**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

| **(Mark One)**        |
|-----------------------|
| **  ****x** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **            | ** ** |
| ** **            | **FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007** |
| ** **            |   | ** ** |
| **  ****o** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE EXCHANGE ACT** |

**CommissionFile No. 0-31267**

**IWT TESORO CORPORATION**(Exact name of registrant as specified in its charter)
| **Nevada**                                                       |   | **91-2048019**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |

 

**101 Post Road West, Suite 10,Westport, CT 06880**(Address of principal executive offices)

**(203) 221-2770**(Registrant’s telephone number, including area code)

Indicate by check, markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days:

xYes                        oNo

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer. x |
|---------------------------|--------|---------------------|--------|--------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)

oYes                xNo

Indicate thenumber of shares outstanding of each of the issuer’s class of common equity, asof July 19, 2007: 14,821,931 shares

 

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**IWTTESORO CORPORATION AND SUBSIDIARIESFORM 10-QFor the six months ended June 30, 2007INDEX**
| PART I      | ** ** | FINANCIAL INFORMATION                                                                             | ** ** |   |
|-------------|------------|---------------------------------------------------------------------------------------------------|------------|--------|
| ** **  | ** ** | ** **                                                                                        | ** ** |   |
| Item 1.     |       | Financial Statements                                                                              |       | 3      |
|        |       | Consolidated Balance  Sheets as of June 30, 2007 and December 31, 2006                            |       | 3      |
|        |       | Consolidated  Statements of Operations for the three and six months ended June 30, 2007 and  2006 |       | 4      |
|        |       | Consolidated  Statements of Stockholders’ Deficit for the six months ended June 30, 2007     |       | 5      |
|        |       | Consolidated  Statements of Cash Flows for the six months ended June 30, 2007 and 2006            |       | 6      |
|        |       | Notes to the  Consolidated Interim Financial Statements                                           |       | 8      |
| Item 2.     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations       |       | 18     |
| Item 3.     |       | Quantitative  and Qualitative Disclosures About Market Risk                                       |       | 22     |
| Item 4.     |       | Controls and Procedures                                                                           |       | 22     |
|        |       |                                                                                              |       |   |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                             | ** ** |   |
| ** **  |       |                                                                                              |       |   |
| Item 1.     |       | Legal Proceedings                                                                                 |       | 22     |
| Item  1/A.  |       | Risk  Factors                                                                                     |       | 23     |
| Item 2.     |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                      |       | 23     |
| Item 3.     |       | Default Upon  Senior Securities                                                                   |       | 24     |
| Item 4.     |       | Submission of  Matters to a vote of Security Holders                                              |       | 24     |
| Item  6.    |       | Exhibits                                                                                          |       | 24     |

 

2

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PART 1– FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

**IWTTESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS
| ** **                                                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                                                                                                      | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                          |       |              |       |                  |       |
| Current Assets:                                                                                                                 |       |              |       |                  |       |
| Cash                                                                                                                            |       | $                 | 623,627    |                  | $          | 157,729 |   |
| Accounts  receivable, net of allowance for doubtful accounts and returns of $475,510  and $477,674, respectively                |       | 10,941,526        |       | 9,780,039             |       |
| Inventories, net  of allowance for obsolescence of $382,364 and $525,000, respectively                                          |       | 24,763,710        |       | 30,674,860            |       |
| Deposit on purchases  of inventories                                                                                            |       | 205,798           |       | 167,693               |       |
| Prepaid expenses                                                                                                                |       | 274,940           |       | 210,345               |       |
| Total current  assets                                                                                                           |       | 36,809,601        |       | 40,990,666            |       |
|                                                                                                                            |       |              |       |                  |       |
| Property and Equipment,  net                                                                                                    |       | 2,067,883         |       | 2,264,762             |       |
|                                                                                                                            |       |              |       |                  |       |
| Other Assets                                                                                                                    |       | 921,095           |       | 1,016,250             |       |
| Total assets                                                                                                                    |       | $                 | 39,798,579 |                  | $          | 44,271,678 |   |
|                                                                                                                            |       |              |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                      |       |              |       |                  |       |
|                                                                                                                            |       |              |       |                  |       |
| Current Liabilities:                                                                                                            |       |              |       |                  |       |
| Accounts payable                                                                                                                |       | $                 | 16,401,323 |                  | $          | 17,014,921 |   |
| Accrued expenses  and other liabilities                                                                                         |       | 2,308,619         |       | 2,040,593             |       |
| Current portion  of equipment leases                                                                                            |       | 10,271            |       | 55,889                |       |
| Current portion  of equipment notes                                                                                             |       | 29,635            |       | 30,499                |       |
| Note payable,  revolving line of credit                                                                                         |       | 23,191,461        |       | 24,400,378            |       |
| Current portion  of convertible debt                                                                                            |       | 800,007           |       | 800,007               |       |
| Note payable,  other (net of discounts of $0 and $74,273, respectively)                                                         |       | 2,000,000         |       | 1,925,727             |       |
| Total current  liabilities                                                                                                      |       | 44,741,316        |       | 46,268,014            |       |
|                                                                                                                            |       |              |       |                  |       |
| Long-Term Debt:                                                                                                                 |       |              |       |                  |       |
| Capital leases,  equipment, net of current portion                                                                              |       | 82,516            |       | 41,098                |       |
| Notes payable,  equipment, net of current portion                                                                               |       | 20,024            |       | 47,297                |       |
| Note payable,  revolving line of credit (net of discounts of $1,944,464 and $2,777,792,  respectively)                          |       | 3,055,536         |       | 2,222,208             |       |
| Convertible  debt, net of current portion (net of discounts of $425,068 and $741,408,  respectively)                            |       | 41,591            |       | 125,252               |       |
| Total long-term  debt                                                                                                           |       | 3,199,667         |       | 2,435,855             |       |
| Total  liabilities                                                                                                              |       | 47,940,983        |       | 48,703,869            |       |
|                                                                                                                            |       |              |       |                  |       |
| Stockholders’ Equity:                                                                                                      |       |              |       |                  |       |
| Preferred stock,  $0.001 par value, 25,000,000 authorized; none issued                                                          |       | —            |       | —                |       |
| Common stock,  $0.001 par value, 100 million shares authorized; 12,185,567 and 11,928,600  issued and outstanding, respectively |       | 12,186            |       | 11,929                |       |
| Additional paid  in capital                                                                                                     |       | 7,880,663         |       | 7,383,305             |       |
| Accumulated  deficit                                                                                                            |       | (16,015,173       | )          | (11,817,278           | )          |
|                                                                                                                            |       | (8,122,324        | )          | (4,422,044            | )          |
| Treasury stock,  10,584 and 6,105 shares at cost, respectively                                                                  |       | (20,080           | )          | (10,147               | )          |
| Total  stockholders’ deficit                                                                                               |       | (8,142,404        | )          | (4,432,191            | )          |
|                                                                                                                            |       | $                 | 39,798,579 |                  | $          | 44,271,678 |   |

 

See notes to theconsolidated interim financial statements.

3

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)
| ** **                                   | ** ** | **The three months ended** | ** ** | **The six months ended** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                         | ** ** | **June 30,**                       | ** ** |
| ** **                                   | ** ** | **2007**                                  | ** ** | **2006**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Net Sales                                    |       | $                                         | 14,672,898 |                                    | $          | 16,940,815 |   | $ | 29,473,061 |   | $ | 32,972,034 |   |
| Cost of Goods  Sold                          |       | 9,694,702                                 |       | 10,748,471                              |       | 18,957,174 |   | 20,966,261 |   |
| Gross Profit                                 |       | 4,978,196                                 |       | 6,192,344                               |       | 10,515,887 |   | 12,005,773 |   |
| Operating  Expenses:                         |       |                                      |       |                                    |       |   |   |   |   |
| Warehouse and distribution                   |       | 2,546,182                                 |       | 2,638,498                               |       | 5,115,874 |   | 4,992,852 |   |
| Sales and marketing                          |       | 1,360,510                                 |       | 1,421,269                               |       | 2,697,561 |   | 2,957,999 |   |
| General and administrative                   |       | 1,850,932                                 |       | 1,931,431                               |       | 3,951,931 |   | 3,915,079 |   |
| Restructuring charge                         |       | —                                    |       | 585,680                                 |       | — |   | 585,680 |   |
|                                         |       | 5,757,624                                 |       | 6,576,878                               |       | 11,765,366 |   | 12,451,610 |   |
| Loss from  Operations                        |       | (779,428                                  | )          | (384,534                                | )          | (1,249,479 | ) | (445,837 | ) |
| Other Expenses:                              |       |                                      |       |                                    |       |   |   |   |   |
| Interest expense                             |       | (1,468,452                                | )          | (1,336,671                              | )          | (2,939,099 | ) | (2,418,047 | ) |
| Change in fair value of derivative           |       | —                                    |       | 324,130                                 |       | — |   | 4,347,233 |   |
| Other                                        |       | 6,696                                     |       | (111,126                                | )          | 2,734 |   | (141,408 | ) |
|                                         |       | (1,461,756                                | )          | (1,123,667                              | )          | (2,936,365 | ) | 1,787,778 |   |
| Income (Loss)  Before Income Taxes           |       | (2,241,184                                | )          | (1,508,201                              | )          | (4,185,844 | ) | 1,341,941 |   |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Income Tax  Benefit (Expense)                |       | (9,000                                    | )          | —                                  |       | (12,051 | ) | — |   |
| Net Income  (Loss)                           |       | $                                         | (2,250,184 | )                                       | $          | (1,508,201 | ) | $ | (4,197,895 | ) | $ | 1,341,941 |   |
| Earnings (Loss)  Per Share:                  |       |                                      |       |                                    |       |   |   |   |   |
| Basic                                        |       | $                                         | (0.19      | )                                       | $          | (0.13 | ) | $ | (0.35 | ) | $ | 0.11 |   |
| Diluted                                      |       | $                                         | (0.19      | )                                       | $          | (0.13 | ) | $ | (0.35 | ) | $ | 0.10 |   |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Weighted Average  Common Shares Outstanding: |       |                                      |       |                                    |       |   |   |   |   |
| Basic                                        |       | 11,945,075                                |       | 11,927,146                              |       | 11,972,997 |   | 11,788,211 |   |
| Diluted                                      |       | 11,945,075                                |       | 11,927,146                              |       | 11,972,997 |   | 12,958,321 |   |

 

See notes to theconsolidated interim financial statements.

4

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (Unaudited)
| ** **                                                           | ** ** | ** **            | ** ** | ** **   | ** ** | ** **       | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|------------------|------------|----------------|------------|-----------------|------------|------------|------------|
| ** **                                                           | ** ** | **Common Stock** | ** ** | **Treasury** | ** ** | **Paid in** | ** ** | **Earnings**   | ** ** | ** **      | ** ** |
| ** **                                                           | ** ** | **Shares**            | ** ** | **Amount**   | ** ** | **Stock**        | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Total**  | ** ** |
|                                                                 |       |                  |       |         |       |             |       |           |       |            |       |       |       |
| Balance,  December 31, 2006                                          |       | 11,928,600            |       | $            | 11,929     |             | $          | (10,147        | )          | $               | 7,383,305  |       | $          | (11,817,278 | ) | $ | (4,432,191 | ) |
|                                                                 |       |                  |       |         |       |             |       |           |       |            |       |       |       |
| Issuance of shares to employees and directors for  services rendered |       | 66,800                |       | 67           |       | —           |       | 110,883        |       | —          |       | 110,950    |       |
|                                                                 |       |                  |       |         |       |             |       |           |       |            |       |       |       |
| Issuance of shares to consultant for services rendered               |       | 190,167               |       | 190          |       | —           |       | 330,769        |       | —          |       | 330,959    |       |
|                                                                 |       |                  |       |         |       |             |       |           |       |            |       |       |       |
| Stock option compensation expense                                    |       | —                |       | —       |       | —           |       | 55,706         |       | —          |       | 55,706     |       |
|                                                                 |       |                  |       |         |       |             |       |           |       |            |       |       |       |
| Treasury stock at cost                                               |       | —                |       | —       |       | (9,933           | )          | —         |       | —          |       | (9,933     | )          |
|                                                                 |       |                  |       |         |       |             |       |           |       |            |       |       |       |
| Net loss, six months ended June 30, 2007                             |       | —                |       | —       |       | —           |       | —         |       | (4,197,895      | )          | (4,197,895 | )          |
|                                                                 |       |                  |       |         |       |             |       |           |       |            |       |       |       |
| Balance, June 30, 2007                                               |       | 12,185,567            |       | $            | 12,186     |             | $          | (20,080        | )          | $               | 7,880,663  |       | $          | (16,015,173 | ) | $ | (8,142,404 | ) |

 

See notes to theconsolidated interim financial statements.

