**UNITED STATESSECURITIES 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 MARCH 31, 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)

xYes                oNo

Indicate thenumber of shares outstanding of each of the issuer’s class of common equity, asof May 2, 2007: 14,958,749 shares

 

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**IWT TESORO CORPORATION AND SUBSIDIARIESFORM 10-QFor the three months ended March 31, 2007INDEX**
| **PART I**   | ** ** | **FINANCIAL  INFORMATION**                                                                       | ** ** | ** ** |
|--------------|------------|--------------------------------------------------------------------------------------------------|------------|------------|
| ** **   | ** ** | ** **                                                                                       | ** ** | ** ** |
| Item 1.      |       | Financial Statements                                                                             |       | 3          |
|         |       | Consolidated  Balance Sheets as of March 31, 2007 and December 31, 2006                          |       | 3          |
|         |       | Consolidated  Statements of Operations for the three months ended March 31, 2007 and 2006        |       | 4          |
|         |       | Consolidated  Statements of Stockholders’ Deficit for the three months ended March 31, 2007 |       | 5          |
|         |       | Consolidated Statements of Cash Flows for the three  months ended March 31, 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                                      |       | 20         |
| Item 4.      |       | Controls and  Procedures                                                                         |       | 20         |
|         |       |                                                                                             |       |       |
|         |       |                                                                                             |       |       |
| **PART  II** | ** ** | **OTHER  INFORMATION**                                                                           | ** ** | ** ** |
| ** **   |       |                                                                                             |       |       |
| Item 1.      |       | Legal Proceedings                                                                                |       | 20         |
| Item  1/A.   |       | Risk  Factors                                                                                    |       | 20         |
| Item 2.      |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                     |       | 21         |
| Item 3.      |       | Default  Upon Senior Securities.                                                                 |       | 21         |
| Item 4.      | ** ** | Submission  of Matters to a vote of Security Holders                                             |       | 21         |
| Item 6.      | ** ** | Exhibits                                                                                         |       | 21         |

 

2

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PART 1– FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS

**IWTTESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS
| ** **                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                        | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| ASSETS                                                                                                            |       |               |       |                  |       |
| Current Assets:                                                                                                   |       |               |       |                  |       |
| Cash                                                                                                              |       | $                  | 337,484    |                  | $          | 157,729 |   |
| Accounts  receivable, net of allowance for doubtful accounts and returns of $440,687  and $477,674, respectively  |       | 10,667,524         |       | 9,780,039             |       |
| Inventories, net  of allowance for obsolescence of $435,502 and $525,000, respectively                            |       | 28,415,914         |       | 30,674,860            |       |
| Deposit on purchases  of inventories                                                                              |       | 84,626             |       | 167,693               |       |
| Prepaid expenses                                                                                                  |       | 298,571            |       | 210,345               |       |
| Total current  assets                                                                                             |       | 39,804,119         |       | 40,990,666            |       |
|                                                                                                              |       |               |       |                  |       |
| Property and Equipment,  net                                                                                      |       | 2,174,721          |       | 2,264,762             |       |
|                                                                                                              |       |               |       |                  |       |
| Other Assets                                                                                                      |       | 982,095            |       | 1,016,250             |       |
| Total assets                                                                                                      |       | $                  | 42,960,935 |                  | $          | 44,271,678 |   |
|                                                                                                              |       |               |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                        |       |               |       |                  |       |
|                                                                                                              |       |               |       |                  |       |
| Current Liabilities:                                                                                              |       |               |       |                  |       |
| Accounts payable                                                                                                  |       | $                  | 16,648,386 |                  | $          | 17,014,921 |   |
| Accrued expenses  and other liabilities                                                                           |       | 2,071,504          |       | 2,040,593             |       |
| Current portion  of equipment leases                                                                              |       | 40,155             |       | 55,889                |       |
| Current portion  of equipment notes                                                                               |       | 22,797             |       | 30,499                |       |
| Note payable,  revolving line of credit                                                                           |       | 24,608,195         |       | 24,400,378            |       |
| Current portion  of convertible debt                                                                              |       | 800,007            |       | 800,007               |       |
| Note payable,  other (net of discounts of $18,572 and $74,273, respectively)                                      |       | 1,981,428          |       | 1,925,727             |       |
| Total current  liabilities                                                                                        |       | 46,172,472         |       | 46,268,014            |       |
|                                                                                                              |       |               |       |                  |       |
| Long-Term Debt:                                                                                                   |       |               |       |                  |       |
| Capital leases,  equipment, net of current portion                                                                |       | 41,119             |       | 41,098                |       |
| Notes payable,  equipment, net of current portion                                                                 |       | 47,283             |       | 47,297                |       |
| Note payable, revolving  line of credit (net of discounts of $2,361,128 and $2,777,792, respectively)             |       | 2,638,872          |       | 2,222,208             |       |
| Convertible  debt, net of current portion (net of discounts of $573,073 and $741,408,  respectively)              |       | 93,587             |       | 125,252               |       |
| Total long-term  debt                                                                                             |       | 2,820,861          |       | 2,435,855             |       |
| Total  liabilities                                                                                                |       | 48,993,333         |       | 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; 12,103,067 and 11,928,600  issued and outstanding |       | 12,104             |       | 11,929                |       |
| Additional paid  in capital                                                                                       |       | 7,740,567          |       | 7,383,305             |       |
| Accumulated  deficit                                                                                              |       | (13,764,989        | )          | (11,817,278           | )          |
|                                                                                                              |       | (6,012,318         | )          | (4,422,044            | )          |
| Treasury stock,  10,584 and 6,105 shares at cost, respectively                                                    |       | (20,080            | )          | (10,147               | )          |
| Total  stockholders’ deficit                                                                                 |       | (6,032,398         | )          | (4,432,191            | )          |
|                                                                                                              |       | $                  | 42,960,935 |                  | $          | 44,271,678 |   |

 

See notes to theconsolidated interim financial statements.

