** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q-A**

 

| **(Mark One)**                                         |
|--------------------------------------------------------|
| **ý**                                             | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                   |   |   |
| **FOR THE QUARTERLY PERIOD ENDED SEPTEMBER  30, 2005** |
|                                                   |   |   |
| **o**                                                  | ** ** | **TRANSITION REPORT UNDER SECTION  13 OR 15(d) OF THE EXCHANGE ACT** |

 

**Commission File No. 0-31267**

 

**IWT TESORO CORPORATION**

(Exact name of registrant asspecified 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 mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days:

o Yes                 ý No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.

 

| Large Accelerated Filer  o |   | Accelerated  Filer  o |   | Non-Accelerated  Filer  ý |
|--------------------------------------|--------|---------------------------------|--------|------------------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act)

o Yes                 ý No

 

Statethe number of shares outstanding of each of the issuer’s class of commonequity, as of May 10, 2006 11,926,900 shares

 

 

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**IWT TESORO CORPORATION AND SUBSIDIARIES**

**FORM 10-Q**

**For the Nine months Ended September 30, 2005**

**INDEX**

 
| **PART I**   |       | **FINANCIAL INFORMATION**                                                                                                                                                            | ** ** |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **   |       | ** **                                                                                                                                                                           | ** ** |
| Item  I.     |       | Financial  Statements                                                                                                                                                                |       |
|         |       |                                                                                                                                                                                 |       |
|         |       | Consolidated  Balance Sheets as of September 30, 2005, as restated and December 31, 2004                                                                                             |       |
|         |       | Consolidated Statements of  Operations for the Three Months and Nine Months Ended September 30, 2005, as  restated and for the Three Months and Nine months Ended September 30, 2004 |       |
|         |       | Consolidated Statement of  Stockholders’ Equity for the Nine Months Ended September 30, 2005, as  restated                                                                      |       |
|         |       | Consolidated Statements of  Cash Flows for the Nine Months Ended September 30, 2005, as restated and for  the Nine Months Ended September 30, 2004                                   |       |
|         |       | Notes to the Consolidated  Interim Financial Statements                                                                                                                              |       |
|         |       |                                                                                                                                                                                 |       |
| Item 2.      |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                                                          |       |
| Item 3.      |       | Quantitative and Qualitative  Disclosures About Market Risk                                                                                                                          |       |
| Item  4.     |       | Controls  and Procedures                                                                                                                                                             |       |
|         |       |                                                                                                                                                                                 |       |
|         |       |                                                                                                                                                                                 |       |
| **PART  II** | ** ** | OTHER INFORMATION                                                                                                                                                                    |       |
| ** **   |       |                                                                                                                                                                                 |       |
| Item  1.     |       | Legal  Proceedings                                                                                                                                                                   |       |
| Item 2.      |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                                                                         |       |
| Item 6.      |       | Exhibits                                                                                                                                                                             |       |

 

2

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PART 1 – FINANCIAL INFORMATION

 

ITEM1:  FINANCIAL STATEMENTS

 

