Accounts payable and accrued expenses
    
    
    1,066,179
    
    
    
    1,106,037Advances from related company
    
    
    102,500
    
    
    
    Current portion of deferred income taxes
    
    
    85,301
    
    
    
    Current portion of long-term debt
    
    
    859,710
    
    
    
    1,004,132Current portion of capital lease obligations
    
    
    32,524
    
    
    
    31,618Total current liabilities
    
    
    4,148,966
    
    
    
    2,998,176Advances from shareholders
    
    
    34,899
    
    
    
    34,899Deferred income taxes, less current portion
    
    
    131,132
    
    
    
    403,129Long-term debt, less current portion
    
    
    1,782
    
    
    
    12,220Capital lease obligations, less current portion
    
    
    38,489
    
    
    
    55,383Notes payable to related companies
    
    
    1,000,000
    
    
    
    1,000,000Note payable to shareholder
    
    
    596,000
    
    
    
    600,000Total liabilities
    
    
    5,951,268
    
    
    
    5,103,807Shareholders equity:Common stock, par value $0.0001:Authorized100,000,000 sharesIssued and outstanding18,974,238 shares
in 2007 and 18,834,238 shares in 2006
    
    
    1,898
    
    
    
    1,884Additional paid-in capital
    
    
    11,260,904
    
    
    
    11,234,318Accumulated deficit
    
    
    (10,770,238
    )
    
    
    (10,592,578
    )Net shareholders equity
    
    
    492,564
    
    
    
    643,624Total liabilities and shareholders equity
    
    $
    6,443,832
    
    
    $
    5,747,431
 See accompanying Notes to Condensed Consolidated Financial Statements.
 F-3




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Three months ended
    
    
    Six months endedJune 30
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    2,924,277
    
    
    $
    2,316,340
    
    
    $
    5,570,352
    
    
    $
    5,604,011Costs of goods sold
    
    
    2,440,284
    
    
    
    1,930,015
    
    
    
    4,922,042
    
    
    
    4,715,791Gross profit
    
    
    483,993
    
    
    
    386,325
    
    
    
    648,310
    
    
    
    888,220Operating expenses:Professional/Consulting Services
    
    
    91,526
    
    
    
    53,761
    
    
    
    116,426
    
    
    
    104,815Marketing and advertising
    
    
    133,799
    
    
    
    84,377
    
    
    
    230,318
    
    
    
    188,781Office and administrative
    
    
    227,248
    
    
    
    235,547
    
    
    
    450,357
    
    
    
    474,647Total operating expenses
    
    
    452,573
    
    
    
    373,685
    
    
    
    797,101
    
    
    
    768,243Operating income (loss)
    
    
    31,420
    
    
    
    12,640
    
    
    
    (148,791
    )
    
    
    119,977Other income (expenses):Miscellaneous income
    
    
    14,575
    
    
    
    1,396
    
    
    
    16,257
    
    
    
    3,816Interest expense
    
    
    (90,945
    )
    
    
    (111,269
    )
    
    
    (166,447
    )
    
    
    (218,735
    )Net other expenses
    
    
    (76,370
    )
    
    
    (109,873
    )
    
    
    (150,190
    )
    
    
    (214,919
    )Net loss before income taxes
    
    
    (44,950
    )
    
    
    (97,233
    )
    
    
    (298,981
    )
    
    
    (94,942
    )Deferred income tax benefit
    
    
    18,209
    
    
    
    
    
    
    
    121,321
    
    
    
    Net loss
    
    $
    (26,741
    )
    
    $
    (97,233
    )
    
    $
    (177,660
    )
    
    $
    (94,942
    )Net loss 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 302007
    
    
    2006Operating activitiesNet loss
    
    $
    (177,660
    )
    
    $
    (94,942
    )Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:Depreciation
    
    
    101,982
    
    
    
    119,425Deferred income tax benefit
    
    
    (121,321
    )
    
    
    Stock issued for services
    
    
    26,600
    
    
    
    1,600Changes in operating assets and liabilities:Accounts receivable
    
    
    (127,231
    )
    
    
    (235,451
    )Inventories
    
    
    (63,336
    )
    
    
    (36,672
    )Prepaid expenses
    
    
    (413,668
    )
    
    
    (81,498
    )Checks outstanding in excess of bank balance
    
    
    
    
    
    
    (3,450
    )Accounts payable and accrued expenses
    
    
    (114,858
    )
    
    
    836,181Net cash (used in) provided by operating activities
    
    
    (889,492
    )
    
    
    505,193Investing activitiesPurchases of property, plant, and equipment
    
    
    (283,069
    )
    
    
    (364,335
    )Financing activitiesNet borrowings on line of credit
    
    
    1,146,363
    
    
    
    100,000Net borrowings from related companies
    
    
    102,500
    
    
    
    Net payments on advances from shareholders
    
    
    
    
    
    
    (5,001
    )Principal repayment on note payable to shareholder
    
    
    (4,000
    )
    
    
    Principal repayments on long-term debt
    
    
    (154,860
    )
    
    
    (144,511
    )Principal repayments on capital lease obligation
    
    
    (15,988
    )
    
    
    (15,110
    )Payments on amount due to seller
    
    
    
    
    
    
    (68,182
    )Net cash provided by (used in) financing activities
    
    
    1,074,015
    
    
    
    (132,804
    )Net (decrease) increase in cash
    
    
    (98,546
    )
    
    
    8,054Cash at beginning of period
    
    
    122,835
    
    
    
    Cash at end of period
    
    $
    24,289
    
    
    $
    8,054
 Supplemental disclosure of noncash activities
  See accompanying Notes to Condensed Consolidated Financial Statements.
 F-5




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1. Basis of Presentation
     2. Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)
 F-6




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3. Related Party Transactions
  4. Contingencies
  5. Debt Covenants
  6. Income Tax Provision
  7. Income (Loss) Per Share Data
  F-7




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7. Income (Loss) Per Share Data (continued)
  Three months ended
    
    
    Six months endedJune 30
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Average shares outstanding
    
    
    18,950,905
    
    
    
    18,834,238
    
    
    
    18,892,571
    
    
    
    18,832,571Net income (loss) per share
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
 8. Going Concern
  F-8




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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
      1




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Results of Operations
      Liquidity and Capital Resources
  Other Significant Events
  2




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Off Balance Sheet Arrangements
  
 Item 3.
    
    Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures.
  (b) Changes in Internal Control over Financial Reporting
  3




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PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 3.
    
    Defaults Upon Senior Securities
  
 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, 2007
    /s/ B. Grant HunterB. Grant HunterPresident and Chief Executive OfficerDate:     August 14, 2007
    /s/ J. Terry MedovitchJ. Terry MedovitchChief Financial Officer 5