Diversified Thermal Solutions (DVTS) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

________________________

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2008

[   ] TRANSITION REPORT UNDER 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.

(Name of Small Business Issuer in Its Charter)

Nevada	94-3342064
(State or Other Jurisdiction of	(IRS Employer
Incorporation or Organization)	Identification No.)

4126 Delp Street, Suite 200, Memphis, TN  38118

(Address of Principal Executive Offices)

Issuer’s telephone number, including area code (901) 365-7650

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   þ Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller Reporting Company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨Yes  þ No

Number of shares outstanding of each of the issuer’s classes of common stock, as of August 13, 2008:

Title                                                                            Outstanding

Common Stock, $0.0001 par value        18,974,238

TABLE OF CONTENTS

	Page No.
PART I.                  FINANCIAL INFORMATION
Item 1.         Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet	F-2
Condensed Consolidated Statements of Operations	F-4
Condensed Consolidated Statemenets of Cash Flows	F-5
Notes to Condensed Consolidated Financial Statements	F-6
Item 2.        Management’s Discussion and Analysis of Financial Condition And Results of Operations	1
Item 3.        Quantitative and Qualitative Disclosures About Market Risk	4
Item 4.        Controls and Procedures	4
PART II.                OTHER INFORMATION
Item 1.        Legal Proceedings	5
Item 1A.     Risk Factors	5
Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds	5
Item 3.         Defaults Upon Senior Securities	5
Item 4.         Submission of Matters to a Vote of Security Holders	5
Item 5.         Other Information	5
Item 6.         Exhibits	5
SIGNATURES	6

F-1

PART I.

ITEM 1. FINANCIAL STATEMENTS.

Index to Financial Statements

Condensed Consolidated Balance Sheets........................................................................................................................................................................................................................F-2

Condensed Consolidated Statements of Operations......................................................................................................................................................................................................F-4

Condensed Consolidated Statements of Cash Flows.....................................................................................................................................................................................................F-5

Notes to Condensed Consolidated Financial Statements..............................................................................................................................................................................................F-6

F-1

Diversified Thermal Solutions, Inc.

Condensed Consolidated Balance Sheets

	June 30 2008		December 31 2007
	(Unaudited)
Assets
Current assets:
Cash	$	3,712	$	1,445
Accounts receivable:
Trade		1,246,522		865,056
Related companies		–		84,980
Insurance claim		–		128,485
Total accounts receivable		1,246,522		1,078,521
Inventories, net		2,531,205		3,472,744
Prepaid expenses		96,183		59,544
Deferred income taxes		60,320		65,021
Total current assets		3,937,942		4,677,275
Property, plant and equipment:
Land		222,303		222,303
Buildings		821,248		821,248
Machinery and equipment		1,323,621		1,047,685
		2,367,172		2,091,236
Less accumulated depreciation		644,583		535,383
		1,722,589		1,555,853
Construction in progress		2,800,458		1,415,608
Net property, plant, and equipment		4,523,047		2,971,461
Total assets	$	8,460,989	$	7,648,736

F-2

Diversified Thermal Solutions, Inc.

Condensed Consolidated Balance Sheets (continued)

	June 30 2008			December 31 2007
	(Unaudited)
Liabilities and shareholders’ equity
Current liabilities:
Checks outstanding in excess of bank balance	$	3,720		$	25,829
Line of credit		2,453,728			2,136,811
Accounts payable and accrued expenses:
Trade and other		1,773,515			1,651,800
Related companies		306,390			268,546
Total accounts payable and accrued expenses		2,079,905			1,920,346
Deferred revenue		35,396			288,984
Current portion of long-term debt		584,221			735,747
Current portion of capital lease obligations		35,713			33,458
Total current liabilities		5,192,683			5,141,175
Advances from shareholders		34,899			34,899
Advances from related company		705,236			–
Deferred income taxes		189,783			262,110
Long-term debt, less current portion		252,852			8,829
Capital lease obligations, less current portion		18,373			21,926
Notes payable to related companies		1,000,000			1,000,000
Note payable to shareholder		592,000			592,000
Total liabilities		7,985,826			7,060,939
Shareholders’ equity:
Common stock, par value $0.0001:   Authorized--100,000,000 shares   Issued and outstanding--18,974,238 shares in      2008 and 2007		1,898			1,898
Additional paid-in capital		11,260,904			11,260,904
Accumulated deficit		(10,787,639	)		(10,675,005	)
Net shareholders’ equity		475,163			587,797
Total liabilities and shareholders’ equity	$	8,460,989		$	7,648,736

See accompanying Notes to Condensed Consolidated Financial Statements.