**IWT TESOROCORPORATION AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 
| ** **                                                                                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| ** **                                                                                                       | ** ** | **(Restated)**         | ** ** | ** **            | ** ** |
| ASSETS                                                                                                           |       |                   |       |                  |       |
| Current Assets:                                                                                                  |       |                   |       |                  |       |
| Cash                                                                                                             |       | $                      | 712,961    |                  | $          | 507,677 |   |
| Accounts receivable, net allowance for  doubtful accounts and returns of $323,256 and $270,013                   |       | 9,354,416              |       | 7,883,756             |       |
| Inventories                                                                                                      |       | 29,034,469             |       | 21,578,829            |       |
| Deposit on purchase of inventories                                                                               |       | 374,332                |       | 366,667               |       |
| Prepaid expenses                                                                                                 |       | 784,786                |       | 271,104               |       |
| Total current assets                                                                                             |       | 40,260,964             |       | 30,608,033            |       |
|                                                                                                             |       |                   |       |                  |       |
| Property and equipment, net                                                                                      |       | 1,842,354              |       | 1,762,065             |       |
|                                                                                                             |       |                   |       |                  |       |
| Other assets                                                                                                     |       | 1,055,207              |       | 758,997               |       |
|                                                                                                             |       | $                      | 43,158,525 |                  | $          | 33,129,095 |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                       |       |                   |       |                  |       |
|                                                                                                             |       |                   |       |                  |       |
| Current Liabilities:                                                                                             |       |                   |       |                  |       |
| Accounts payable                                                                                                 |       | $                      | 15,271,542 |                  | $          | 15,282,653 |   |
| Accrued expenses and other liabilities                                                                           |       | 1,253,205              |       | 997,432               |       |
| Current portion of capital lease  obligations                                                                    |       | 71,595                 |       | 80,943                |       |
| Current portion of notes payable, other                                                                          |       | 29,415                 |       | 18,218                |       |
| Note payable, revolving line of credit                                                                           |       | 21,461,097             |       | —                |       |
| Total current liabilities                                                                                        |       | 38,086,854             |       | 16,379,246            |       |
|                                                                                                             |       |                   |       |                  |       |
| Long-Term Debt:                                                                                                  |       |                   |       |                  |       |
| Note payable, revolving line of credit                                                                           |       | —                 |       | 16,047,220            |       |
| Note payable, convertible debt (net of  discounts of $4,861,112)                                                 |       | 138,888                |       | —                |       |
| Embedded derivative liability, at fair  value                                                                    |       | 5,910,773              |       | —                |       |
| Capital lease obligations                                                                                        |       | 115,888                |       | 170,425               |       |
| Subordinated notes payable, stockholders                                                                         |       | —                 |       | 338,662               |       |
| Notes payable, other                                                                                             |       | 84,909                 |       | 37,487                |       |
| Total long-term debt                                                                                             |       | 6,250,458              |       | 16,593,794            |       |
| Total liabilities                                                                                                |       | 44,337,312             |       | 32,973,040            |       |
|                                                                                                             |       |                   |       |                  |       |
| Commitments and Contingencies                                                                                    |       | —                 |       | —                |       |
|                                                                                                             |       |                   |       |                  |       |
| Stockholders’ Equity:                                                                                       |       |                   |       |                  |       |
| Preferred stock, $0.001 par value,  25,000,000 authorized; none issued                                           |       | —                 |       | —                |       |
| Common stock, $0.001 par value, 100 million  shares authorized; 11,701,102 and 11,697,102 issued and outstanding |       | 11,701                 |       | 11,697                |       |
| Additional paid in capital                                                                                       |       | 4,189,396              |       | 4,178,800             |       |
| Accumulated deficit                                                                                              |       | (5,379,884             | )          | (4,034,442            | )          |
|                                                                                                             |       | (1,178,787             | )          | 156,055               |       |
|                                                                                                             |       | $                      | 43,158,525 |                  | $          | 33,129,095 |   |

 

See notes to the consolidated interimfinancial statements.

 

3

----

 

**IWT TESORO CORPORATION ANDSUBSIDIARIES**

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 
| ** **                                  | ** ** | **The three months ended** | ** ** | **The nine months ended** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | **September 30,**                    | ** ** | **September 30,**                   | ** ** |
| ** **                                  | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **(Restated)**                            | ** ** | ** **                               | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| Net Sales                                   |       | $                                         | 14,006,762 |                                     | $          | 11,052,268 |   | $ | 42,141,461 |   | $ | 32,171,915 |   |
| Cost of Goods Sold                          |       | 8,277,926                                 |       | 6,733,909                                |       | 25,443,315 |   | 19,688,729 |   |
| Gross Profit                                |       | 5,728,836                                 |       | 4,318,359                                |       | 16,698,146 |   | 12,483,186 |   |
| Operating Expenses:                         |       |                                      |       |                                     |       |   |   |   |   |
| Warehouse and distribution                  |       | 2,206,240                                 |       | 1,389,693                                |       | 5,817,625 |   | 3,972,777 |   |
| Sales and marketing                         |       | 1,923,521                                 |       | 1,657,820                                |       | 5,381,340 |   | 4,951,181 |   |
| General and administrative                  |       | 1,686,324                                 |       | 1,592,713                                |       | 4,914,560 |   | 4,357,287 |   |
|                                        |       | 5,816,085                                 |       | 4,640,226                                |       | 16,113,525 |   | 13,281,245 |   |
| Income (Loss) from Operations               |       | (87,249                                   | )          | (321,867                                 | )          | 584,621 |   | (798,059 | ) |
| Other Expenses:                             |       |                                      |       |                                     |       |   |   |   |   |
| Interest expense                            |       | (554,412                                  | )          | (150,806                                 | )          | (1,159,173 | ) | (412,183 | ) |
| Change in fair value of derivative          |       | (910,773                                  | )          | —                                   |       | (910,773 | ) | — |   |
| Other                                       |       | (8,799                                    | )          | 19,548                                   |       | 139,883 |   | 49,824 |   |
|                                        |       | (1,473,984                                | )          | (131,258                                 | )          | (1,930,063 | ) | (362,359 | ) |
| Loss Before Income Taxes                    |       | (1,561,233                                | )          | (453,125                                 | )          | (1,345,442 | ) | (1,160,418 | ) |
|                                        |       |                                      |       |                                     |       |   |   |   |   |
| Income Tax Benefit (Expense)                |       | —                                    |       | —                                   |       | — |   | — |   |
| Net Loss                                    |       | $                                         | (1,561,233 | )                                        | $          | (453,125 | ) | $ | (1,345,442 | ) | $ | (1,160,418 | ) |
| Loss Per Share:                             |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                       |       | $                                         | (0.13      | )                                        | $          | (0.04 | ) | $ | (0.12 | ) | $ | (0.10 | ) |
| Diluted                                     |       | $                                         | (0.13      | )                                        | $          | (0.04 | ) | $ | (0.12 | ) | $ | (0.10 | ) |
|                                        |       |                                      |       |                                     |       |   |   |   |   |
| Weighted Average Common Shares Outstanding: |       |                                      |       |                                     |       |   |   |   |   |
|                                        |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                       |       | 11,701,102                                |       | 11,695,906                               |       | 11,698,417 |   | 11,672,754 |   |
| Diluted                                     |       | 11,701,102                                |       | 11,695,906                               |       | 11,698,417 |   | 11,672,754 |   |