3

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
| ** **                                   | ** ** | **The three months ended** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **March 31,**                        | ** ** |
| ** **                                   | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
|                                         |       |                                      |       |   |   |
| Net Sales                                    |       | $                                         | 14,800,163 |   | $ | 16,031,219 |   |
| Cost of Goods  Sold                          |       | 9,262,472                                 |       | 10,217,790 |   |
| Gross Profit                                 |       | 5,537,691                                 |       | 5,813,429 |   |
| Operating  Expenses:                         |       |                                      |       |   |   |
| Warehouse and distribution                   |       | 2,569,692                                 |       | 2,354,354 |   |
| Sales and marketing                          |       | 1,337,051                                 |       | 1,536,730 |   |
| General and administrative                   |       | 2,100,999                                 |       | 1,983,648 |   |
|                                         |       | 6,007,742                                 |       | 5,874,732 |   |
| Loss from  Operations                        |       | (470,051                                  | )          | (61,303 | ) |
| Other Income  (Expense):                     |       |                                      |       |   |   |
| Interest expense                             |       | (1,470,647                                | )          | (1,081,376 | ) |
| Change in fair value of derivative           |       | —                                    |       | 4,023,103 |   |
| Other                                        |       | (3,962                                    | )          | (30,282 | ) |
|                                         |       | (1,474,609                                | )          | 2,911,445 |   |
| Income (Loss)  Before Income Taxes           |       | (1,944,660                                | )          | 2,850,142 |   |
|                                         |       |                                      |       |   |   |
| Income Tax  Expense                          |       | 3,051                                     |       | — |   |
| Net Income  (Loss)                           |       | $                                         | (1,947,711 | ) | $ | 2,850,142 |   |
| Earnings (Loss)  Per Share:                  |       |                                      |       |   |   |
| Basic                                        |       | $                                         | (0.16      | ) | $ | 0.24 |   |
| Diluted                                      |       | $                                         | (0.16      | ) | $ | 0.22 |   |
|                                         |       |                                      |       |   |   |
| Weighted Average  Common Shares Outstanding: |       |                                      |       |   |   |
| Basic                                        |       | 11,929,500                                |       | 11,731,856 |   |
| Diluted                                      |       | 11,929,500                                |       | 12,901,966 |   |

 

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 |       | 51,800                |       | 52           |       | —           |       | 103,548        |       | —          |       | 103,600    |       |
| Issuance of shares to consultant for services rendered               |       | 122,667               |       | 123          |       | —           |       | 222,460        |       | —          |       | 222,583    |       |
| Stock option compensation expense                                    |       | —                |       | —       |       | —           |       | 31,254         |       | —          |       | 31,254     |       |
| Treasury stock at cost                                               |       | —                |       | —       |       | (9,933           | )          | —         |       | —          |       | (9,933     | )          |
| Net loss, three months ended March 31, 2007                          |       | —                |       | —       |       | —           |       | —         |       | (1,947,711      | )          | (1,947,711 | )          |
| Balance, March 31, 2007                                              |       | 12,103,067            |       | $            | 12,104     |             | $          | (20,080        | )          | $               | 7,740,567  |       | $          | (13,764,989 | ) | $ | (6,032,398 | ) |

 

See notes to theconsolidated interim financial statements.