5

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTSOF CASH FLOWS (Unaudited)
| ** **                                                                     | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** |
| ** **                                                                     | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                         |       |                           |       |   |   |
| Net (loss) income                                                              |       | $                              | (4,197,895 | ) | $ | 1,341,941 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                           |       |   |   |
| Non-cash restructuring charge                                                  |       | —                         |       | 478,794 |   |
| Depreciation and amortization                                                  |       | 327,651                        |       | 353,630 |   |
| Amortization of loan discount                                                  |       | 1,223,941                      |       | 1,213,659 |   |
| Change in fair value of embedded derivative                                    |       | —                         |       | (4,347,233 | ) |
| Common stock issued for services and compensation                              |       | 441,909                        |       | 12,792 |   |
| Stock option compensation expense                                              |       | 55,706                         |       | 60,152 |   |
| Provision for doubtful accounts and reserve for  returns                       |       | 98,400                         |       | 97,570 |   |
| Loss on disposal of property and equipment                                     |       | 1,864                          |       | 80,156 |   |
| Changes in operating assets and liabilities:                                   |       |                           |       |   |   |
| (Increase) Decrease in:                                                        |       |                           |       |   |   |
| Accounts receivable                                                            |       | (1,259,887                     | )          | (2,443,955 | ) |
| Inventories                                                                    |       | 5,911,150                      |       | 876,157 |   |
| Deposit on purchase of inventories                                             |       | (38,105                        | )          | 359,509 |   |
| Prepaid expenses and other assets                                              |       | (57,233                        | )          | (174,047 | ) |
| Increase (Decrease) in:                                                        |       |                           |       |   |   |
| Accounts payable                                                               |       | (613,598                       | )          | (2,317,848 | ) |
| Accrued expenses and other liabilities                                         |       | 252,190                        |       | 101,653 |   |
| Accrued restructuring charges                                                  |       | —                         |       | 11,451 |   |
| Net cash provided by (used in) operating activities                            |       | 2,146,093                      |       | (4,295,619 | ) |
|                                                                           |       |                           |       |   |   |
| Cash flows from  investing activities:                                         |       |                           |       |   |   |
| Acquisitions of property and equipment                                         |       | (79,643                        | )          | (423,700 | ) |
| Proceeds from sale of equipment                                                |       | 34,800                         |       | 17,300 |   |
| Net cash used in investing activities                                          |       | (44,843                        | )          | (406,400 | ) |
|                                                                           |       |                           |       |   |   |
| Cash flows from  financing activities:                                         |       |                           |       |   |   |
| Proceeds from revolving line of credit                                         |       | 26,600,939                     |       | 34,968,529 |   |
| Payments on revolving line of credit                                           |       | (27,794,020                    | )          | (34,297,193 | ) |
| Proceeds from issuance of convertible debt and  warrant                        |       | —                         |       | 4,000,000 |   |
| Debt issuance costs                                                            |       | —                         |       | (156,000 | ) |
| Repayment of convertible debt                                                  |       | (400,000                       | )          | — |   |
| Proceeds from long-term debt and capital lease  obligations                    |       | 48,733                         |       | — |   |
| Payments of long-term debt and capital lease  obligations                      |       | (81,071                        | )          | (54,574 | ) |
| Purchase of Treasury stock                                                     |       | (9,933                         | )          | — |   |
| Net cash (used in) provided by financing activities                            |       | (1,635,352                     | )          | 4,460,762 |   |
|                                                                           |       |                           |       |   |   |
| Net Increase  (Decrease) in Cash                                               |       | 465,898                        |       | (241,257 | ) |
|                                                                           |       |                           |       |   |   |
| Cash, Beginning                                                                |       | 157,729                        |       | 552,042 |   |
| Cash, Ending                                                                   |       | $                              | 623,627    |   | $ | 310,785 |   |

 

See notes to theconsolidated interim financial statements.

6

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| ** **                                                        | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** |
| ** **                                                        | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Cash Paid During  the Period for:                                 |       |                           |       |   |   |
| Interest expense                                                  |       | $                              | 1,715,158  |   | $ | 1,078,327 |   |
| Income tax                                                        |       | $                              | 12,051     |   | $ | — |   |
| Non-Cash  Operating Activities:                                   |       |                           |       |   |   |
| Inventory acquired through deposit with vendor                    |       | $                              | 58,511     |   | $ | 147,237 |   |
| Non-Cash  Investing and Financing Activities:                     |       |                           |       |   |   |
| Payment of  interest expense through the issuance of common stock |       | $                              | 103,004    |   | $ | 38,925 |   |

 

See notes to theconsolidated interim financial statements.

7

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IWT TESORO CORPORATIONAND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

SIX MONTHS ENDEDJUNE 30, 2007

###### **NOTE 1.****               ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

#### ***Organization and Nature of Operations***

The consolidated financial statements include IWTTesoro Corporation and its wholly owned subsidiaries (collectively the “Company”).

IWT Tesoro Corporation “Tesoro”was incorporated in the state of Nevada on May 3, 2000.  On October 1, 2002, IWT Tesoro Corporationacquired 100% of the outstanding stock of International Wholesale Tile, Inc.(IWT) in exchange for 83% of its outstanding common stock in a transactionaccounted for as a recapitalization of IWT. A total of 9,000,000 shares ofcommon stock were issued for the acquisition. For accounting purposes, theacquisition has been treated as a capital transaction and as a recapitalizationof International Wholesale Tile, Inc. The financial statements became those ofInternational Wholesale Tile, Inc., with adjustments to reflect the changes inequity structure.

International WholesaleTile, Inc. is principally a value added reseller of ceramic floor and wallcovering products (primarily ceramic, porcelain and stone tile) to the newconstruction and remodeling industries for commercial and residentialmarketplaces. In addition to IWT, Tesoro’s primary operating subsidiary,Tesoro, has five additional wholly owned subsidiaries. The Tile Club, Inc.,formed in 2004, organized to acquire licensing, manufacturing and distributionrights; Tesoro Direct, Inc., formally known as Import Flooring Group, Inc. awholly owned subsidiary of The Tile Club formed in 2005 to develop an agencybusiness; and American Gres, Inc. formed in November 2006, organized to producedomestic ceramic tile. The remaining two, IWT Tesoro Transport, Inc. and IWTTesoro International, LTD., a Bermuda corporation are inactive.

#### ***Principles of Consolidation***

The consolidated financial statements include IWTTesoro Corporation and its wholly owned subsidiaries: International WholesaleTile, Inc., IWT Tesoro International, Ltd, IWT Tesoro Transport, Inc., AmericanGres, Inc. and The Tile Club, Inc and The Tile Club, Inc.’s wholly ownedsubsidiary Tesoro Direct, Inc., formerly known as Import Flooring Group, Inc.All significant inter-company balances and transactions have been eliminated inconsolidation.

#### ***Basis of Presentation***

The interim financial information included herein isunaudited; however, such information reflects all adjustments, which are, inthe opinion of management, necessary for a fair presentation of the Company’sfinancial position, results of operations, changes in stockholders’ deficit andcash flows for the interim periods. All such adjustments are of a normal,recurring nature. The results of operations for the first six months of theyear are not necessarily indicative of the results of operations which might beexpected for the entire year.

The accompanying consolidated financial statements of the Company havebeen prepared in accordance with accounting principles generally accepted inthe United States of America and with the instructions to Form 10-Q and Rule10-10 of Regulation S-X of the Securities and Exchange Commission. Accordinglycertain information and footnote disclosure required by accounting principlesgenerally accepted in the United States of America for complete financialstatements have been omitted. These condensed financial statements should beread in conjunction with the Company’s financial statements and notes theretoincluded in the Company’s audited financial statements on Form 10-K, for thefiscal year ended December 31, 2006.

The Consolidated Balance Sheet at December 31, 2006 has been derivedfrom the audited financial statements of IWT Tesoro Corporation at that date,but does not include all of the information and footnotes required by U.S.generally accepted accounting principles for complete financial statements.

8

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***Adoption of NewAccounting Policy***

In July 2006, the FASBissued Interpretation No. 48 (“FIN 48”), *Accounting for Uncertaintyin Income Taxes*.  FIN 48applies to all tax positions related to income taxes subject to SFAS No. 109, *Accounting for Income Taxes*. This includes tax positions considered to be “routine” as well as thosewith a high degree of uncertainty.  FIN48 utilizes a two-step approach for evaluating tax positions.  Recognition (step one) occurs when anenterprise concludes that a tax position, based solely on its technical merits,is more-likely-than-not to be sustained upon examination.  Measurement (step two) is only addressed ifstep one has been satisfied (i.e., the position is more-likely-than-not to besustained).  FIN 48 clarifies theaccounting for income taxes by prescribing the minimum recognition threshold atax position must meet before being recognized in the financialstatements.  FIN 48 also providesguidance on derecognition, measurement, classification, interest and penalties,accounting in interim periods, disclosure and transition.

Effective January 1,2007, the Company has adopted the provisions of FIN 48 and has analyzed itsfederal and significant state filing positions. The periods subject to examination for the Company’s federal returns arethe tax years 2004 through 2006.  Theperiods subject to examination for the Company’s significant state returns, arethe tax years 2004 through 2006.  TheCompany believes that its income tax filing positions and deductions will besustained on examination and does not anticipate any adjustments that willresult in a material change on its financial statements.  As a result, no reserves for uncertain incometax positions have been recorded pursuant to FIN 48 nor were there a cumulativeeffect related to adopting FIN 48 recorded.

The Company’s policy forrecording interest and penalties related to uncertain tax positions is torecord such items as part of its provision for federal and state income taxes.

There have been no other material changes to oursignificant accounting policies and estimates from the information provided inNote 1 of our Consolidated Financial Statements included in our Form 10-K forthe year ended December 31, 2006.

***Recent Accounting Pronouncements***

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements” (FAS 157). FAS 157 defines fair value, establishes theframework for measuring fair value in generally accepted accounting principalsand expands disclosures about fair value measurements. This Statement appliesonly to fair value measurements that are already required or permitted by otheraccounting standards. Accordingly, this Statement does not require any new fairvalue measurements. SFAS No. 157 is effective for fiscal years beginning afterDecember 15, 2007. The Company is currently evaluating the impact, if any theadoption of SFAS No. 157 will have on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFASNo. 158”). SFAS No. 158 requires companies to recognize in theirstatement of financial position an asset for a plan’s overfunded status or aliability for a plan’s underfunded status and to measure a plan’s assets andits obligations that determine its funded status as of the end of the company’sfiscal year. Additionally, SFAS No. 158 requires companies to recognizechanges in the funded status of a defined benefit postretirement plan in theyear that the changes occur and those changes will be reported in comprehensiveincome. SFAS No. 158 is effective for fiscal years ending after December 31,2006. The adoption of SFAS No. 158 did not have an impact on ourconsolidated financial statements.