 

See notes to the consolidated interimfinancial statements.

 

4

----

 

**IWT TESOROCORPORATION AND SUBSIDIARIES**

CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

 
| ** **                                                     | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|-----------------|------------|------------|------------|
| ** **                                                     | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Earnings**   | ** ** | ** **      | ** ** |
| ** **                                                     | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Total**  | ** ** |
| ** **                                                     | ** ** | ** **            | ** ** | ** **       | ** ** | **(Restated)** | ** ** | **(Restated)**  | ** ** | ** ** | ** ** |
| Balance, December 31, 2004                                     |       | 11,697,102            |       | $                | 11,697     |           | $          | 4,178,800       |       | $          | (4,034,442 | ) | $ | 156,055 |   |
|                                                           |       |                  |       |             |       |           |       |            |       |       |       |
| Issuance of shares to employees                                |       | 4,000                 |       | 4                |       | 10,596         |       | —          |       | 10,600     |       |
|                                                           |       |                  |       |             |       |           |       |            |       |       |       |
| Net income, nine months ended September 30,  2005, as restated |       | —                |       | —           |       | —         |       | (1,345,442      | )          | (1,345,442 | )          |
|                                                           |       |                  |       |             |       |           |       |            |       |       |       |
| Balance, September 30, 2005, as restated                       |       | 11,701,102            |       | $                | 11,701     |           | $          | 4,189,396       |       | $          | (5,379,884 | ) | $ | (1,178,787 | ) |

 

See notes to the consolidated interimfinancial statements.

 

5

----

 