5

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTSOF CASH FLOWS(Unaudited)
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| ** **                                                                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                         |       |                             |       |   |   |
| Net (loss) income                                                              |       | $                                | (1,947,711 | ) | $ | 2,850,142 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                  |       | 169,445                          |       | 155,648 |   |
| Amortization of loan discount                                                  |       | 640,700                          |       | 525,373 |   |
| Change in fair value of embedded derivative                                    |       | —                           |       | (4,023,103 | ) |
| Common stock issued for services and compensation                              |       | 326,183                          |       | 11,500 |   |
| Stock option compensation expense                                              |       | 31,254                           |       | 30,437 |   |
| Provision for doubtful accounts and reserve for  returns                       |       | 49,200                           |       | 79,060 |   |
| Provision for obsolete inventory                                               |       | (89,498                          | )          | — |   |
| Loss on disposal of property and equipment                                     |       | —                           |       | 11,161 |   |
| Changes in operating assets and liabilities:                                   |       |                             |       |   |   |
| (Increase) Decrease in:                                                        |       |                             |       |   |   |
| Accounts receivable                                                            |       | (936,685                         | )          | (2,094,553 | ) |
| Inventories                                                                    |       | 2,348,444                        |       | 781,206 |   |
| Deposit on purchase of inventories                                             |       | 83,067                           |       | 74,052 |   |
| Prepaid expenses and other assets                                              |       | (104,259                         | )          | (144,191 | ) |
| Increase (Decrease) in:                                                        |       |                             |       |   |   |
| Accounts payable                                                               |       | (366,535                         | )          | (1,428,990 | ) |
| Accrued expenses and other liabilities                                         |       | 43,045                           |       | (68,461 | ) |
| Net cash provided by (used in) operating activities                            |       | 246,650                          |       | (3,240,719 | ) |
|                                                                           |       |                             |       |   |   |
| Cash flows from  investing activities:                                         |       |                             |       |   |   |
| Acquisitions of property and equipment                                         |       | (29,216                          | )          | (364,005 | ) |
| Proceeds from sale of equipment                                                |       | —                           |       | 5,300 |   |
| Net cash used in investing activities                                          |       | (29,216                          | )          | (358,705 | ) |
|                                                                           |       |                             |       |   |   |
| Cash flows from  financing activities:                                         |       |                             |       |   |   |
| Proceeds from revolving line of credit                                         |       | 13,905,097                       |       | 17,625,018 |   |
| Payments on revolving line of credit                                           |       | (13,709,414                      | )          | (16,347,768 | ) |
| Proceeds from issuance of convertible debt and  warrant                        |       | —                           |       | 2,000,000 |   |
| Debt issuance costs                                                            |       | —                           |       | (80,500 | ) |
| Repayment of convertible debt                                                  |       | (200,000                         | )          | — |   |
| Payments of long-term debt and capital lease  obligations                      |       | (23,429                          | )          | (30,512 | ) |
| Tresury stock                                                                  |       | (9,933                           | )          | — |   |
| Net cash (used in) provided by financing activities                            |       | (37,679                          | )          | 3,166,238 |   |
|                                                                           |       |                             |       |   |   |
| Net Increase  (Decrease) in Cash                                               |       | 179,755                          |       | (433,186 | ) |
|                                                                           |       |                             |       |   |   |
| Cash, Beginning                                                                |       | 157,729                          |       | 522,042 |   |
| Cash, Ending                                                                   |       | $                                | 337,484    |   | $ | 118,856 |   |

 

See notes to theconsolidated interim financial statements.

6

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| ** **                                                        | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                        | ** ** | **March 31,**     | ** ** | **March 31,** | ** ** |
| ** **                                                        | ** ** | **2007**               | ** ** | **2006** | ** ** |
| Cash Paid During  the Period for:                                 |       |                   |       |   |   |
| Interest expense                                                  |       | $                      | 829,947    |   | $ | 556,004 |   |
| Income tax                                                        |       | $                      | 3,051      |   | $ | — |   |
| Non-Cash  Operating Activities:                                   |       |                   |       |   |   |
| Inventory acquired through deposit with vendor                    |       | $                      | 55,858     |   | $ | 48,215 |   |
| Non-Cash  Investing and Financing Activities:                     |       |                   |       |   |   |
| Payment of  interest expense through the issuance of common stock |       | $                      | 54,812     |   | $ | 38,925 |   |

 

See notes to theconsolidated interim financial statements.

7

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IWT TESORO CORPORATIONAND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

THREE MONTHS ENDEDMARCH 31, 2007

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

#### ***Organization and Nature ofOperations***

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. These include IWT TesoroTransport, a USDOT licensed common carrier; IWT Tesoro International, LTD., aBermuda corporation to act as a holding company for foreign operations; TheTile Club, Inc., formed in 2004, organized to acquire licensing, manufacturingand distribution rights; Tesoro Direct, Inc., formally known as Import FlooringGroup, Inc. a wholly owned subsidiary of The Tile Club formed in 2005 todevelop an agency business; and American Gres, Inc. formed in November 2006,organized to produce domestic ceramic tile.

#### ***Principles ofConsolidation***

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, recurringnature. The results of operations for the first three months of the year arenot necessarily indicative of the results of operations which might be expectedfor 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 will resultin a material change on its financial statements.  As a result, no reserves for uncertain incometax positions have been recorded pursuant to FIN 48 nor was 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 afterDecember 31, 2006. The adoption of SFAS No. 158 did not have animpact on our consolidated financial statements.

9

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**NOTE 2                 LIQUIDITY AND PROFITABILITYCONSIDERATIONS**

***Profitability***

The Company’s net loss for the three months endedMarch 31, 2007 is approximately $1,948,000 compared to a $2,850,000 profit forthe three months ended March 31, 2006. This follows net losses of approximately$3,439,000, $4,344,000 and $1,209,000 for the years ended December 31, 2006,2005 and 2004, respectively. The net loss for the year ended December 31, 2006was reduced by a $4.6 million gain from the change in the fair value of aderivative in the first quarter of 2006. Also included in the 2006 loss was a $2.3 million loss from the restructuredoperations of the IFG subsidiary and $2.6 million of non-cash loan discountamortization expense.  For the firstquarter of 2007 the loss from operations increased to $470,000 versus $61,000in the first quarter of 2006 as a result of the lower sales in the firstquarter 2007.  Interest expense in thefirst quarter of 2007 increased to $1,471,000 from $1,081,000 in 2006 as aresult of the two additional loans in February and May 2006 and the non-cashamortization of the loan discounts.

Overall revenue in the first quarter 2007 decreased7.7% to $14,800,000 from $16,031,000 in the 2006 first quarter.  The decrease in revenue is primarily theresult of the slower housing market in Florida and the southeast. On thepositive side, the Company is seeing sales growth in the Texas region and hasadded two additional sales staff in that area to accelerate its growth in thatmarket. Gross margin for the three months ended March 31, 2007 increased to37.4% of net sales compared to 36.3% for the three months ended March 31, 2006.The Company has instituted a 6% price increase in fourth quarter 2006 on amajority of its products in order to cover higher shipping and import costs.