F-3

Diversified Thermal Solutions, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

	Three months ended June 30						Six months ended June 30
	2008			2007			2008			2007
Revenues:
Trade	$	3,071,440		$	2,860,258		$	6,222,613		$	5,116,744
Related companies		50,792			64,019			144,235			453,608
Total revenues		3,122,232			2,924,277			6,366,848			5,570,352
Costs of goods sold		2,740,120			2,440,284			5,556,589			4,922,042
Gross profit		382,112			483,993			810,259			648,310
Operating expenses:
Professional and consulting services		54,533			91,526			135,957			116,426
Marketing and advertising		113,537			133,799			218,966			230,318
Office and administrative		257,913			227,248			505,858			450,357
Total operating expenses		425,983			452,573			860,781			797,101
Operating  income (loss)		(43,871	)		31,420			(50,522	)		(148,791	)
Other income (expenses):
Miscellaneous income		18,992			14,575			21,422			16,257
Interest expense		(70,530	)		(90,945	)		(151,160	)		(166,447	)
Net other expenses		(51,538	)		(76,370	)		(129,738	)		(150,190	)
Net loss before income taxes		(95,409	)		(44,950	)		(180,260	)		(298,981	)
Deferred income tax benefit		31,373			18,209			67,626			121,321
Net loss	$	(64,036	)	$	(26,741	)	$	(112,634	)	$	(177,660	)
Net loss per share	$	–		$	–		$	(0.01	)	$	(0.01	)

See accompanying Notes to Condensed Consolidated Financial Statements.

F-4

Diversified Thermal Solutions, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Six months ended June 30
	2008			2007
Operating activities
Net loss	$	(112,634	)	$	(177,660	)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation		109,200			101,982
Deferred income tax benefit		(67,626	)		(121,321	)
Stock issued for services		–			26,600
Changes in operating assets and liabilities:
Accounts receivable		(168,001	)		(127,231	)
Inventories		941,539			(63,336	)
Prepaid expenses		(36,639	)		(413,668	)
Checks outstanding in excess of bank balance		(22,109	)		–
Deferred revenue		(253,588	)		–
Accounts payable and accrued expenses		159,559			(114,858	)
Net cash provided by (used in) operating activities		549,701			(889,492	)
Investing activities
Purchases of property, plant, and equipment		(1,642,531	)		(283,069	)
Financing activities
Net borrowings on line of credit		316,917			1,146,363
Net advances from related company		705,236			102,500
Principal repayment on note payable to shareholder		–			(4,000	)
Borrowings of long-term debt		262,260			–
Principal repayments on long-term debt		(169,763	)		(154,860	)
Principal repayments on capital lease obligation		(19,553	)		(15,988	)
Net cash provided by financing activities		1,095,097			1,074,015
Net increase (decrease) in cash		2,267			(98,546	)
Cash at beginning of period		1,445			122,835
Cash at end of period	$	3,712		$	24,289

Supplemental Schedule of Noncash Activities

During January 2008, the Company entered into a capital lease obligation for certain equipment with a cost of $18,255.

Advances from related company at June 30, 2007 included $75,000 for equipment.

See accompanying Notes to Condensed Consolidated Financial Statements.

F-5

Diversified Thermal Solutions, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2008

1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Diversified Thermal Solutions, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.   Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008.

The condensed consolidated financial statements include the accounts of Diversified Thermal Solutions, Inc. and its wholly-owned subsidiaries, DT Solutions, Inc. and Fuzion Technologies, Inc.  All intercompany balances and transactions have been eliminated.

The balance sheet at December 31, 2007, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United Sates of America for complete financial statements.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2007.

2.  Recent Accounting Pronouncements

During September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements, which is effective for fiscal years beginning after November 15, 2007, with earlier adoption encouraged. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009.   The Company adopted SFAS 157 on January 1, 2008, for all financial assets and liabilities, but the implementation did not have a significant impact on the Company’s financial position or results of operations.  The Company has not yet determined the impact the implementation of SFAS 157 will have on the Company’s non-financial assets and liabilities which are not recognized or disclosed on a recurring basis.  However, the Company does not anticipate that the full adoption of SFAS 157 will significantly impact its consolidated financial statements.