**NOTE 2****                 LIQUIDITY ANDPROFITABILITY CONSIDERATIONS**

***Profitability***

The Company’s net loss for the three months ended June30, 2007 is approximately $2.2 million compared to a $1.5 million loss for thethree months ended June 30, 2006. The Company’s net loss for the six monthsended June 30, 2007 is approximately $4.2 million versus a $1.3 million netprofit for the six months ended June 30, 2006. The net profit of $1.3 millionfor the six months ended June, 30, 2006 included a $4.3 million gain from thechange in the fair value of a derivative.  This follows net losses of approximately $3.4 million, $4.3 million and$1.2 million for the years ended December 31, 2006, 2005 and 2004,respectively.

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 The Company’ssecond quarter 2007 loss from operations increased to $0.8 million from $0.4million in the second quarter of 2006 as a result of the lower sales.  Interest expense in the second quarter of2007 increased to $1.5 million from $1.3 million in 2006.  Loss from operations for the six months endedJune 30, 2007 increased to $1.3 million from $0.5 million for the first half of2006 as a result of the lower sales. Interest expense for the first six months of 2007 increased to $2.9million from $2.4 million in 2006 as a result of the two additional loans inFebruary and May 2006 and the non-cash amortization of the loan discounts.

Revenue in the second quarter 2007 decreased 13.4% to$14.7 million from $16.9 million in the 2006 second quarter. Revenue decreased10.6% to $29.5 million for the six months ended June 30, 2007 from $33.0million in the six months ended June 30, 2006. The overall decrease in revenueis primarily the result of the slower housing market in Florida and theSoutheast. The Company however, continues to see an increase in its sales inthe Texas region where it has only been operating for a few years and has addedtwo additional sales staff in that market to accelerate its growth there.  Overall, the building material and flooringmarket have slowed considerably in the last year as a result of the declininghousing market in Florida and the Southeast. Although the Company continues to expect long term above average growthin the housing and flooring market that it serves the Company cannot predictwhen the market will begin to improve.

Gross margin for the three months ended June 30, 2007decreased to 33.9% of net sales compared to 36.6% for the three months endedJune 30, 2006. Gross margin for the six months ended June 30, 2007 decreased to35.7% of net sales compared to 36.4% for the same six months of 2006.  The decrease in margin percentage isprimarily related to aggressively reducing inventory including the lower marginproduct lines.

Total operating expenses for the three months endedJune 30, 2007 decreased to $5.8 million from $6.0 million in the second quarter2006 which included $0.6 million of restructuring charges.  The operating expenses for the six monthsended June 30, 2007 decreased to $11.8 million from $12.0 million in the sixmonths ended June 30, 2006 which included $0.6 million of restructuringcharges. Warehouse and delivery expense increased to $5.1 million during thesix months ended June 30, 2007 from $5.0 million during the six months endedJune 30, 2006 as a result of higher freight rates, smaller orders in the cutorder business and higher warehouse expenses related to requirements to assumeadditional warehouse space in Dallas in the second half of 2006.  Administration expense increased slightlyduring the six months ended June 30, 2007 to $4.0 million from $3.9 millionduring the six months ended June 30, 2006. Sales and Marketing expense during the six months ended June 30, 2007decreased to $2.7 million from $3.0 million during the six months ended June30, 2006 as a result of lower sales.

***Cost ReductionProgram***

On June 18, 2007 the Company announced salary and costreductions totaling $1.3 million annually. As of August 1, 2007 these reductions have been implemented.  The Company has identified an additional $1.2million of potential cost reductions primarily associated with reducing thesize of its presence in some of its locations.  The Company expects that the savings associated with these additionalchanges will not commence until the first quarter of 2008. In addition, on July2, 2007, the Company implemented, a per day handling fee that is expected togenerate approximately $1 million annually to offset the increased warehousingand distribution costs.

The Company believes the recent cost reductions,including lower warehouse and administrative costs and revenue enhancementscombined with growing sales in Texas and steady sales in Florida could lead toprofitability.  In recent years theCompany has invested in additional sales personnel, warehouse and operations inCalifornia and Ohio and while these locations continue to generate increasedsales, the current revenue levels do not cover all of the locations’ operatingcosts.

***Liquidity***

As reported in theconsolidated balance sheet as of June 30, 2007, the Company had a workingcapital deficit of approximately $7.9 million, a deterioration of approximately$2.6 million from December 31, 2006 at which time a working capital deficit ofapproximately $5.3 million existed. The increase in the first half of 2007working capital deficit is a result of the decrease in inventory and theoperating loss partially offset by the reduction in short term debt. In thepast, the Company has been able to generate sufficient working capital from itscustomers, However with the slowing housing market; the Company does not havesufficient working capital from its sales. Because of 

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the Company’s highly leveraged financial position, itis having a difficult time securing additional credit from its suppliers forinventory.

As a result of therecent decline in sales and in better management of inventory ($5.9 millionreduction during the first half of 2007) the Company generated $2.1 million ofcash from operations in the first six months of 2007 versus a $4.3 million useof cash from operations in the first six months of 2006.  Inventory turns for the first six months of2007 (on an annualized basis) increased to 1.5 times versus 1.3 for the twelvemonths ended December 31, 2006. The Company also issued stock instead of cashfor approximately $0.4 million of investor related services during the firstsix months of 2007.

Several investmentbanks and financial advisors are working with the Company to try to secureadditional equity and or debt financing. As discussed in the subsequent event section, on August 15, 2007, theCompany entered into a term sheet with KMA Capital Partners, Inc., itsaffiliates and investors, to raise up to $10.0 million in Cumulative PreferredStock on a best efforts basis.  On April9, 2007 the Company entered into a definitive agreement and issuedapproximately 1.8 million restricted shares to Antares Trading Fund MercatechSA at a price to be determined.  TheCompany expected to complete the funding in May 2007 but the transaction wasdelayed and as of August 3, 2007 the shares have been recalled due to nopurchase price being delivered (see subsequent event section for additionaldetails).   On May 2, 2007 the Companyreceived an extension to June 3, 2007 from the Laurus Master Fund, LTD on theCompany’s one year $2 million note due May 3, 2007.  The Company continues to make interestpayments on all the Laurus Notes. However, the Company has not received afurther extension on the May $2.0 million note, which is currently past due.The Company expects to be able to pay the note when sufficient new longer termcapital is raised.

As more fully discussed in Note 5, the Companyreceived notice of default from its primary lender on October 25, 2006 and onNovember 2, 2006 the Company has subsequently entered into a forbearanceagreement with its primary lender. As discussed in the the subsequent eventsection, on August 9, 2007 the Company’s primary lender notifed the Companythat the revolving credit loan exceeded the borrowing base by approximately$700,000.  The Company is working withits senior lender to resolve this condition. The Company’s original three (3) year $26.5 million credit lineagreement ended in December 2006, however the bank has been extending theagreement in 90 day increments including the forbearance requirements thatcontains certain covenants requiring the Company to maintain a certain minimumadjusted EBITDA.  The current 90 dayextension expires September 10, 2007.Although we have not met our minimumadjusted EBITDA covenants management believes that the credit line will beextended for at least another 90 days.

Management believes that its continued focus onreducing costs of operations while growing sales in Texas and maintaining salesin the southeast will improve its profitability. The Company will also continueto maintain reduced inventory levels while still providing optimal customerservice. The Company is making progress toward obtaining additional financingto support its working capital needs and meet its near term debt obligationsand is exploring all options. However if the Company is unable to secureadditional financing in the next few weeks or its current lenders are unable orunwilling to provide additional operating funds, the Company may no alternativebut to file a voluntary protection petition for relief under Chapter 11 of theU.S. Bankruptcy Code.

**NOTE 3****                 INVENTORIES**

Inventoriesconsisted of the following:
|                             | ** ** | **June 30.** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                        |       |              |       |                  |       |
| Tiles                       |       | $                 | 24,083,028 |                  | $          | 30,033,507 |   |
| Inventory in  transit       |       | 1,063,046         |       | 1,166,353             |       |
|                        |       | 25,146,074        |       | 31,199,860            |       |
| Allowance for  obsolescence |       | 382,364           |       | 525,000               |       |
|                        |       | $                 | 24,763,710 |                  | $          | 30,674,860 |   |

 

Inventory in transit consists of merchandise purchased overseas, whichis not yet received in the warehouse. The Company obtains legal title at theshipping point.

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#### **NOTE 4****                 PROPERTY ANDEQUIPMENT**

Property and equipment consisted of the following:
|                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                           |       |              |       |                  |       |
| Furniture and  fixtures        |       | $                 | 319,052    |                  | $          | 318,128 |   |
| Machinery and  equipment       |       | 1,203,646         |       | 1,154,913             |       |
| Vehicles                       |       | 256,580           |       | 321,572               |       |
| Office and  computer equipment |       | 750,202           |       | 720,216               |       |
| Leasehold  improvements        |       | 888,533           |       | 888,533               |       |
|                           |       | 3,418,013         |       | 3,403,362             |       |
| Less accumulated  depreciation |       | 1,350,130         |       | 1,138,600             |       |
|                           |       | $                 | 2,067,883  |                  | $          | 2,264,762 |   |

 

Depreciation expense for the three months ended June 30, 2007 and 2006was $120,600 and $56,800, respectively and for the six months ended June 30,2007 and 2006 was approximately $239,900 and $142,200, respectively.

#### **NOTE 5****                 NOTE PAYABLE,REVOLVING LINES OF CREDIT**

***Revolving Line ofCredit***

On September 5, 2006, the Company amended and restatedthe existing revolving line of credit agreement with its senior lenderproviding up to $26,500,000 of available borrowings with interest rates ofeither (1) LIBOR plus 3.00% or (2) the base rate plus 0.50% (interest ratesranging from 8.34375% to 8.375% at June 30, 2007) payable monthly.  The line of credit is limited by a borrowingbase which is comprised of a percentage of eligible accounts receivable andeligible inventories, as defined, and is collateralized by substantially allthe assets of the Company. The balance due at June 30, 2007 and December 31,2006 was $ 23,114,301 and $24,370,278, respectively. At September 10, 2006 theCompany was not in compliance with the minimum fixed charge coverage ratio andthe minimum adjusted EBITDA covenants and received a notice of default from itsprimary lender on October 25, 2006. On November 2, 2006, the primary lender andthe Company entered into a forbearance agreement whereby the bank agreed toforbear the exercise of its rights to demand payment until December 10, 2006,provided that the Company is not in default of any of its other obligations,which it currently is not, and the Company engages a management consultant toprovide a comprehensive business analysis of the Company’s operations. TheCompany continues to operate under the November 2nd, 2006 forbearance agreement. EffectiveJune 9th, 2007, the Company entered into the Eighth Amendment to the Amendedand Restated Loan Agreement with its senior credit Facility, Bank of America,N.A.  The Eighth Amendment extends the term of its $26.5 million line ofcredit to September 10, 2007 and contains monthly minimum adjusted EBITDAcovenant. The Company was not in compliance with its monthly EBITDA covenantduring the first six months of 2007.

In November 2006, the Company entered into anunsecured revolving line of credit agreement for its newly created subsidiary AmericanGres, Inc., with its primary lender providing up to $95,000 of availableborrowings with an interest rate of 29.99% at June 30, 2007 payable monthly.The balance due at June 30, 2007 and December 31, 2006 was $77,160 and $30,100,respectively.