The operating expenses for the three months endedMarch 31, 2007 increased a total of $133,000 to $6,008,000 versus $5,875,000 inthe first quarter 2006.  Warehouse anddelivery expense increased $216,000 to $2,570,000 versus $2,354,000 in thefirst quarter 2006 as a result of higher freight rates, smaller orders in thecut order business and a continued shift to more in the truck loadbusiness.  The increase in higherwarehouse expenses is also due to the Company’s obligation to assume additionalwarehouse space in Dallas in the second half of 2006.  Administration expense increased slightly inthe first quarter 2007 to $2,101,000 versus $1,984,000 in the first quarter2006.  Sales and Marketing expensedecreased $200,000 to $1,337,000 from $1,537,000 in the first quarter 2007 as aresult of lower sales.

The Company believes that it needs to continue tofocus on growing sales and leveraging its fixed warehouse and administrativecosts while still keeping its inventory levels lower (thus increasing inventoryturns) to increase its profitability.  Inrecent years the Company has invested in additional sales personnel, warehouseand operations in Texas, California and Ohio and while these locations continueto generate increased sales, the current revenue levels do not cover all of thelocations’ operating costs.

***Liquidity***

As reflected in the consolidated balance sheet as ofMarch 31, 2007, the Company had a working capital deficit of approximately$6,368,000, a deterioration of approximately $1,091,000 from December 31, 2006at which time a working capital deficit of approximately $5,277,000 existed.The increase in the first quarter working capital deficit is a result of theoperating loss.

As a result of the recentslowing sales growth and better management of inventory ($2.3 million reductionachieved during the first quarter of 2007) the Company generated $247,000 ofcash from operations in the first quarter of 2007 versus a $3,241,000 use ofcash from operations in the first quarter of 2006.  Inventory turns for the first quarter of 2007(on an annualized basis) remained unchanged from the 1.3 for the twelve monthsended December 31, 2006. The Company also was able to issue stock instead ofcash for approximately $223,000 of investor related services.

10

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The Company has several investment banks and financial advisors workingwith the Company to secure additional equity and or debt financing.  On April 9, 2007 the Company entered into adefinitive agreement and issued approximately 1.8 million restricted shares toAntares Trading Fund Mercatech SA at a price to be determined.  The Company expects to complete the fundingin May 2007.   On May 2, 2007 the Companyreceived an extension from the Laurus Master Fund, LTD on the Company’s oneyear $2 million note due May 3, 2007. The Company expects to be able to pay the note with new longer termcapital.

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. The Company’s original three (3) year $26.5million credit line agreement ended in December 2006 and the bank has beenextending the agreement in 90 day increments including the forbearancerequirements that contains certain covenants requiring the Company to maintaina certain minimum adjusted EBITDA.  Thecurrent 90 day extension expires June 10, 2007. Although we have not met ourminimum adjusted EBITDA covenants management believes that the credit line willbe extended for at least another 90 days.

Management believes that its continued focus on salesgrowth in Texas and California while maintaining margins and leveragingoperating costs will improve its profitability. The Company will also continueto maintain reduced inventory levels while still providing optimal customerservice. The Company is committed to identifying and obtaining additionalfinancing to grow its business and meet it’s near term debt obligations.

**NOTE 3                 INVENTORIES**

Inventoriesconsisted of the following:
|                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                        |       |               |       |                  |       |
| Tiles                       |       | $                  | 27,045,184 |                  | $          | 30,033,507 |   |
| Inventory in  transit       |       | 1,806,232          |       | 1,166,353             |       |
|                        |       | 28,851,416         |       | 31,199,860            |       |
| Allowance for  obsolescence |       | 435,502            |       | 525,000               |       |
|                        |       | $                  | 28,415,914 |                  | $          | 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.

11

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#### **NOTE 4                 PROPERTYAND EQUIPMENT**

Property and equipment consisted of the following:
|                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                           |       |               |       |                  |       |
| Furniture and  fixtures        |       | $                  | 319,052    |                  | $          | 318,128 |   |
| Machinery and  equipment       |       | 1,154,913          |       | 1,154,913             |       |
| Vehicles                       |       | 321,572            |       | 321,572               |       |
| Office and  computer equipment |       | 748,508            |       | 720,216               |       |
| Leasehold  improvements        |       | 888,533            |       | 888,533               |       |
|                           |       | 3,432,578          |       | 3,403,362             |       |
| Less accumulated  depreciation |       | 1,257,857          |       | 1,138,600             |       |
|                           |       | $                  | 2,174,721  |                  | $          | 2,264,762 |   |

 

Depreciation expense for the three months ended March 31, 2007 and 2006was approximately $119,300 and $85,400, respectively.