F-6

Diversified Thermal Solutions, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

2.  Recent Accounting Pronouncements (continued)

During February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  The Company adopted SFAS 159 on January 1, 2008, but the implementation of SFAS 159 did not have a significant impact on the Company's financial position or results of operations.

3.  Contingencies

The Company has agreed to guarantee certain indebtedness of two related companies.  Upon default by the related companies, the Company would be obligated to pay any outstanding principal and accrued interest on their behalf.  In addition, if the related companies default on these loans, the Company’s outstanding loans with the same financial institution will be considered in default.  At June 30, 2008, the debt guaranteed for the related companies was $1,832,663 under term loans and up to $5,500,000 under revolving lines of credit.  These term loans and revolving lines of credit expire between February 2009 and October 2010.  These loans are also cross-collateralized by substantially all of the assets of the related companies and the Company.

4.  Debt Covenants

As of December 31, 2007 and June 30, 2008, the Company was not in compliance with certain financial covenants of the line of credit and long-term debt with a financial institution, and accordingly, these balances have been classified as current in the accompanying condensed consolidated balance sheets.

5.  Income (Loss) Per Share Data

Basic earnings/loss per share assumes no dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common stock outstanding during each period.  Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon the exercise of stock options or warrants, using the treasury stock method of computing such effects and contingent shares.  As the Company has no outstanding stock options or warrants, there is no diluted income (loss) per share.

F-7

Diversified Thermal Solutions, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

5.  Income (Loss) Per Share Data (continued)

The following table sets forth the computation of basic loss per share for the periods indicated:

	Three months ended June 30				Six months ended June 30
	2008		2007		2008			2007
Average shares outstanding		18,974,238		18,950,905		18,974,238			18,892,571
Net income (loss) per share	$	–	$	–	$	(0.01	)	$	(0.01	)

6.  Notes Payable

During 2008, the Company received approval for two loans through loan programs of the Commonwealth of Pennsylvania Department of Community and Economic Development.  The first loan of $291,400 was approved under the Pennsylvania Industrial Development Authority (“PIDA”).  As of June 30, 2008, $262,260 of this loan has been received.  The second loan of $350,850 was approved under the Machinery and Equipment Loan Fund (“MELF”).  During August 2008, $235,328 was received.  The PIDA loan will be repaid over 15 years and the MELF loan will be repaid over 7 years.  Both loans bear interest at 4% and are in a superior position to the Company’s financial institution debt.

7.  Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company’s recent losses and cash requirements, among other things, may indicate the Company will be unable to continue as a going concern for a reasonable period of time.  Management recognizes the Company must achieve profitably in order to continue as a going concern.  The Company anticipates the future efficiencies in operations will continue to improve operating cash flows necessary to continue as a going concern.

F-8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

Our primary business purpose is to acquire businesses related to the manufacturing and distribution of refractory materials used in industry.  DT Solutions, Inc., one of our subsidiaries, currently has no operations.

All of our current operations are presently conducted through our other subsidiary, Fuzion Technologies, Inc. This subsidiary is engaged in the business of manufacturing refractory products, and dies used in the refractory industry and precision machining. The subsidiary operates the Freeport Brick Division, Kittanning Brick Division, and Armstrong Precision Manufacturing Division in Pennsylvania and operates the Memphis Division in Tennessee, which is on a much smaller scale.

We earn revenue and generate cash principally through the sale of products manufactured by its Fuzion Technologies, Inc. subsidiary. Products are sold to customers worldwide in the cement & lime, aluminum, steel, chemical, petroleum, paper & pulp, foundry, and other non-ferrous industries.

BALANCE SHEETS

There have been several significant changes in our assets since December 31, 2007.  Trade and related companies accounts receivable at June 30, 2008 have increased by approximately $296,000 as compared to December 31, 2007, mainly due to increased sales in the last month of the reporting period.  Additionally, we collected an insurance claim receivable of $128,485 during the second quarter of 2008.  Inventories decreased by approximately $942,000 at June 30, 2008 as compared to December 31, 2007.  This was the result of a slow-down in production at the Freeport plant for approximately two and one-half months in 2008 as the inventories of finished goods at the Freeport plant from the beginning of the year were sufficient enough to allow us to reduce gas consumption by shutting off the Freeport plant tunnel kiln for this period of time.  Similarly, production at the Kittanning plant also slowed down in the month of April 2008. In addition, we have purchased only minimal amounts of raw materials during the first six months of 2008, thereby reducing the amount of raw materials inventory from what was on hand at December 31, 2007.  Net property, plant, and equipment has increased by approximately $1,552,000 since December 31, 2007 primarily due to expenditures for equipment and construction related to the plant consolidation, which will be discussed below.