***Revolving Note Payable***

On August 25, 2005, the Company issued a securedconvertible revolving note in the aggregate amount of $5,000,000 resulting innet proceeds of $4,733,000 after debt issuance costs of $267,000.  Interest accrued on the principal balance ofthe note at an annual interest rate equal to prime plus 1.5%.  The note matures on August 25, 2008.  The note was convertible into common stock ofthe Company at an initial conversion rate of $2.74 per share.  Because the related 

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loan documentation contained certain non-standardanti-dilution provisions and requirements to settle any conversion option withregistered shares, the Company was required to account for the conversionoption as an embedded derivative requiring separate accounting treatment inaccordance with *SFAS No. 133 Accounting for DerivativeInstruments and Hedging Activities*. Based upon the closing price per share of the Company’s common stock onthe date of issuance, the Company estimated the fair value of the embeddedconversion option and classified $2,068,317 as a derivative liability that wasadjusted to fair value at each reporting date with changes in fair valuereported in earnings.  In connection withthe convertible notes, the Company issued to the holder of the note a five-yearwarrant to purchase 511,883 shares of the Company’s common stock at an exerciseprice of $3.15 per share and an option to purchase 1,170,110 shares of theCompany’s common stock at an exercise price of $0.001 per share.  Based upon the closing price per share of theCompany’s common stock on the date of issuance, the Company estimated the fairvalue of the warrant and option and classified $3,099,835 and $692,334,respectively, as derivative liabilities that were adjusted to fair value ateach reporting date with changes in fair value reflected in operations. Thefair values of the options, warrants, and embedded conversion option wasestimated at the date of issuance using the Black-Scholes option-pricing modelusing the following weighted average assumptions: risk-free rate of 4.06%,dividend yields of 0%, and volatility factors of the expected market price ofthe Company’s common stock of 60.79%.

On March 31, 2006, the parties entered into an amendment to certainagreements, dated August 25, 2005. As a result of the Amendment, the Company isno longer required to make any modifications to the fixed conversion price, orissue additional securities in the event the Company issues common stock at aprice less than $2.74 per share

On July 21, 2006, the Company amended and restated thesecured revolving note dated August 25, 2005 removing all conversion featuresof the original note. In addition the interest rate was modified as follows:August 25, 2006 thru July 20, 2006, annual interest rate equal to prime plus1.5%; July 21, 2006 thru August 25, 2008, annual interest rate equal to8.5%.   A secured convertible minimumborrowing note, dated August 25, 2005 was voided.  An amendment to the registration rightsagreement removed all references to the convertibility of the Secured RevolvingNote, removed all references to the secured convertible minimum borrowing noteand removed the provision for liquidating damages as a remedy in the event theCompany is unable to deliver registered shares. As a result, the provisions that required derivative liabilityclassification in accordance with *SFAS No. 133 – “Accountingfor Derivative Instruments and Hedging Activities:”*no longer exist*.*The holder of the note no longer has the right to convertany portion of principal or interest into common shares of the Company. Theregistration rights agreement was modified to remove all “uneconomical”provisions that previously resulted in the requirement to classify the warrantsand options to purchase common shares covered by the registration rightsagreement as derivative liabilities.  Asamended, the registration rights agreement does not preclude equityclassification of the warrants and options in accordance with EITF 00-19.

Therefore, the fair valueof the embedded derivative liability on July 21, 2006 in the amount of$1,646,269 was eliminated and the $1,345,640 relating to fair value of theoptions and warrants on the date of modification was recorded as additionalpaid in capital and the remaining $300,629, representing the fair value of theconversion feature was credited to operations.

The note is secured by a lien on substantially all theassets of the Company, subject to a first priority lien of the Company’sprimary financial lender.

The holder of the note had agreed that it will not convert the note, orexercise any warrant or option, into common stock in amounts that would causethe holder’s aggregate beneficial ownership of the Company’s common stock toexceed 4.99%, without 120 days prior notice, or 19.199%, without stockholderapproval.

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The balance of the note net of unamortized discountsas of June 30, 2007 and December 31, 2006 are as follows:
|                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                                         |       |              |       |                  |       |
| Principal amount  of notes                   |       | $                 | 5,000,000  |                  | $          | 5,000,000 |   |
| Fair value -  Conversion feature             |       | (1,764,629        | )          | (1,764,629            | )          |
| Fair value -  Warrants and options           |       | (3,235,371        | )          | (3,235,371            | )          |
| Accretion of  discount into interest expense |       | 3,055,536         |       | 2,222,208             |       |
| Balance, net of  unamortized discounts       |       | $                 | 3,055,536  |                  | $          | 2,222,208 |   |

 

For the three months ended June 30, 2007 and 2006, interest expenserelated to the revolving credit line amounted to $504,342 and $475,990,respectively. For the six months ended June 30, 2007 and 2006, interest expenserelated to the revolving credit line amounted to $1,009,785 and $912,063,respectively.

Interest expense related to the secured revolving notefor the three months ended June 30, 2007 and 2006 amounted to $298,544 and$118,785, respectively. Interest expense related to the secured revolving notefor the six months ended June 30, 2007 and 2006 amounted to $405,581 and$230,348, respectively.

Accretion of discounts for the conversion feature andwarrant related to the secured revolving note resulted in charges to interestexpense totaling $147,051 for both the three months ended June 30, 2007 and2006. Accretion of discounts for the conversion feature and warrant related tothe secured revolving note resulted in charges to interest expense totaling$294,102 for both the six months ended June 30, 2007 and 2006.

Accretion of discounts for the detachable warrantrelated to the secured revolving note resulted to charges to interest expensetotaling $269,613 for both three months ended June 30, 2007 and 2006. Accretionof discounts for the detachable warrant related to the secured revolving noteresulted to charges to interest expense totaling $539,226 for both six monthsended June 30, 2007 and 2006.

**NOTE6****         NOTESPAYABLE – CONVERTIBLE DEBT**

On February 10, 2006, the Company issued a securedconvertible term note in the amount of $2,000,000 resulting in net proceeds of$1,919,500.  Interest accrues on theprincipal balance of the note at an annual interest rate equal to prime plus2.0%, payable monthly in arrears commencing on March 1, 2006.  On June 30, 2007, the interest rate was10.25%.  The note requires monthlyprincipal payments of $66,667 that commenced on August 1, 2006 and continuinguntil maturity.  The note matures onFebruary 10, 2009.    The note isconvertible into common stock of the Company at a fixed conversion rate of$2.17 per share.  Based upon the closingprice per share of the Company’s common stock on the date of issuance, therewas a beneficial conversion feature with an estimated intrinsic value of$553,593, which is presented as a discount on the note to be amortized intoexpense over the three year term of the loan using the effective interestmethod.  In connection with theconvertible note, the Company issued to the holder of the note a seven-yearwarrant to purchase 460,829 shares of the Company’s common stock at an exerciseprice of $2.39 per share.  The Companyestimated the fair value of the warrant and allocated $455,943 of the proceedsof the debt to the warrant which is presented as a discount on the note to beamortized into interest expense over the three-year term of the note using theeffective interest method. The aggregate discount allocated to the beneficialconversion feature and the options and warrants was recorded as additional paidin capital at the date of issuance. The fair value of the warrant was estimatedat the date of issuance using the Black-Scholes option-pricing model using thefollowing assumptions: risk-free rate of 4.59%, dividend yields of 0%, and avolatility factor of the expected market price of the Company’s common stock of58.2%.  The Company also issued to theholder, 221,198 shares of the Company’s common stock as prepayment of interestin the amount of $486,636, which was calculated based upon the closing priceper share of the Company’s common stock on the date of issuance of $2.20 pershare. The prepaid interest is presented as a discount on the note to beamortized into interest expense over the three year term using the effectiveinterest method.

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The note is secured by a lien on substantially all theassets of the Company, subject to a first priority lien of the Company’sprimary financial lender. The holder ofthe note has agreed that it will not convert the note, or exercise any warrantor option, into common stock in amounts that would cause the holder’s aggregatebeneficial ownership of the Company’s common stock to exceed 4.99%, without 120days prior notice, or 19.199%, without stockholder approval.

The balance of the note, net of unamortized discountsas of June 30, 2007 and December 31, 2006 are as follows:
|                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                                       |       |              |       |                  |       |
| Principal amount  of notes                 |       | $                 | 1,266,666  |                  | $          | 1,666,667 |   |
| Fair value -  Conversion feature           |       | (553,593          | )          | (553,593              | )          |
| Fair value -  Warrants                     |       | (942,579          | )          | (942,579              | )          |
| Accretion of  discount to interest expense |       | 1,071,104         |       | 754,764               |       |
| Balance, net of  unamortized discounts     |       | $                 | 841,598    |                  | $          | 925,259 |   |
|                                       |       |              |       |                  |       |
| Current                                    |       | 800,007           |       | 800,007               |       |
| Non-current                                |       | 41,591            |       | 125,252               |       |
|                                       |       | $                 | 841,598    |                  | $          | 925,259 |   |

 

Interest expense related to the note for the threemonths ended June 30, 2007 and 2006 was $48,192 and $72,288, respectively.Interest expense related to the note for the six months ended June 30, 2007 and2006 was $103,003 and $111,213, respectively.

Accretion of discounts for the beneficial conversionfeature and warrant resulted in charges to interest expense totaling $54,734and $82,100 for the three months ended June 30, 2007 and 2006, respectively.Accretion of discounts for the beneficial conversion feature and warrantresulted in charges to interest expense totaling $116,986 and $127,210 for thesix months ended June 30, 2007 and 2006, respectively.

Accretion of discounts for the detachable warrantresulted to charges to interest expense totaling $45,079 and $67,619 for thethree months ended June 30, 2007 and 2006, respectively. Accretion of discountsfor the detachable warrant resulted to charges to interest expense totaling$96,350 and $104,773 for the six months ended June 30, 2007 and 2006,respectively.

**NOTE7****                 NOTESPAYABLE – OTHER**

On May 3, 2006, the Company issued a secured term notein the amount of $2,000,000 resulting in net proceeds of $1,924,500.  Interest accrues on the principal balance ofthe note at an annual interest rate equal to 15%, payable monthly in arrearscommencing on June 1, 2006. The note matured on May 3, 2007 and has beenextended to June 3, 2007.  In connectionwith the term note, the Company issued to the holder of the note a seven-yearwarrant to purchase 333,333 shares of the Company’s common stock at an exerciseprice of $1.12 per share.  The Companyestimated the fair value of the warrant and allocated $222,809 of the proceedsof the debt to the warrant, which is presented as a discount on the note to beamortized into expense over the one-year term of the note.  The fair value of the warrant was estimatedat the date of issuance using the Black-Scholes option-pricing model using thefollowing assumptions: risk-free rate of 5.06%, dividend yields of 0%, and avolatility factor of the expected market price of the Company’s common stock of59.18%.

The note is secured by a lien on substantially all theassets of the Company, subject to a first priority lien of the Company’sprimary financial lender.

#### The holder of the note hasagreed that it will not convert the note, or exercise any warrant or option,into common stock in amounts that would cause the holder’s aggregate beneficialownership of the Company’s common stock to exceed 4.99%, without 120 days priornotice, or 19.199%, without stockholder approval.

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The balance of the note as of June 30, 2007 andDecember 31, 2006, net of unamortized discounts is a follows:
|                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                                         |       |              |       |                  |       |
| Principal amount  of notes                   |       | $                 | 2,000,000  |                  | $          | 2,000,000 |   |
| Fair value -  Warrants                       |       | (222,809          | )          | (222,809              | )          |
| Accretion of  discount into interest expense |       | 222,809           |       | 148,536               |       |
| Balance, net of  unamortized discounts       |       | $                 | 2,000,000  |                  | $          | 1,925,727 |   |

 

Interest expense related to the note amounted to $75,833 and $48,444for the three months ended June 30, 2007 and 2006, respectively. Interestexpense related to the note amounted to $150,833 and $48,444 for the six monthsended June 30, 2007 and 2006, respectively.

Accretion of discounts for the detachable warrantresulted in charges to interest expense totaling $18,572 and $37,134 for thethree months ended June 30, 2007 and 2006, respectively. Accretion of discountsfor the detachable warrant resulted in charges to interest expense totaling$74,273 and $37,134 for the six months ended June 30, 2007 and 2006,respectively.

#### **NOTE 8****                 STOCKHOLDERS’EQUITY**

**Common Stock**

During the six months ended June 30, 2007, the Company issued 256,967shares of common stock to several employees and consultants under the StockIncentive Plan for services rendered, based on the closing stock price at thedate of issuance, for a total of $441,909, resulting in an equivalent charge tooperations.