#### **NOTE 5                 NOTEPAYABLE, 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 rate of8.375% at March 31, 2007) payable monthly. The line of credit is limited by a borrowing base which is comprised ofa percentage of eligible accounts receivable and eligible inventories, asdefined, and is collateralized by substantially all the assets of the Company.The balance due at March 31, 2007 and December 31, 2006 was $ 24,549,431 and$24,370,278, respectively. At September 10, 2006 the Company was not incompliance with the minimum fixed charge coverage ratio and the minimumadjusted EBITDA covenants and received a notice of default from its primarylender on October 25, 2006. On November 2, 2006, the primary lender and theCompany entered into a forbearance agreement whereby the bank agreed to forbearthe exercise of its rights to demand payment until December 10, 2006, providedthat the Company is not in default of any of its other obligations, which itcurrently is not, and the Company engages a management consultant to provide acomprehensive business analysis of the Company’s operations. The Companycontinues to operate under the November 2nd, 2006 forbearance agreement. EffectiveMarch 10, 2007, the Company entered into the Seventh Amendment to the Amendedand Restated Loan Agreement with its senior credit Facility, Bank of America,N.A.  The Seventh Amendment extends the term of its $26.5 million line ofcredit to June 10, 2007 and contains monthly minimum adjusted EBITDA covenant.The Company was not in compliance with its monthly EBITDA covenant during thefirst quarter of 2007.

In November 2006, the Company entered into anunsecured revolving line of credit agreement for its newly created subsidiaryAmerican Gres, Inc., with its primary lender providing up to $95,000 ofavailable borrowings with interest rates ranging from 11.24% to 13.24% at March31, 2007 payable monthly. The balance due at March 31, 2007 was $58,764.

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***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 loan documentationcontained certain non-standard anti-dilution provisions and requirements to settleany conversion option with registered shares, the Company was required toaccount for the conversion option as an embedded derivative requiring separateaccounting treatment in accordance with *SFAS No. 133 Accountingfor Derivative Instruments and Hedging Activities*.  Based upon the closing price per share of theCompany’s common stock on the date of issuance, the Company estimated the fairvalue of the embedded conversion option and classified $2,068,317 as aderivative liability that was adjusted to fair value at each reporting datewith changes in fair value reported in earnings.  In connection with the convertible notes, theCompany issued to the holder of the note a five-year warrant to purchase511,883 shares of the Company’s common stock at an exercise price of $3.15 pershare and an option to purchase 1,170,110 shares of the Company’s common stockat an exercise price of $0.001 per share. 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 warrant andoption and classified $3,099,835 and $692,334, respectively, as derivativeliabilities that were adjusted to fair value at each reporting date withchanges in fair value reflected in operations. The fair values of the options,warrants, and embedded conversion option was estimated at the date of issuanceusing the Black-Scholes option-pricing model using the following weightedaverage assumptions: risk-free rate of 4.06%, dividend yields of 0%, andvolatility factors of the expected market price of the Company’s common stockof 60.79%.

On March 31, 2006, the Company issued 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” provisionsthat previously resulted in the requirement to classify the warrants andoptions to purchase common shares covered by the registration rights agreementas derivative liabilities.  As amended,the registration rights agreement does not preclude equity classification ofthe 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 the optionsand warrants on the date of modification was recorded as additional paid incapital 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 notehad agreed that it will not convert the note, or exercise any warrant oroption, 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.

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The balance of the note net of unamortized discountsas of March 31, 2007 and December 31, 2006 are as follows:
|                                              | ** ** | **March 31,** | ** ** | **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 |       | 2,638,872          |       | 2,222,208             |       |
| Balance, net of  unamortized discounts       |       | $                  | 2,638,872  |                  | $          | 2,222,208 |   |

 

For the three months ended March 31, 2007 and 2006, interest expenserelated to the revolving credit line amounted to $505,443 and $436,073,respectively.

Interest expense related to the secured revolving notefor the three months ended March 31, 2007 and 2006 amounted to $107,037 and$111,563, 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 March 31, 2007 and2006.

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 March 31, 2007 and 2006.

**NOTE6         NOTES PAYABLE – 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 March 31, 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.

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.

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The balance of the note, net of unamortized discountsas of March 31, 2007 and December 31, 2006 are as follows:
|                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                                       |       |               |       |                  |       |
| Principal amount  of notes                 |       | $                  | 1,466,667  |                  | $          | 1,666,667 |   |
| Fair value -  Conversion feature           |       | (553,593           | )          | (553,593              | )          |
| Fair value -  Warrants                     |       | (942,579           | )          | (942,579              | )          |
| Accretion of  discount to interest expense |       | 923,099            |       | 754,764               |       |
| Balance, net of  unamortized discounts     |       | $                  | 893,594    |                  | $          | 925,259 |   |
| Current                                    |       | 800,007            |       | 800,007               |       |
| Non-current                                |       | 93,587             |       | 125,252               |       |
|                                       |       | $                  | 893,594    |                  | $          | 925,259 |   |

 

Interest expense related to the note for the threemonths ended March 31, 2007 and 2006 was $54,812 and $38,925, respectively.

Accretion of discounts for the beneficial conversionfeature and warrant resulted in charges to interest expense totaling $62,252and $45,110 for the three months ended March 31, 2007 and 2006, respectively.

Accretion of discounts for the detachable warrantresulted to charges to interest expense totaling $51,271 and $37,154 for thethree months ended March 31, 2007 and 2006, respectively.

**NOTE7                 NOTES PAYABLE – 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 been extendedto June 3, 2007.  In connection with theterm note, the Company issued to the holder of the note a seven-year warrant topurchase 333,333 shares of the Company’s common stock at an exercise price of$1.12 per share.  The Company estimatedthe fair value of the warrant and allocated $222,809 of the proceeds of thedebt 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 has agreed that it will notconvert the note, or exercise any warrant or option, into common stock in amountsthat would cause the holder’s aggregate beneficial ownership of the Company’scommon stock to exceed 4.99%, without 120 days prior notice, or 19.199%,without stockholder approval.