1

Accounts payable and accrued expenses have increased by approximately $160,000 since December 31, 2007, mainly due to amounts owed on construction costs related to the plant consolidation.  In addition, we borrowed an additional $705,236 from a related company and drew down an additional $316,917 on our line of credit to fund the plant consolidation projects.

In conjunction with the plant consolidation project, we have been approved for two loan programs through the Commonwealth of Pennsylvania. The Lender in the first program is the Pennsylvania Industrial Development Authority (“PIDA”). The PIDA loan of $291,400 represents 40% of the estimated building costs of $728,500 for one portion of our plant consolidation project. As of June 30, 2008, $262,260 has been advanced on the PIDA loan.  The second loan will be funded through the Machinery & Equipment Loan Fund (“MELF”). The MELF loan of $350,850 represents 50% of the estimated equipment acquisition and installation costs related to another portion of our plant consolidation project. The MELF loan was closed on August 7, 2008, at which time $235,328 was advanced to us. The remaining balances of these project segments are being funded through advances from a related company as disclosed above as well as our own internal funds.

Our shareholders’ equity at June 30, 2008 has decreased by $112,634 since December 31, 2007, as a result of the net loss for the quarter.

RESULTS OF OPERATIONS

Revenues – Our revenues for the six months ended June 30, 2008 are $6,366,848, which is an increase of $796,496 from the six months ended June 30, 2007.  This is primarily due to several significant orders for Duro brick which accounted for most of the sales increase.  Sales of runner brick decreased approximately $196,000 for the six months ended June 30, 2008 as compared to the same period for 2007.  However, all of this decrease occurred in the quarter ended March 31, 2008 as runner brick sales increased by approximately $216,000 in the quarter ended June 30, 2008 compared to the previous quarter.  Sales of our other product lines were relatively consistent.  We expect that the current level of Duro sales will decrease throughout the remainder of the year due to the singular nature of several of the large orders in the six months ended June 30, 2008.  In addition, the increase in revenues is due to selective price increases in 2008 as well as the imposition of surcharges in some of our product lines.

Expenses – Our cost of goods sold for the six months ended June 30, 2008 is $5,556,589, which is an increase of approximately $635,000 from the six months ended June 30, 2007, due somewhat to the increase in costs directly related to the increase in sales. However, our gross profit percentage for the six months ended June 30, 2008 was 12.7%, which compares favorably to 11.6% for the same period last year. One of the factors contributing to this increase related to improved sales in some of our better performing product lines along with our price increases. Other factors that had a significant impact on gross profit relate to energy and raw material costs. Due to increases in the cost of natural gas over the past several years, it has become our single largest cost of operations.  This trend has continued into 2008 operations as our gas rate in 2008 is significantly higher than it was in 2007. We are in the process of completing a major improvement in the efficiency of our production processes by consolidating our refractory product manufacturing facilities to one site.  This consolidation involves moving production operations from the Kittanning plant to the Freeport plant. Unfortunately, the fire that occurred at the Freeport plant on February 2, 2006, caused a significant delay in the plant consolidation process and therefore caused a corresponding delay in realizing the financial benefits of this consolidation project.  Also as a result of the fire at the Freeport plant, we were unable to grind bauxite (which is an important and expensive raw material used in our manufacturing of high alumina products) at our own facilities from February 2006 through March 2008, until we completed the re-installation of our bauxite grinding equipment.  This enabled us to grind some of the lower cost raw bauxite that we had on site with our own equipment during the six months ended June 30, 2008, thereby generating some cost savings.  Prior to the re-installation of this equipment, we were buying already-ground bauxite from a third party on an “as-needed basis” as well as out-sourcing the grinding of our own raw bauxite inventory. In addition, all of the clay used in production at the Freeport plant is still being ground at the Kittanning plant and subsequently transported to the Freeport plant.  This also is a direct result of the fire. These extra handling and transportation costs have also had an impact on our raw material costs.