On March 28, 2007, the Company signed a $2 millionmedia campaign agreement with a third party consultant. Over a three yearperiod the Company will receive $5.0 million of advertising, event planning andsponsorship, convention support and other marketing support services at thisthird party’s “rate card rates”. In return the Company issued one (1) millionshares of its common stock (875,000 restricted shares issued to Global MediaFunds and 125,000 unrestricted shares issued to an individual associated withGlobal Media Funds). The agreement has a default provision which could requirethe third party to return shares under certain conditions thus requiring theshares to be accounted for as if they had not been issued. Recognition of theshares will occur as services are rendered, at which point the Company willrecognize advertising expense and the corresponding capital based on the fairmarket value of the Company’s stock on the date the services are rendered. Theone (1) million shares issued are not included on the Company’s balance sheetor basic EPS (are included in diluted EPS to the extent they are notanti-dilutive) until the services have been rendered and recognized in theCompany’s financial statements. During the three and six months ended June 30,2007 no shares were recognized.

On April 9, 2007, the Company entered into anagreement with Antares Trading Fund Mercatech SA and issued 1,818,182 shares ata price to be determined at a later date. The funds were to be delivered within45 days of issuance and the Company may recall the shares and terminate theagreement at its discretion after the 45 days. At June 30, 2007 the Company hasnot received the purchase price under the agreement however has extended thepayment date. The shares issued are not included on the Company’s balance sheetor basic EPS (are included in diluted EPS to the extent they are notanti-dilutive) until the payment is received and recognized in the Company’sfinancial statements.

**Treasury Stock**

On June 26, 2006, theCompany’s board of directors authorized an employee stock purchase programwhereby the Company would purchase up to 150,000 shares of IWT Tesoro’s stockfor resale to employees participating in the program. During the six monthsended June 30, 2007, the Company purchased 4,479 shares of IWT Tesoro commonstock for a total cost of $9,933, at fair market value in the open market. OnMarch 17, 2007 the Company’s board of directors terminated the employee stockpurchase plan and the 10,584 shares will be retired.

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#### **NOTE9                 INCOME TAXES**

At June 30, 2007, theCompany had net operating loss carry forwards for federal income tax purposesof approximately $13,500,000 which are available to offset future federaltaxable income through 2027.

**NOTE 10               STOCK-BASED COMPENSATION**

On January 10,2007, the Company granted to non-employee members of the Board of Directors,50,000 options to purchase shares of its common stock with an exercise priceequal to the fair market value of the Company’s stock at the close of tradingon January 10, 2007. These options have a contractual life of ten years andvest 50% immediately and 50% one year after the date of grant.

The fair value ofeach option awarded is estimated on the date of grant using a Black-Scholesoption-pricing model. Expected volatilities are based on historical volatilityof the Company’s stock and historical volatility of the stock of similarcompanies, and other factors. The Company uses historical data to estimateoption exercises and employee terminations within the valuation model. Theexpected life of options granted represents the period of time that optionsgranted are expected to be outstanding. The risk-free rate for periods withinthe life of the option is based on the U.S. Treasury yield curve in effect atthe time of grant.

The following assumptions were used to calculate theCompany’s options on the date of grant during the six months ended June 30,2007 and 2006, respectively:
|                                        | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                   |       |                                             |       |   |   |
| Dividend yield                         |       | 0                                                | %          | 0 | % |
| Expected volatility                    |       | 72.2                                             | %          | 58.8 | % |
| Risk-free interest rate                |       | 4.7                                              | %          | 4.4 | % |
| Expected life of  options (in years)   |       | 5.5                                              |       | 5.5 |   |
| Weighted-average grant-date fair value |       | $                                                | 1.31       |   | $ | 1.42 |   |
|                                        |            |                                                  |            |  |  |  |  |

 

During the threemonth periods ended June 30, 2007 and 2006, the Company recognized additionalcompensation costs of $24,452 and $29,725, respectively. During the six monthperiods ended June 30, 2007 and 2006, the Company recognized additionalcompensation costs of $55,706 and $60,162, respectively.

As of June 30, 2007, there was $148,560 ofunrecognized compensation cost related to share-based payments which isexpected to be recognized over a weighted-average period of 1.17 years.

As of June 30, 2007 there were 806,082 shares grantedand 652,249 shares outstanding.

Shares available for future stock option grants toemployees and directors under the existing plan were 3,193,918 and 3,243,918,respectively, at June 30, 2007 and 2006. The aggregate intrinsic value of shares outstanding as of June 30, 2007and 2006 were $1,160,711 and $1,109,625, respectively. The aggregate intrinsicvalue of options exercisable as of June 30, 2007 and 2006 were $977,392 and$863,005, respectively.

#### **NOTE11              ****SUBSEQUENTEVENT**

On August 3, 2007 the Company notified Mercatus &Partners Limited that the 1,818,182 shares issued on April 9, 2007 were to bereturned immediately for failure to remit the purchase price within 45 days asrequired under the agreement.  IWT Tesoro’stransfer agent has initiated the process to void and cancel the issued shares.

On August 9, 2007, the Company received a letter from its Senior Lendernotifying it that there was an over advance of  approximately $700,000 asof that date.  The amount of the over advances changes on a daily basisand since that date of the notice, the Overdraft has ranged from approximately$200,000 to $800,000.  The Company is working with its Senior Lender toaddress the over advances.

On August 15, 2007, the Company entered into a Term Sheet with KMACapital Partners, Inc. its affiliates and investors whereby KMA will use itsbest efforts to purchase up to $10.0 million of Series A Convertible CumulativePreferred Stock at $5.00 per share. The coupon rate for the Series A (a) 4% foryear 1, (b) 6% for year 2, (c) 8% for year three, and (c) 10% for years 4 andthereafter.   The Series A is convertibleinto Tesoro Common Stock at $.625 per share (or eight shares of Common Stockfor each Series A).  However, if certainPerformance Criteria are not met, each share of Series A is convertible into 20shares of common stock.  Following Tesororeceiving a substantial portion of the funding, the Performance Criteriaincludes (i) satisfying certain subordinate debt on mutually agreeable terms,  (ii) sustaining sales at not less than $40million following receiving a portion of the funding, (iii) maintaining asenior credit facility, and (iv) keeping a positive net worth.  The Company makes no assurances that it willreceive any funding, based on the Term Sheet.

17

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ITEM 2:    MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The consolidated financial statements include IWTTesoro Corporation and its wholly owned subsidiaries (collectively the “Company”).

IWT Tesoro Corporation was incorporated in the stateof Nevada on May 3, 2000.  On October 1,2002, IWT Tesoro Corporation acquired 100% of the outstanding stock ofInternational Wholesale Tile, Inc. (IWT) in exchange for 83% of its outstandingcommon stock in a transaction accounted for as a recapitalization of IWT. Atotal of 9,000,000 shares of common stock were issued for the acquisition. Foraccounting purposes, the acquisition has been treated as a capital transactionand as a recapitalization of International Wholesale Tile, Inc. The financialstatements became those of International Wholesale Tile, Inc., with adjustmentsto reflect the changes in equity structure.

International Wholesale Tile, Inc. is principally avalue added reseller of ceramic floor and wall covering products (primarilyceramic, porcelain and stone tile) to the new construction and remodelingindustries for commercial and residential marketplaces. In addition to IWT,Tesoro’s primary operating subsidiary, Tesoro, has five additional wholly ownedsubsidiaries. The Tile Club, Inc., formed in 2004, organized to acquirelicensing, manufacturing and distribution rights; Tesoro Direct, Inc., formallyknown as Import Flooring Group, Inc. a wholly owned subsidiary of The Tile Clubformed in 2005 to develop an agency business; and American Gres, Inc. formed inNovember 2006, organized to produce domestic ceramic tile.  The remaining two, IWT Tesoro Transport, Inc.and IWT Tesoro International, LTD., a Bermuda corporation are inactive.

Our principal executiveoffice is located at 191 Post Road West, Suite 10, Westport, CT 06880.  Our telephone number is (203) 221-2770.  Our web site can befound at*http://www.iwttesoro.com*.   Information contained on our web site is notpart of this report.

***Profitability***

TheCompany’s net loss for the three months ended June 30, 2007 is approximately$2.2 million compared to a $1.5 million loss for the three months ended June30, 2006. The Company’s net loss for the six months ended June 30, 2007 isapproximately $4.2 million versus a $1.3 million net profit for the six monthsended June 30, 2006. The net profit of $1.3 million for the six months endedJune 30, 2006 included a $4.3 million gain from the change in the fair value ofa derivative.   This follows net lossesof approximately $3.4 million, $4.3 million and $1.2 million for the yearsended December 31, 2006, 2005 and 2004, respectively.

Revenuein the second quarter 2007 decreased 13.4% to $14.7 million from $16.9 millionin the 2006 second quarter. Revenue decreased 10.6% to $29.5 million for thesix months ended June 30, 2007 from $33.0 million in the six months ended June30, 2006. The overall decrease in revenue is primarily the result of the slowerhousing market in Florida and the Southeast. The Company however, continues tosee an increase in its sales in the Texas region where it has only beenoperating for a few years and has added two additional sales staff in thatmarket to accelerate its growth there. Overall, the building material and flooring market have slowedconsiderably in the last year as a result of the declining housing market inFlorida and the Southeast.   Although theCompany continues to expect long term above average growth in the housing andflooring market that it serves the Company cannot predict when the market willbegin to improve.

Grossmargin for the three months ended June 30, 2007 decreased to 33.9% of net salescompared to 36.6% for the three months ended June 30, 2006. Gross margin forthe six months ended June 30, 2007 decreased to 35.7% of net sales compared to36.4% for the same six months of 2006. The decrease in margin is primarily related to aggressively reducinginventory including the lower margin discontinued product lines.

***Cost Reduction Program***

OnJune 18, 2007, the Company announced salary and cost reductions totaling $1.3million annually.  As of August 1, 2007these reductions have been implemented. The Company has identified an additional $1.2 million of potential costreductions primarily associated with reducing the size of its presence in someof its locations.   The Company expectsthat the savings associated with these additional changes will not commenceuntil the first quarter of 2008. In addition, on July 2, 2007, the 

18

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Companyimplemented, a per day handling fee that is expected to generate approximately$1 million annually to offset the increased warehousing and distribution costs.

TheCompany believes the recent cost reductions, including lower warehouse andadministrative costs and revenue enhancements combined with growing sales inTexas and steady sales in Florida will leadto profitability.  In recent years theCompany has invested in additional sales personnel, warehouse and operations inCalifornia and Ohio, and while these locations continue to generate increasedsales, the current revenue levels do not cover all of the locations’ operatingcosts.

***Liquidity***

Asreflected in the consolidated balance sheet as of June 30, 2007, the Companyhad a working capital deficit of approximately $7.9 million, a deterioration ofapproximately $2.7 million from December 31, 2006 at which time a workingcapital deficit of approximately $5.3 million existed. The increase in thefirst half of 2007 working capital deficit is a result of the decrease ininventory and the operating loss partially offset by the reduction in short termdebt.  In the past, the Company has beenable to generate sufficient working capital from its customers.  However, with the slowing housing market, theCompany does not have sufficient working capital from its sales.  Because of the Company’s highly leveragedfinancial position, it is having a difficult time securing additional creditfrom its suppliers for inventory.

As a result of the recent decline in sales and bettermanagement of inventory ($5.9 million reduction during the first half of 2007)the Company generated $2.1 million of cash from operations in the first sixmonths of 2007 versus a $4.3 million use of cash from operations in the firstsix months of 2006.  Inventory turns forthe first six months of 2007 (on an annualized basis) increased to 1.5 timesversus 1.3 for the twelve months ended December 31, 2006.