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The balance of the note as of March 31, 2007 andDecember 31, 2006, net of unamortized discounts is a follows:
|                                              | ** ** | **March 31,** | ** ** | **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 |       | 204,237            |       | 148,536               |       |
| Balance, net of  unamortized discounts       |       | $                  | 1,981,428  |                  | $          | 1,925,727 |   |

 

Interest expense related to the note amounted to $75,000 for the threemonths ended March 31, 2007.

Accretion of discounts for the detachable warrantresulted in charges to interest expense totaling $55,701 for the three monthsended March 31, 2007.

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

**Common Stock**

During the three months ended March 31, 2007, the Company issued174,467 shares of common stock to several employees and consultants under theStock Incentive Plan for services rendered, based on the closing stock price atthe date of issuance, for a total of $326,183, resulting in an equivalentcharge to operations.

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.

**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 three monthsended March 31, 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, 2007the Company’s board of directors terminated the employee stock purchase planand the 10,584 shares will be retired.

#### **NOTE 9                 INCOMETAXES**

At March 31, 2007, the Company had net operating losscarry forwards for federal income tax purposes of approximately $11,500,000which are available to offset future federal taxable income through 2027.

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**NOTE 10               STOCK-BASED COMPENSATION**

On January 10, 2007, theCompany granted to non-employee members of the Board of Directors, 50,000options to purchase shares of its common stock with an exercise price equal tothe fair market value of the Company’s stock at the close of trading on January10, 2007. These options have a contractual life of ten years and vest 50%immediately and 50% one year after the date of grant.

The fair value of eachoption 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 three months ended March 31,2007 and 2006, respectively:
|                                         | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **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 three monthperiods ended March 31, 2007 and 2006, the Company recognized additionalcompensation costs of $31,254 and $30,437, respectively.

As of March 31, 2007, there was $187,200 ofunrecognized compensation cost related to share-based payments which isexpected to be recognized over a weighted-average period of 1.38 years.

As of March 31, 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 March 31, 2007 and 2006. The aggregate intrinsic value of shares outstanding as of March 31, 2007and 2006 were $1,175,211 and $1,109,625, respectively. The aggregate intrinsicvalue of options exercisable as of March 31, 2007 and 2006 were $984,682 and$863,005, respectively.

#### **NOTE 11              ****SUBSEQUENTEVENT**

On April 9, 2007, theCompany entered into a Securities Purchase Agreement with Mercatus &Partners Limited (Antares) in which we agreed to issue an aggregate of1,818,182 shares to Antares based on a discounted market price as of the dateof closing. The Company delivered the shares to a custodian financialinstitution on April 11, 2007 and Mercatus agrees to pay the purchase pricewithin 45 days. Upon receipt of the payment for the shares the Company will issuea warrant to purchase 181,812 shares of common stock at $.001 per share toMercatus. If the purchase price is not received within 45 days the Company atits discretion can demand recall of the shares, issue a stop transfer order onthe sale and delivery of any of the shares, and terminate the agreement.

On May 2, 2007, theCompany entered into an agreement with Laurus Master Funds LTD to extend thematurity date of the $2.0 million term note due on May 3rd, 2007, as more fullydescribed in Note 7 of the Company’s Consolidated Financial Statements, to June 3, 2007.

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

The consolidatedfinancial statements include IWT Tesoro Corporation and its wholly ownedsubsidiaries (collectively the “Company”).

IWT TesoroCorporation 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.

InternationalWholesale Tile, Inc. is principally a value added reseller of ceramic floor andwall covering 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. These include IWT TesoroTransport, a USDOT licensed common carrier; IWT Tesoro International, LTD., aBermuda corporation to act as a holding company for foreign operations; TheTile Club, Inc., formed in 2004, organized to acquire licensing, manufacturingand distribution rights; Tesoro Direct, Inc., formally known as Import FlooringGroup, Inc. a wholly owned subsidiary of The Tile Club formed in 2005 todevelop an agency business; and American Gres, Inc. formed in November 2006,organized to produce domestic ceramic tile.

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.

*Results of Operations for the Quarters ended March 31, 2007,2006 and 2005.*

The following discussionand analysis should be read in conjunction with the financial statements andnotes 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.
|                                | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                           |       |                                                 |       |   |   |   |   |
| Revenues                       |       | $                                                    | 14,800,163 |   | $ | 16,031,219 |   | $ | 13,692,978 |   |
| Cost of Goods  Sold            |       | 9,262,472                                            |       | 10,217,790 |   | 8,562,993 |   |
| Gross Margin                   |       | 5,537,691                                            |       | 5,813,429 |   | 5,129,985 |   |
| Gross Margin  Percentage       |       | 37.42                                                | %          | 36.26 | % | 37.46 | % |
| Operating  Expenses            |       | $                                                    | 6,007,742  |   | $ | 5,874,732 |   | $ | 4,895,825 |   |
|                           |       | 40.6                                                 | %          | 36.6 | % | 35.8 | % |
| Income (Loss) from  operations |       | (470,051                                             | )          | (61,303 | ) | 234,160 |   |

 

*Quarterended March 31, 2007 Compared to Quarter March 31, 2006*

Net sales for the threemonths ended March 31, 2007 decreased approximately $1,231,000 or 7.7% over thereported net sales for the three months ended March 31, 2006. Managementbelieves that the decline in sales for the three months ended March 31, 2007was due primarily to the slowing housing market in Florida and the southeast.The Company is continuing its growth strategy by continuing to add sales staffin various regions.