2

Operating expenses for the six months ended June 30, 2008 are approximately $64,000 higher than the six months ended June 30, 2007, due to various increases in costs for professional services as well as other administrative expenses.

All of the above resulted in an operating loss of $50,522 for the six months ended June 30, 2008 as compared to an operating loss of $148,791 for the six months ended June 30, 2007. This represents an improvement of $98,269.

For the six months ended June 30, 2008, other income was generally consistent compared with the same period last year.  However, interest expense has decreased approximately $15,000 for the six months ended June 30, 2008 as compared with the same period last year due to the fact that interest rates are lower on our line of credit, some interest has been capitalized in conjunction with the plant consolidation project, and we have continued to pay down the principal balance on our term loan with the financial institution.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2007 and June 30, 2008, we were not in compliance with certain financial covenants of the line of credit and long-term debt and accordingly, these balances have been classified as current in the accompanying condensed consolidated balance sheets.  We recognize that we must achieve profitable operations to continue as a going concern. We anticipate that the future efficiencies in operations will continue to improve operating cash flows necessary to continue as a going concern.

OTHER SIGNIFICANT EVENTS

We are in the process of improving the efficiency of our production processes by consolidating our refractory product manufacturing facilities to one site.  This consolidation involves moving production operations from the Kittanning plant to the Freeport plant. We have contracted with a commercial realtor to sell the Kittanning plant.  We are aware that we need to finalize this plant consolidation as quickly as possible in order to improve efficiency.  We have prioritized our plans to complete the plant consolidation project before rebuilding the remainder grinding department.  As of June 30, 2008, we have expended approximately $2,800,000 in construction and equipment related to plant consolidation costs. It is expected that plant consolidation will be completed in the Fall of 2008.

As discussed earlier, bauxite is an important and expensive raw material used in manufacturing some of our products. However, there is no domestic supply of refractory grade bauxite and all of it must be imported from China.  Unfortunately, the cost of this important raw material is rising at an alarming rate. The most recent price quote that we were provided in 2008 represented a price increase of almost 300% as compared to our most recent purchase in August 2007.  All of our competitors are facing this same cost increase issue. Although we have increased our prices in 2008 to offset these cost increases, the problem is compounded by the pressure placed on our cash management in having to purchase raw materials well in advance of the time that we are able to turn this raw material into a manufactured product, sell the product, and collect our payments from our customers.  We are currently researching alternative product mixes to counter this problem.

3

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

(a)   Evaluation of Disclosure Controls and Procedures.

We have evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were not effective as of June 30, 2008, (the end of the period covered by this Quarterly Report on Form 10-Q) as a result of one material weakness relating to the segregation of duties in the area of preparing checks.  This material weakness is further described in our Annual Report on Form 10-KSB for the year ended December 31, 2007.  It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.  In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.  As a result of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

(b)   Changes in Internal Control over Financial Reporting.

During the three months ended June 30, 2008, except as described below, there were no changes in our internal control over financial reporting that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.  As of May 31, 2008, we now verify the physical quantity of certain raw materials inventory on a monthly basis, which rectifies the material weakness first described in our Annual Report on Form 10-KSB for the year ended December 31, 2007.

4

PART II. – OTHER INFOMRATION

ITEM 1.                  LEGAL PROCEEDINGS.

There are no material changes to the Legal Proceedings described under the title “Legal Proceedings” in our Annual Report on Form 10-KSB for the year ended December 31, 2007.

ITEM 1A.              RISK FACTORS.

There are no material changes to the Risk Factors described under the title “Risk Factors” in our Annual Report on Form 10-KSB for the year ended December 31, 2007.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.                 DEFAULT UPON SENIOR SECURITIES.

None.

ITEM 4.                SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5.                OTHER INFORMATION.

None.

ITEM 6.                EXHIBITS.

31.1#	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2#	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1#	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2#	Certification of Chief Financial Officer Pursuant to 18. U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
#	Filed herewith.

5 

SIGNATURES

           Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DIVERSIFIED THERMAL SOLUTIONS, INC.

Date:      August 14, 2008 By:  /s/ B. Grant Hunter

 B. Grant Hunter

     Chief Executive Officer

Date:      August 14, 2008 By:  /s/ J. Terry Medovitch

J. Terry Medovitch

Chief Financial Officer

6 

EXHIBIT INDEX

31.1#	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2#	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1#	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2#	Certification of Chief Financial Officer Pursuant to 18. U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
#	Filed herewith.