Asmore fully discussed in Note 5, the Company received notice of default from itsprimary lender on October 25, 2006 and on November 2, 2006 the Company hassubsequently entered into a forbearance agreement with its primary lender. Asdiscussed in the the subsequent event section, on August 9, 2007 the Company’sprimary lender notifed the Company that the revolving credit loan exceeded theborrwing base by approximately $700,000. The Company is working with its senior lender to reduce this amount. TheCompany’s original three (3) year $26.5 million credit line agreement ended inDecember 2006 and the bank has been extending the agreement in 90 dayincrements including the forbearance requirements that contains certaincovenants requiring the Company to maintain a certain minimum adjustedEBITDA.  The current 90-day extensionexpires September 10, 2007.  Although wehave not met our minimum adjusted EBITDA covenants management believes that thecredit line will be extended for at least another 90 days.

On May2, 2007 the Company received an extension from the Laurus Master Fund, LTD onthe Company’s one year $2 million note due May 3, 2007.  The Company continues to make interestpayments on the Laurus notes however the Company has not received a furtherextension and the note is currently past due. The Company expects to be able topay the note when sufficient new longer term capital is raised

Managementbelieves that its continued focus on reducing costs of operations while growingsales in Texas and maintaining sales in the southeast will improve itsprofitability. The Company will also continue to maintain reduced inventorylevels while still providing optimal customer service. The Company has madeprogress with several investment banks and financial advisors to secureadditional equity and or debt financing. As discussed in the subsequent eventsection, on August 15, 2007, the Company entered into a term sheet with KMACapital Partners, Inc. its affiliates and investors, to raise up to $10.0million in Cumulative Preferred Stock on a best efforts basis. The Company iscommitted to obtaining additional financing to support its working capitalneeds and meet it’s near term debt obligations and is exploring all itsoptions.   However if the Company isunable to secure additional financing in the next few weeks or its currentlenders are unable or unwilling to provide additional operating funds, theCompany may have no alternative but to file a voluntary protection petition for relief under Chapter 11 of the U.S.Bankruptcy Code.

*Results of Operations for the three months ended June 30,2007, 2006 and 2005.*

The followingdiscussion and analysis should be read in conjunction with the financial statementsand notes thereto that appear elsewhere in this document. The table below setsforth certain operating data for the periods indicated. Percentages are relative to total revenue for the periods indicated.

19

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|                               | ** ** | **Results of Operations for the Quarter** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                    | ** ** | **Quarter ending June 30,**                         | ** ** |
| ** **                    | ** ** | **June 30,**                                                  | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                    | ** ** | **2007**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|                          |       |                                                               |       |   |   |   |   |
| Revenues                      |       | $                                                                  | 14,672,898 |   | $ | 16,940,815 |   | $ | 14,317,461 |   |
| Cost of Goods Sold            |       | 9,694,702                                                          |       | 10,748,471 |   | 8,602,396 |   |
| Gross Margin                  |       | 4,978,196                                                          |       | 6,192,344 |   | 5,715,065 |   |
| Gross Margin Percentage       |       | 33.93                                                              | %          | 36.55 | % | 39.92 | % |
| Operating Expenses            |       | 5,757,624                                                          |       | 6,576,878 |   | 5,257,277 |   |
|                          |       | 39.2                                                               | %          | 38.8 | % | 36.7 | % |
| Income (loss) from operations |       | $                                                                  | (779,428   | ) | $ | (384,534 | ) | $ | 457,788 |   |

 

*Quarter ended June 30, 2007 Compared to Quarter June 30,2006*

Net sales for thethree months ended June 30, 2007 decreased approximately $2,268,000 or 13.4%over the reported net sales for the three months ended June 31, 2006.Management believes that the decline in sales for the three months ended June30, 2007 was due primarily to the slowing housing market throughout the UnitedStates. The Company is selectively adding sales staff in certain regions toexpand its customer base to maintain current sales levels.

Grossmargin for the three months ended June 30, 2007 was approximately $4,978,000 or33.9% of net sales compared to $6,192,000 or 36.6% of net sales for the threemonths ended June 30, 2006. The decline in gross margin is a result ofaggressively reducing our inventory levels including the sale of discontinuedlower margin product lines.

Ouroperating expenses for the three months ended June 30, 2007 were approximately$5,758,000 or 39.2% of net sales compared to $6,577,000 or 38.8% of net salesfor the three months ended June 30, 2006. The increase in our operating expenseratio for the three months ended June 30, 2007 compared to the three monthsended June 30, 2006, was caused by fixed overhead costs that could not bereduced at a rate equal to the 13% decrease in sales.

*Results of Operations for the six ended June 30, 2007, 2006and 2005.*

The followingdiscussion and analysis should be read in conjunction with the financialstatements and notes thereto that appear elsewhere in this document. The tablebelow sets forth certain operating data for the periods indicated. Percentages are relative to total revenuefor the periods indicated.
|                               | ** ** | **Six Months Ending June 30,** | ** ** |
|-------------------------------|------------|----------------------------------------------------|------------|
| ** **                    | ** ** | **June 30,**                                  | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                    | ** ** | **2007**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|                          |       |                                               |       |   |   |   |   |
| Revenues                      |       | $                                                  | 29,473,061 |   | $ | 32,972,034 |   | $ | 27,904,510 |   |
| Cost of Goods Sold            |       | 18,957,174                                         |       | 20,966,261 |   | 17,165,389 |   |
| Gross Margin                  |       | 10,515,887                                         |       | 12,005,773 |   | 10,739,121 |   |
| Gross Margin Percentage       |       | 35.68                                              | %          | 36.41 | % | 38.49 | % |
| Operating Expenses            |       | 11,765,366                                         |       | 12,451,610 |   | 10,067,253 |   |
|                          |       | 39.9                                               | %          | 37.8 | % | 36.1 | % |
| Income (loss) from operations |       | $                                                  | (1,249,479 | ) | $ | (445,837 | ) | $ | 671,868 |   |

 

*Six Months ended June 30, 2007 Compared to the Six Monthsended June 30, 2006*

Net sales for thesix months ended June 30, 2007 decreased approximately $3,499,000 or 10.6% overthe reported net sales for the six months ended June 30, 2006. Managementbelieves that the decline in sales for the six months ended June 30, 2007 wasdue primarily to the slowing housing market throughout the United States. TheCompany is selectively adding sales staff in certain regions to expand itscustomer base to maintain current sales levels.

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Gross margin forthe six months ended June 30, 2007 was approximately $10,516,000 or 35.7% ofnet sales compared to $12,006,000 or 36.4% of net sales for the six monthsended June 30, 2006. The slight decline in gross margin is a result ofaggressively reducing our inventory levels including the sale of discontinuedlower margin product lines.

Ouroperating expenses for the six months ended June 30, 2007 were approximately$11,765,000 or 39.9% of net sales compared to $12,452,000 or 37.8% of net salesfor the six months ended June 30, 2006. The increase in our operating expenseratio for the six months ended June 30, 2007 compared to the six months endedJune 30, 2006, was caused by fixed overhead costs that could not be reduced ata rate equal to the 11% decrease in sales.

**Changesin Financial Position for the six months ended June 30, 2007 from the yearended December 31, 2006**

Current assets atJune 30, 2007 are approximately $36.8 million compared to $41.0 million atDecember 31, 2006, a decrease of approximately $4.2 million. The net decreaseis primarily attributable to a decrease in inventory of approximately $5.9million offset by an increase in accounts receivable of approximately $1.1million and an increase of cash of approximately $500,000.  The decrease in inventory relates to ourcontinued efforts to improve our inventory turnover rate and utilization ofresources.

Currentliabilities at June 30, 2007 are approximately $44.7 million compared to $46.3million at December 31, 2006, a decrease of approximately $1.6 million. Thedecrease is attributable to a decrease in accounts payable of approximately$0.6 and a decrease in our revolving line of credit of approximately $1.2million. These decreases are consistent with our decrease in inventory,improving the turnover rate and utilization of resources.

Longterm liabilities at June 30, 2007 are approximately $3.2 million compared to$2.4 million at December 31, 2006, an increase of approximately $0.8 million.The increase is due to an increase in convertible debt from the accretion ofdiscounts as more fully described in Note 5, 6 and 7 of the consolidatedfinancial statements.

# **Liquidity and Capital Resources**

We had cash balances of approximately $623,600 at June30, 2007 and $157,700 at December 31, 2006.

Thecash provided by operations during the six months ended June 30, 2007 wereapproximately $2.1 million compared to the cash used in operations of $4.3 millionfor the six months ended June, 30 2006. The $6.4 million increased inflow isprimarily attributable to a decrease in inventory.

Netcash used in investing activities during the six months ended June 30, 2007 wasapproximately $45,000 compared to $406,000 for the six months ended June 30,2006. Capital expenditures in the six months ended June 30, 2006 were higherthan normal due to the purchase of tile finishing equipment.

Netcash used in financing activities during the six months ended June 30, 2007 wasapproximately $1.6 million compared to the net cash provided of $4.5 millionduring the six months ended June 30, 2006. The approximate $6.1 million changein financing activities is attributable to no new financing arrangements in thesix months ended June 30, 2007 as compared to a $4.0 financial arrangementduring the six months ended June, 30, 2006 along with payments of approximately$1.2 million to our commercial lender in 2007.

# **Critical Accounting Policies**

Ourfinancial statements are prepared in accordance with U.S. generally acceptedaccounting principles, which require us to make estimates and assumptions aboutfuture events and their impact on amounts reported in our Financial Statementsand related Notes. Since future events and their impact cannot be determinedwith certainty, the actual results will inevitably differ from our estimates.These differences could be material to the financial statements.

Webelieve that our application of accounting policies, and the estimates that areinherently required by these policies, are reasonable. We believe thatsignificant accounting policies are described in Note 1 to the consolidatedfinancial statements included in the Company’s Annual Report on Form 10-K, forthe year ended December 31, 2006 and the FIN 48 “*Accounting for Uncertainty in Income Taxes*” policy adoptedJanuary 1, 2007, as described in Note 1 herein, may involve a higher degree ofjudgment and complexity.

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**Forward-LookingInformation**

Some statements made in this Quarterly Report on Form10-Q, are “forward-looking statements” and are not historical facts.  For example, statements regarding ourfinancial position, business strategy and other plans and objectives for futureoperations, and assumptions and predictions about future demand for ourservices and products, supply, costs, marketing and pricing factors are allforward-looking statements. When we use words like “intend,” “would”, “anticipate,”“believe,” “estimate,” “plan” or “expect” or the negative of these terms andsimilar expressions, we are making forward- looking statements.  You should be aware that these forward-lookingstatements are subject to risks and uncertainties.  Additionally, our forward-looking statementsspeak only as of the date of this report. Other than as required by law, we undertake no obligation to update orrevise these statements, whether as a result of new information, future eventsor otherwise.   New factors emerge fromtime to time that may cause our business not to develop as we expect, and it isnot possible for us to predict all of them. Factors that may cause our actual results, performance or achievementsto be materially different from the results, performance or achievementsexpressed or implied by the forward-looking statements include, among otherthings are changes in the industry, energy costs, timing and level of capitalexpenditures and introduction of new products.

**ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

**Quantitative and Qualitative Disclosures about Market Risk**

Informationabout the Company’s exposure to market risk was disclosed in its Annual Reporton Form 10-K and Form 10-K/A for the year ended December 31, 2006, which wasfiled with the Securities and Exchange Commission on April 2, 2007.  No material quantitative or qualitativechanges in market risk exposure has occurred since the date of that filing.

**ITEM 4 – CONTROLS AND PROCEDURES**

As of the end of the period covered by thisQuarterly Report on Form 10-Q, Tesoro’s management, with participationof the Company’s principal executive officer and principal financial officer,have performed an evaluation of the Company’s disclosure controls andprocedures, (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (“Exchange Act”) to ensure thatinformation required to be disclosed by Tesoro in the reports that Tesoro filesor submits under the Exchange Act is recorded, processed, summarized, andreported within the time periods specified by the SEC’s rules and forms.

Basedon that evaluation, Tesoro’s principal executive officer and principalfinancial officer have concluded that its disclosure controls and proceduresare effective in ensuring that information required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized, and reported within the time periods specifiedby the SEC’s rules and forms. At this time, management has determined thatthe Company’s current system of disclosure controls and procedures aresufficient i) to ensure that data errors, control problems, or acts of fraudare detected and ii) to confirm that appropriate corrective action, includingprocess improvements, is undertaken in a timely manner.