Gross profit forthe three months ended March 31, 2007 was approximately $5,538,000 or 37.4% ofnet sales compared to $5,813,000 or 36.3% of net sales for the three monthsended March 31, 2006. Gross profit has improved as a result of our 6% salesprice increase implemented in the fourth quarter of 2006 and the restructuredoperations of the former Import Flooring Group subsidiary now know as TesoroDirect, Inc. The Company expects to maintain a gross profit sales ratio ofapproximately 36% to 38% in the future.

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Our operatingexpenses for the three months ended March 31, 2007 were approximately$6,008,000 or 40.6% of net sales compared to $5,875,000 or 36.6% of net salesfor the three months ended March 31, 2006. The increase in our operatingexpense ratio for the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006, was caused by higher freight rates and additionalwarehouse costs in Dallas.

**Changesin Financial Position for the three months ended March 31, 2007 from the yearended December 31, 2006**

Current assets at March31, 2007 are approximately $40.0 million compared to $41.0 million at December31, 2006, a decrease of approximately $1.0 million. The net decrease isprimarily attributable to a decrease in inventory of approximately $2.3 millionoffset by an increase in accounts receivable of approximately $.9 million.  The decrease in inventory relates to ourcontinued efforts to improve our inventory turnover rate and utilization ofresources.

Currentliabilities at March 31, 2007 are approximately $46.2 million compared to $46.3million at December 31, 2006, a decrease of approximately $0.1 million. Thedecrease is attributable to a decrease in accounts payable of approximately$0.4 million offset by an increase in our revolving line of credit ofapproximately $0.2 million. These changes are consistent with our ability tofund our growth through continuing operations.

Long term liabilitiesat March 31, 2007 are approximately $2.8 million compared to $2.4 million atDecember 31, 2006, an increase of approximately $0.4 million. The increase isdue to an increase in convertible debt from the accretion of discounts as morefully described in Note 5, 6 and 7 of the consolidated financial statements.

# **Liquidity and Capital Resources**

We had cash balances of approximately $337,500 atMarch 31, 2007 and $157,700 at December 31, 2006.

The cash providedby operations during the quarter ended March 31, 2007 were approximately $0.2million compared to the cash used in operations of $3.2 million for the quarterended March, 31 2006. The increased inflow was primarily attributable to adecrease in inventory from approximately $30.7 million at the beginning of 2007to $28.4 million at March 31, 2007.

Net cash used ininvesting activities during the quarter ended March 31, 2006 was approximately$29,000 compared to $359,000 for the quarter ended March 31, 2006. Capitalexpenditures in the first quarter of 2006 were higher than normal due to thepurchase of tile finishing equipment to enhance our breadth of productsoffered.

Net cash used infinancing activities during the quarter ended March 31, 2007 was approximately$38,000 compared to the net cash provided of $3.2 million during the quarterended March 31, 2006. The approximate $3.2 million change in financingactivities is attributable to no new financing arrangements in the firstquarter of 2007 as compared to a $2.0 financial arrangement in the firstquarter of 2006 along with increase borrowings of approximately $1.3 millionthrough our commercial lender.

# **Critical Accounting Policies**

Our financialstatements are prepared in accordance with U.S. generally accepted accountingprinciples, which require us to make estimates and assumptions about futureevents and their impact on amounts reported in our Financial Statements andrelated Notes. Since future events and their impact cannot be determined withcertainty, the actual results will inevitably differ from our estimates. Thesedifferences could be material to the financial statements.

We believe thatour application of accounting policies, and the estimates that are inherentlyrequired by these policies, are reasonable. We believe that significant accountingpolicies are described in Note 1 to the consolidated financial statementsincluded in the Company’s Annual Report on Form 10-K, for the year endedDecember 31, 2006 and the FIN 48 “*Accountingfor Uncertainty in Income Taxes*” policy adopted January 1, 2007, asdescribed in Note 1 herein, may involve a higher degree of judgment andcomplexity.

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**Forward-LookingInformation**

Some statements made in this Quarterly Report on Form 10-Q, are “forward-lookingstatements” and are not historical facts. For example, statements regarding our financial position, businessstrategy and other plans and objectives for future operations, and assumptionsand predictions about future demand for our services and products, supply,costs, marketing and pricing factors are all forward-looking statements.When we use words like “intend,” “would”, “anticipate,” “believe,” “estimate,” “plan”or “expect” or the negative of these terms and similar expressions, we aremaking forward- looking statements. You should be aware that these forward-looking statements aresubject to risks and uncertainties. Additionally, our forward-looking statements speak only as of the dateof this report.  Other than as requiredby law, we undertake no obligation to update or revise these statements, whetheras a result of new information, future events or otherwise.   New factors emerge from time to time thatmay cause our business not to develop as we expect, and it is not possible forus to predict all of them.  Factors thatmay cause our actual results, performance or achievements to be materiallydifferent from the results, performance or achievements expressed or implied bythe forward-looking statements include, among other things are changes inthe industry, energy costs, timing and level of capital expenditures andintroduction of new products.