TheCompany is in the process of preparing its compliance with Section 404 ofSarbanes-Oxley with respect to its Internal Control Evaluation and Reportrequirements. The Company has been focusing on those aspects of its controlsthat are most salient and which it can undertake. Additionally it is focusingon controls that maintain the integrity of its financial statements. Attachedas Exhibits 31.1 and 31.2 to this Quarterly Report are certifications of theCEO and the CFO, which are required in accordance with Rule 13a-14 of theSecurities Exchange Act of 1934 (the Exchange Act). This Controls andProcedures section includes the information concerning the controls evaluationreferred to in the certifications and it should be read in conjunction with thecertifications.

**PART II**

**ITEM 1.                  LEGALPROCEEDINGS.**

We are not a partyto any material pending legal proceedings and, to the best of our knowledge, nosuch action by or against us are contemplated, threatened or expected.

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**ITEM 1/A.             RISK FACTORS**

The risk factorsare substantially the same as those included in our Annual Report of Form 10-Kand Form 10-K/A, filed with the Securities and Exchange Commission on April 2and April 3, 2007, respectively.

**ITEM 2.                  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

**UnregisteredSales.**

In connection with a $2.0 million media campaignagreement with Global Media Fund (GMF), the Company issued 875,000 shares ofits restricted stock to GMF. The sale of these securities were deemed to beexempt from registration under the Securities act in reliance on Section 4(2)of the Securities Act, or Regulation D promulgated thereafter, as transactionsby an issuer not involving a public offering. GMF represented its intention toacquire the securities for investment only and not with a view for sale in connectionwith any distribution thereof and appropriate legends were affixed to the sharecertificates and instruments issued in such transactions. The issuance of thesesecurities was made without general solicitation or advertising. GMF is anaccredited investor and had adequate access, through their relationship withthe Company, to information, including financial, about the Company. Thistransaction did not involve any underwriters, underwriting discounts orcommissions.

OnApril 9, 2007, the Company entered into an agreement with Antares Trading FundMercatech SA and issued 1,818,182 shares at a price to be determined at a laterdate. The funds were to be delivered within 45 days of issuance and the Companymay recall the shares and terminate the agreement at its discretion after the45 days. At June 30, 2007 the Company has not received the purchase price underthe agreement however has extended the payment date. The shares issued are notincluded on the Company’s balance sheet or basic EPS (are included in dilutedEPS to the extent they are not anti-dilutive) until the payment is received andrecognized in the Company’s financial statements. Subsequent to the end of thequarter, Tesoro notified all parties that the certificate representing theshares is to be returned immediately to our transfer agent. Additionally,Tesoro has informed its transfer agent that the certificate representing theseshares is to be voided and canceled.

**IWTTPurchases of Equity Securities**

On June 17, 2006,Tesoro’s board of directors authorized a stock repurchase program of up to150,000 shares of Tesoro stock in open market transactions. Subject to certainconditions, the shares are expected to be purchased through 2006 under Rules10b5-1 and 10b18 under the Securities Act of 1934, as amended. A number of theshares described below were purchased outside those rules, but within thepurview of Tesoro’s Insider Trading Policy. Depending upon prevailing marketconditions and other factors, there can be no assurance that any or all authorizedshares will be purchased pursuant to the plan. Tesoro may terminate the stockrepurchase plan at any time.

In the firstquarter 2007, we repurchased approximately 4,500 shares of IWTT common stock.Since inception of our stock repurchase program in June 2006, we haverepurchased approximately 10,600 shares of IWTT common stock. On March 17, 2007the Company’s board of directors terminated the employee stock purchase plan.Shares repurchased during the first six months of 2007 are as follows:
|                        | ** ** | ** **                             | ** ** | ** **                                | ** ** | ** **                        | ** ** | **(d) Maximum Number**           | ** ** |
|------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | ** **                             | ** ** | ** **                                | ** ** | **(c)Total Number of**  | ** ** | **(or Approximate**                   | ** ** |
| ** **             | ** ** | ** **                             | ** ** | ** **                                | ** ** | **Shares purchased as** | ** ** | **Dollar Value) of Shares** | ** ** |
| ** **             | ** ** | ** **                             | ** ** | ** **                                | ** ** | **Part of Publicly**    | ** ** | **that May Yet Be**         | ** ** |
| ** **             | ** ** | **(a) Total Number of** | ** ** | **(b) Average Price Paid** | ** ** | **Announced Plans or**  | ** ** | **Purchased Under the**          | ** ** |
| **Period**             | ** ** | **Shares Purchased**              | ** ** | **per Share**                        | ** ** | **Programs**                      | ** ** | **Plans or Program**             | ** ** |
| January 1 - 31,  2007  |       | 115                                    |       | 2.10                                      |       | 115                               |       | 143,780                                    |       |
| February 1 - 29,  2007 |       | 3,510                                  |       | 2.25                                      |       | 3,510                             |       | 140,270                                    |       |
| March 1 - 31,  2007    |       | 854                                    |       | 1.54                                      |       | 854                               |       | 139,416                                    |       |
| April 1 - 30,  2007    |       | —                                 |       | —                                    |       | —                            |       | 139,416                                    |       |
| May 1 - 31, 2007       |       | —                                 |       | —                                    |       | —                            |       | 139,416                                    |       |
| June 1 - 30,  2007     |       | —                                 |       | —                                    |       | —                            |       | 139,416                                    |       |
| Total                  |       | 4,479                                  |       | 1.96                                      |       | 4,479                             |       | 139,416                                    |       |

 

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**ITEM 3.  DEFAULTSUPON SENIOR SECURITIES.**

On October 25, 2006, IWTTesoro Corporation and its subsidiaries received a letter from its seniorcredit facility, Bank of America, N.A. stating that certain events of defaulthad occurred and are continuing under its credit facility agreements includingthat the Company did not attain its minimum EBITDA for the months ended August2006 and September 2006, nor did the Company reach its minimum fixed chargecoverage ratio for the period ended September 30, 2006. On November 2, 2006 theCompany and Bank of America executed a forbearance agreement, whereby the Bankagreed to forbear the exercise of its rights to December 10, 2006 provided (i)that the Company is not in default of any of its other obligations, and (ii)the Company engages a management consultant to provide a comprehensive businessanalysis of the Company’s operations. Effective June 9, 2007, the Company entered into the Eighth Amendment tothe Amended and Restated Loan Agreement with its senior credit Facility, Bankof America, N.A.  The Eighth Amendment extends the term of its $26.5million line of credit to September 10, 2007 and contains monthly minimumadjusted EBITDA covenant. The Company was not in compliance with its monthlyEBITDA covenant during the six months ended June 30, 2007.

**ITEM 4.                  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

On June 9, 2007, the 2007 IWT Tesoro StockholdersMeeting was held at 10:00 in Hutchinson Island, Florida.  No votes were solicited from the Stockholdersbecause a majority of the holders, representing 66.2%, had previously approvedthe following two proposals as of April 24, 2007, the record date.  The proposals were effective as of June 17,2007:

1.                                       Toelect the slate of nine Directors proposed by our Nominating and GovernanceCommittee to serve until Tesoro’s next annual Stockholders Meeting;

2.                                       Toratify the selection of McGladrey & Pullen, LLP to act as our IndependentRegistered Public Accounting firm.

The slate of Directors elected included the followingindividuals, all of whom served as Directors for the previous year(s):

Henry J. Boucher, Jr.

Paul F. Boucher

Forrest P. Jordan

Grey Perna

Carl G. Anderson,, Jr.

James R. Edwards

Joseph A Equale

Robert B. Rogers

Allen G. Rosenberg

A copyof Tesoro’s Information Statement, along with its Form 10-K/A for the yearended December 31, 2006, were sent to all stockholders of record as of April24, 2007, the record date.

**ITEM 6:                 EXHIBITS**

(a)       **Exhibits**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                        |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Articles of Incorporation (filed as an  Exhibit to the Company’s Form 10-SB, filed with the Securities and  Exchange Commission on August 7, 2000) |

 

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| 3.1.1 |   | Articles of Amendment to Articles of Incorporation  dated September 23, 2002 (filed as an Exhibit to the Company’s  Report on Form 8-K, filed with the Securities and Exchange Commission on  October 1, 2002)                                                                                                                                                     |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2.2 |   | Amended and Restated Bylaws (filed as an  Exhibit to the Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on February 4, 2003)                                                                                                                                                                                                          |
| 3.3.2 |   | Audit Committee Charter (filed as an Exhibit to  the Company’s Report on Form 8-K, filed with the Securities and Exchange  Commission on February 4, 2003)                                                                                                                                                                                                              |
| 3.3.3 |   | Compensation Committee Charter (filed as an  Exhibit to the Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on February 4, 2003)                                                                                                                                                                                                       |
| 3.3.4 |   | Nominating And Governing Committee Charter (filed as  an Exhibit to the Company’s Report on Form 8-K, filed with the  Securities and Exchange Commission on February 4, 2003)                                                                                                                                                                                           |
| 3.4.1 |   | Code of Ethics for Senior Financial Officers (filed  as an Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                                                                                                            |
| 4.1.1 |   | Form of Warrant Agreement (filed as an  Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                                                                                                                          |
| 4.1.2 |   | Form of Stock Certificate (filed as an  Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                                                                                                                          |
| 10.3  |   | 2001 Ponca Acquisition Corporation Stock Incentive  Plan. (filed as an Exhibit to the Company’s Report on Form 8-K,  filed with the Securities and Exchange Commission on September 11, 2002)                                                                                                                                                                           |
| 10.4  |   | Employment Agreement Between Ponca Acquisition  Corporation And Henry Jr. Boucher, Jr. Dated As Of December 29,  2002 (filed as an Exhibit to the Company’s Report on Form 8-K,  filed with the Securities and Exchange Commission on September 11, 2002)                                                                                                     |
| 10.5  |   | Memorandum Of Understanding Between Ponca  Acquisition Corporation And The Stockholders Of International Wholesale  Tile, Inc. (filed as an Exhibit to the Company’s Report on  Form 8-K, filed with the Securities and Exchange Commission on  September 11, 2002)                                                                                                |
| 10.6  |   | Stock Purchase Agreement Among The Stockholders Of  International Wholesale Tile, Inc., and Ponca Acquisition Corporation  effective October 1, 2002 (filed as an Exhibit on Form 8-K,  filed with the Securities and Exhibit Commission on October 15,  2002).                                                                                               |
| 10.9  |   | Form of Indemnity Agreement (filed as an  Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on April 11, 2003)                                                                                                                                                                                                        |
| 10.10 |   | Employment Agreement between International Wholesale  Tile, Inc. and David W. Whitwell (exhibits omitted) (filed as an  Exhibit to the Company’s Registration Statement, filed with the  Securities and Exchange Commission on May 21, 2003)                                                                                                                            |
| 10.11 |   | Employment Agreement between International Wholesale  Tile, Inc. and Paul F. Boucher (this document is omitted as it is  substantially similar to David W. Whitwell’s Employment Agreement with the  exception of the employee’s name and address)                                                                                                                           |
| 10.12 |   | Employment Agreement between International Wholesale  Tile, Inc. and Grey Perna (this document is omitted as it is  substantially similar to David W. Whitwell’s Employment Agreement with the  exception of the employee’s name and address)                                                                                                                                |
| 10.13 |   | Subordination Agreement between Congress Financial  Corporation (Florida). and David W. Whitwell (filed as an Exhibit to the  Company’s Registration Statement, filed with the Securities and Exchange  Commission on May 21, 2003)                                                                                                                                          |
| 10.14 |   | Subordination Agreement between Congress Financial  Corporation (Florida). and Paul F. Boucher (this document is omitted as it is  substantially similar to David W. Whitwell’s Subordination Agreement with the  exception of the employee’s name and address)                                                                                                                   |
| 10.15 |   | Subordination Agreement between Congress Financial  Corporation (Florida). and Grey Perna (this document is omitted as it is  substantially similar to David W. Whitwell’s Subordination Agreement with the  exception of the employee’s name and address)                                                                                                                        |
| 10.16 |   | Amended and Restated Loan and Security Agreement  between by and between Fleet Capital Corporation, IWT Tesoro Corporation and  International Wholesale Tile, Inc. effective December 31, 2004  (filed as an Exhibit to the Company Annual Report on Form 10-K,  filed with the Securities and Exchange Commission on April 15, 2005).                             |
| 10.17 |   | Form of Security  Agreement dated as of August 25, 2005, by and between IWT Tesoro  Corporation and International Wholesale Tile, Inc., on the one hand, and  Laurus Master Fund Ltd., on the other hand (without exhibits). (filed as an  exhibit to the Company’s Report on Form 8-K filed with the Securities  and Exchange Commission on August 25, 2005) |
| 10.18 |   | Form of Secured  Term Note, dated as of August 25, 2005, by Tesoro and IWT in favor of  Laurus Master Fund, Ltd. (filed as an exhibit to the Company’s Report on  Form 8-K filed with the Securities and Exchange Commission on  August 25, 2005)                                                                                                                  |
| 10.19 |   | Form of Subsidiary Guaranty, dated as of  August 25, 2005, by the Tesoro’s subsidiaries in favor of Laurus Master Fund (filed as an exhibit to  the Company’s Report on Form 8-K filed with the Securities and Exchange  Commission on August 25, 2005)                                                                                                       |

 

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| 10.20 |   | Form of Common Stock Purchase Warrant, by  Tesoro in favor of Laurus Master Fund., Ltd. dated August 25, 2005  (filed as an exhibit to the Company’s Report on Form 8-K filed with the  Securities and Exchange Commission on August 25, 2005)                                                                                                                              |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.21 |   | Form of Funds Escrow Agreement dated  August 25, 2005 (filed as an exhibit to the Company’s Report on  Form 8-K filed with the Securities and Exchange Commission on  August 25, 2005)                                                                                                                                                                                      |
| 10.23 |   | Minimum Borrowing Note in favor of Laurus date  August 25, 2005 (filed as an exhibit to the Company registration  statement on Form S-1, filed with the Securities and Exchange Commission  on September 21, 2005)                                                                                                                                                                    |
| 10.24 |   | Option Agreement to Laurus dated August 25,  2005 (filed as an exhibit to the Company registration statement on  Form S-1, filed with the Securities and Exchange Commission on  September 21, 2005)                                                                                                                                                                                  |
| 10.26 |   | Form of Securities Purchase Agreement dated as  of February 10, 2006, between IWT Tesoro Corporation and Laurus Master  Fund Ltd. (without exhibits) (filed as an exhibit to the Company periodic  report on Form 8-K, filed with the Securities and Exchange Commission on  February 14, 2006).                                                                                 |
| 10.27 |   | Form of Secured Term Note dated as of  February 10, 2006, in favor of Laurus Master Fund Ltd. (filed as an  exhibit to the Company periodic report on Form 8-K, filed with the  Securities and Exchange Commission on February 14, 2006).                                                                                                                                        |
| 10.28 |   | Form of Common Stock Purchase Warrant, by  Tesoro in favor of Laurus Master Fund, Ltd., dated as of February 10,  2006, (filed as an exhibit to the Company periodic report on Form 8-K,  filed with the Securities and Exchange Commission on February 14, 2006).                                                                                                               |
| 10.29 |   | Form of Registration Rights Agreement dated as  of February 10, 2006, between IWT Tesoro Corporation and Laurus Master  Fund Ltd. (filed as an exhibit to the Company periodic report on  Form 8-K, filed with the Securities and Exchange Commission on  February 14, 2006).                                                                                                    |
| 10.30 |   | Ratification and Reaffirmation Agreement by IWT  Tesoro Corporation and each of its subsidiaries dated February 10, 2006,  (filed as an exhibit to the Company periodic report on Form 8-K, filed  with the Securities and Exchange Commission on February 14, 2006).                                                                                                                 |
| 10.31 |   | Form of Registration Rights Agreement dated as  of August 25, 2005, by and between IWT Tesoro Corporation one hand, and  Laurus Master Fund Ltd., as amended December 9, 2005, and as further  amended on April 15, 2006 (filed as an exhibit to the Company’s periodic  report on Form 8-K/A, filed with the Securities and Exchange Commission  on May 8, 2006) |
| 10.32 |   | Amended and Restated Registration Rights Agreement  dated May 3, 2006 between IWT Tesoro Corporation and Laurus Master  Funds, Ltd. (filed as an exhibit to the Company’s periodic report on  Form 8-K, filed with the Securities and Exchange Commission on  May 8, 2006).                                                                                                      |
| 10.33 |   | Form of Securities Purchase Agreement dated  May 3, 2006 between Tesoro and Laurus Master Fund dated May 3, 2006  (filed as an exhibit to the Company’s periodic report on Form 8-K, filed  with the Securities and Exchange Commission on May 9, 2006).                                                                                                               |
| 10.34 |   | Form of Common Stock Purchase Warrant by Tesoro  in favor of Laurus Master Funds., Ltd. (filed as an exhibit to the Company’s  periodic report on Form 8-K, filed with the Securities and Exchange  Commission on May 9, 2006).                                                                                                                                                  |
| 10.35 |   | Amended and Restated Registration Rights Agreement  dated May 3, 2006 between IWT Tesoro Corporation and Laurus Master  Funds, Ltd. (filed as an exhibit to the Company’s periodic report on  Form 8-K, filed with the Securities and Exchange Commission on  May 9, 2006).                                                                                                      |
| 10.36 |   | Reaffirmation and Ratification Agreement dated  May 3, 2006 by Tesoro and its subsidiaries (filed as an exhibit to the  Company’s periodic report on Form 8-K, filed with the Securities and  Exchange Commission on May 9, 2006).                                                                                                                                               |
| 10.37 |   | Second Amended and Restated Senior Subordination  Agreement between Laurus Master Fund, Ltd. and Bank of America, N.A dated  May 3, 2006 (filed as an exhibit to the Company’s periodic report on  Form 8-K, filed with the Securities and Exchange Commission on  May 9, 2006).                                                                                                 |
| 10.38 |   | Amendment dated as of March 31, 2006 to the August  25, 2006 $3.0 million Minimum Borrowing Note (filed as an exhibit to the  Company’s periodic filing on Form 8-K, filed with the Securities and Exchange  Commission on May 9, 2006)                                                                                                                                                         |
| 10.39 |   | Amended and Restated Securities Agreement effective  July 21, 2006 (filed as an exhibit to the Company’s periodic filing on Form  8-K, filed with the Securities and Exchange Commission on August 21, 2006).                                                                                                                                                                                   |
| 10.40 |   | Amended and Restated $5.0 million revolving note  effective August 25, 2005, as amended and restated from time to time (filed  as an exhibit to the Company’s periodic filing on Form 8-K, filed with the  Securities and Exchange Commission on August 21, 2006).                                                                                                                              |
| 10.41 |   | Amended and Amended and Restated Registration Rights  Agreement dated July 21, 2006 (filed as an exhibit to the Company’s periodic  filing on Form 8-K, filed with the Securities and Exchange Commission on  August 21, 2006).                                                                                                                                                                 |
| 10.42 |   | Fifth Amendment to the Amended and Restated Loan and  Security Agreement dated as of September 5, 2006 (filed as an exhibit to the  Company’s periodic filing on Form 8-K, filed with the Securities and Exchange  Commission on September 6, 2006).                                                                                                                                            |

 

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| 10.43 |   | Form of Amended and Restated Credit Note in the  principal amount $26.5 million dated as of September 5, 2006 (filed as an  exhibit to the Company’s periodic filing on Form 8-K, filed with the  Securities and Exchange Commission on September 5, 2006).                  |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.44 |   | Form of Forbearance Agreement between Bank of  America and Tesoro, dated December 2, 2006 (filed as an exhibit to the  Company’s periodic filing on Form 8-K, filed with the Securities and Exchange  Commission on December 3, 2006).                                       |
| 10.45 |   | Form of Project Development and Management Agreement  dated November 20, 2006 (filed as an exhibit to the Company’s periodic filing  on Form 8-K, filed with the Securities and Exchange Commission on November  21, 2006).                                                  |
| 10.46 |   | Form of Amended and Restated Loan Agreement with  Bank of America and the Revolving Line of Credit, each dated December 10,  2006 filed as an exhibit to the Company’s periodic filing on Form 8-K, (filed  with the Securities and Exchange Commission on January 8, 2007). |
| 10.47 |   | Form of Employment Agreement between David W.  Whitwell and Tesoro dated January 2, 2007 (filed as an exhibit to the  Company’s periodic filing on Form 8-K, (filed with the Securities and  Exchange Commission on January 8, 2007).                                        |
| 10.48 |   | Form of Amended and Restated Loan Agreement with  Bank of America and the Revolving Line of Credit, each dated March 10, 2007  filed as an exhibit to the Company’s periodic filing on Form 8-K, (filed with  the Securities and Exchange Commission on March 12, 2007).     |
| 10.49 |   | Form of Securities Purchase Agreement with Global  Media Fund, Inc., dated March 26, 2007 (filed as an exhibit to the Company’s  periodic filing on Form 8-K, filed with the Securities and Exchange  Commission on April 4, 2007).                                          |
| 10.50 |   | Form of Proposal/Memorandum of Understanding with  Mercatus & Partners, Limited, dated April 9, 2007 (filed as an exhibit to  the Company’s periodic filing on Form 8-K, filed with the Securities and  Exchange Commission on April 12, 2007).                          |
| 10.51 |   | Form of Amended and Restated Loan Agreement with  Bank of America and the Revolving Line of Credit, each dated June 9, 2007  filed as an exhibit to the Company’s periodic filing on Form 8-K, (filed with  the Securities and Exchange Commission on June 8, 2007).         |
| 10.52 |   | Form of Term Sheet between IWT Tesoro Corporation  and KMA Capital Partners, Inc. dated August 15, 2007 (Exhibits omitted), (filed  as an exhibit to the Company’s periodic filing on Form 8-K, filed with the  Securities and Exchange Commission on August 16, 2007).      |
| 16    |   | Letter from Kantor Sewell & Oppenheimer,  P.A., concurring with statements concerning their resignation (filed as an  exhibit to the Company Report on Form 8-K filed with the Securities and  Exchange Commission on September 14, 2004).                     |
| 21    |   | Subsidiaries of Registrant (filed as an  Exhibit to the Company registration statement on Form S-1, filed  with the Securities and Exchange Commission on September 21, 2005                                                                                       |
| 31.1  |   | Certification of Henry J. Boucher, Jr., Chief Executive  Officer pursuant to Section 302 of the Sarbanes-Oxley Act.*                                                                                                                                                    |
| 31.2  |   | Certification of David W. Whitwell, Chief Financial  Officer pursuant to Section 302 of the Sarbanes-Oxley Act.*                                                                                                                                                             |
| 32.1  |   | Certification of Henry J. Boucher, Jr., Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*                                                                                                                                                    |
| 32.2  |   | Certification of David W. Whitwell, Chief Financial  Officer pursuant to Section 906 of the Sarbanes-Oxley Act.*                                                                                                                                                             |

 

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| * |   | Included in this filing. Exhibits are available without  charge, upon request of IWT Tesoro. |
|---|--------|----------------------------------------------------------------------------------------------|

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|                 | IWT TESORO CORPORATION                     |
|-----------------|--------------------------------------------|
|            |                                       |
|            |                                       |
| August 16, 2007 | /s/ Henry J. Boucher, Jr.                  |   |
|            | Henry J. Boucher, Jr., President           |
|            |                                       |
| August 16, 2007 | /s/ David W. Whitwell                      |   |
|            | David W. Whitwell, Chief Financial Officer |

 

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