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

**Quantitative and QualitativeDisclosures about Market Risk**

Information about theCompany’s exposure to market risk was disclosed in its Annual Report on Form10-K and Form 10-K/A for the year ended December 31, 2006, which was filed withthe Securities and Exchange Commission on April 2, 2007.  No material quantitative or qualitativechanges in market risk exposure has occurred since the date of that filings

**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 principal financialofficer have concluded that its disclosure controls and procedures areeffective in ensuring that information required to be disclosed by the Companyin the reports that it files or submits under the Exchange Act is recorded,processed, summarized, and reported within the time periods specified by theSEC’s rules and forms. At this time, management has determined that theCompany’s current system of disclosure controls and procedures are sufficienti) to ensure that data errors, control problems, or acts of fraud are detectedand ii) to confirm that appropriate corrective action, including processimprovements, is undertaken in a timely manner.

Attached as Exhibits31.1 and 31.2 to this Quarterly Report are certifications of the CEO and theCFO, which are required in accordance with Rule 13a-14 of the SecuritiesExchange Act of 1934 (the Exchange Act). This Controls and Procedures sectionincludes the information concerning the controls evaluation referred to in thecertifications and it should be read in conjunction with the certifications.

**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.

**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.

20

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

**UnregisteredSales.**

In connection with a $2.0 million media campaign agreement withGlobalMedia Fund (GMF), the Company issued 875,000 shares of its restrictedstock to GMF. The sale of these securities were deemed to be exempt fromregistration under the Securities act in reliance on Section 4(2) of theSecurities Act, or Regulation D promulgated thereafter, as transactions by anissuer not involving a public offering. GMF represented its intention toacquire the securities for investment only and not with a view for sale inconnection with any distribution thereof and appropriate legends were affixedto the share certificates and instruments issued in such transactions. Theissuance of these securities were made without general solicitation oradvertising. GMF is an accredited investor and had adequate access, throughtheir relationship with the Company, to information, including financial, aboutthe Company. This transaction did not involve any underwriters, underwriting discountsor commissions.

**IWTTPurchases of Equity Securities**

On June 17, 2006, Tesoro’sboard of directors authorized a stock repurchase program of up to 150,000shares 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 allauthorized shares will be purchased pursuant to the plan. Tesoro may terminatethe stock repurchase plan at any time.

In the first quarter2007, we repurchased approximately 4,500 shares of IWTT common stock. Sinceinception of our stock repurchase program in June 2006, we have repurchasedapproximately 10,600 shares of IWTT common stock. On March 17, 2007 the Company’sboard of directors terminated the employee stock purchase plan. Our sharerepurchases for the first quarter 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**  | ** ** | **Pruchased 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                                    |       |
| Total                  |       | 4,479                                  |       | 1.96                                      |       | 4,479                             |       | 139,416                                    |       |

 

**ITEM 3.                  DEFAULTSUPON SENIOR SECURITIES.**

On October 25, 2006, IWT Tesoro Corporation and itssubsidiaries received a letter from its senior credit facility, Bank ofAmerica, N.A. stating that certain events of default had occurred and arecontinuing under its credit facility agreements including that the Company didnot attain its minimum EBITDA for the months ended August 2006 and September2006, nor did the Company reach its minimum fixed charge coverage ratio for theperiod ended September 30, 2006. On November 2, 2006 the Company and Bank ofAmerica executed a forbearance agreement, whereby the Bank agreed to forbearthe exercise of its rights to December 10, 2006 provided (i) that the Companyis not in default of any of its other obligations, and (ii) the Company engagesa management consultant to provide a comprehensive business analysis of theCompany’s operations.  Effective March10, 2007, the Company entered into the Seventh Amendment to the Amended andRestated Loan Agreement with its senior credit Facility, Bank of America,N.A.  The Seventh Amendment extends the term of its $26.5 million line ofcredit to June 10, 2007 and contains monthly minimum adjusted EBITDA covenant.The Company was not in compliance with its monthly EBITDA covenant during thefirst quarter of 2007.

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

None

**ITEM 6:                 EXHIBITS AND REPORTS ON FORM 10-Q**

 

(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)                                                                  |
| 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)                                                      |

 

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| 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)                                                                                                       |
| 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)                                                                                                                     |

 

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| 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 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).                          |
| 10.50 |   | 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).                                          |
| 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. |
|---|--------|----------------------------------------------------------------------------------------------|

 

(b)   Reports on Form 8-K

Form 8-K, filed on January 8, 2007, with respect to a press release regarding the appointment of David Whitwell as its new Chief Financial Officer.

Form 8-K/A filed on January 8, 2007,  filing the form of employment agreement with David Whitwell.

Form 8-K/A, filed on January 8, 2007 with respect to the 6th amendment to the credit facility with Bank of America.

Form 8-K, filed on February 21, 2007, with respect to a press release regarding subsidiary International Wholesale Tile’s record sales.

Form 8-K, filed on March 12, 2007, with respect to the 7th amended to the credit facility with Bank of America.

24

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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                     |
|--------------|--------------------------------------------|
|         |                                       |
|         |                                       |
| May14, 2007  | /s/ Henry J. Boucher, Jr.                  |   |
|         | Henry J. Boucher, Jr., President           |
|         |                                       |
| May 14, 2007 | /s/ David W. Whitwell                      |   |
|         | David W. Whitwell, Chief Financial Officer |

 

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