**IWT TESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                     | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                     | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** |
| ** **                                                                     | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(Restated)**                  | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                          |       |                            |       |   |   |
| Net income (loss)                                                              |       | $                               | (1,345,442 | ) | $ | (1,160,418 | ) |
| Adjustments to reconcile net (loss) to net  cash used in operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                  |       | 305,452                         |       | 215,214 |   |
| Amortization of loan discount                                                  |       | 138,888                         |       | — |   |
| Change in fair value of derivatives                                            |       | 910,773                         |       | — |   |
| Loss (Gain) on disposal of property and  equipment                             |       | 16,900                          |       | (21,533 | ) |
| Common stock issued for services and  compensation                             |       | 10,600                          |       | 147,050 |   |
| Provision for doubtful accounts and reserve  for returns                       |       | 53,233                          |       | 123,065 |   |
| Other non-cash items affecting earnings                                        |       |                            |       | (15,976 | ) |
| Changes in operating assets and  liabilities:                                  |       |                            |       |   |   |
| (Increase) Decrease in:                                                        |       |                            |       |   |   |
| Accounts receivable                                                            |       | (1,523,893                      | )          | (2,395,867 | ) |
| Inventories                                                                    |       | (7,455,640                      | )          | (4,035,993 | ) |
| Deposit on purchase of inventories                                             |       | 82,352                          |       | — |   |
| Prepaid expenses and other assets                                              |       | (614,696                        | )          | (289,328 | ) |
| Increase in:                                                                   |       |                            |       |   |   |
| Accounts payable                                                               |       | (11,111                         | )          | 2,055,297 |   |
| Accrued expenses                                                               |       | 255,773                         |       | 329,806 |   |
| Net cash used in operating activities                                          |       | (9,176,811                      | )          | (5,048,683 | ) |
|                                                                           |       |                            |       |   |   |
| Cash flows from investing activities:                                          |       |                            |       |   |   |
| Acquisitions of property and equipment                                         |       | (247,564                        | )          | (611,097 | ) |
| Proceeds from sale of equipment                                                |       | —                          |       | 25,000 |   |
| Net cash used in investing activities                                          |       | (247,564                        | )          | (586,097 | ) |
|                                                                           |       |                            |       |   |   |
| Cash flows from financing activities:                                          |       |                            |       |   |   |
| Proceeds from revolving line of credit                                         |       | 50,813,050                      |       | 34,530,000 |   |
| Payments on revolving line of credit                                           |       | (45,399,173                     | )          | (29,799,645 | ) |
| Proceeds from issuance of convertible debt,  options and warrants              |       | 5,000,000                       |       | — |   |
| Repayment of Notes payable, subordinate  debt                                  |       | (338,662                        | )          |   |   |
| Debt issurance costs                                                           |       | (267,000                        | )          |   |   |
| Collection on notes receivable arising from  sale of stock                     |       | —                          |       | 550,000 |   |
| Proceeds from issuance of stock                                                |       | —                          |       | 147,875 |   |
| Proceeds from long-term debt                                                   |       | —                          |       | 106,360 |   |
| Payments of long-term debt                                                     |       | (102,421                        | )          | (99,628 | ) |
| Costs related to stock purchase activities                                     |       | —                          |       | (94,000 | ) |
| Loan financing costs                                                           |       | (76,135                         | )          | (10,000 | ) |
| Net cash provided by financing activities                                      |       | (9,629,659                      | )          | 5,330,962 |   |
|                                                                           |       |                            |       |   |   |
| Net Increase (decrease) in Cash                                                |       | 205,284                         |       | (303,818 | ) |
|                                                                           |       |                            |       |   |   |
| Cash, Beginning                                                                |       | 507,677                         |       | 867,361 |   |
| Cash, Ending                                                                   |       | $                               | 712,961    |   | $ | 563,543 |   |
|                                                                           |       |                            |       |   |   |
| Cash Paid During the Period for:                                               |       |                            |       |   |   |
| Interest expense                                                               |       | $                               | 1,020,285  |   | $ | 412,183 |   |
| Income tax                                                                     |       | $                               | 26,777     |   | $ | — |   |
| Non-Cash Investing and Financing  Activities:                                  |       |                            |       |   |   |
| Acquisition of property and equipment  financed through long-term debt         |       | $                               | 97,155     |   | $ | 95,361 |   |
| Reclassification of Note payable to  embedded derivative liability             |       | $                               | 5,000,000  |   | $ | — |   |

 

See notes to the consolidated interimfinancial statements.

 

6

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IWT TESORO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2005

 

###### **NOTE 1.                SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

###### ** **

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

#### ** **

The consolidated financialstatements include IWT Tesoro Corporation and its wholly owned subsidiariesInternational Wholesale Tile, Inc., IWT Tesoro International, Ltd, IWT TesoroTransport, Inc., The Tile Club, Inc. and The Tile Club, Inc.’s wholly ownedsubsidiary Import Flooring Group, Inc. All significant inter-company balancesand transactions have been eliminated in consolidation.

 

#### **B*asis of Presentation***

#### ** **

The interim financial information included herein is unaudited;however, such information reflects all adjustments, which are, in the opinionof management, necessary for a fair presentation of the Company’s financialposition, results of operations, changes in stockholders’ equity and cash flowsfor the interim periods. All such adjustments are of a normal, recurringnature. The results of operations for the first nine months of the year are notnecessarily indicative of the results of operations which might be expected forthe entire year.

 

The accompanyingconsolidated financial statements of the Company have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and with the instructions to Form 10-Q and Rule 10-10 of RegulationS-X of the Securities and Exchange Commission. Accordingly certain informationand footnote disclosure required by accounting principles generally accepted inthe United States of America for complete financial statements have beenomitted. These condensed financial statements should be read in conjunctionwith the Company’s financial statements and notes thereto included in theCompany’s audited financial statements on Form 10-K, for the fiscal year endedDecember 31, 2004.

 

TheConsolidated Balance Sheet at December 31, 2004 has been derived from theaudited financial statements of IWT Tesoro Corporation at that date, but doesnot include all of the information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements.

 

#### ***Stock-Based Compensation***

#### ** **

TheCompany has elected to follow Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees*” (APB No. 25), andrelated interpretations, in accounting for its employee and board of directorstock options rather than the alternative fair value accounting allowed by SFASNo. 123, “*Accounting for Stock-Based Compensation*”.As amended by SFAS 148 “Accounting for Stock-Based Compensation Transition andDisclosure” APB No. 25 provides that the compensation expense relative to theCompany’s employee stock options is measured based on the intrinsic value ofthe stock option.

 

SFASNo. 123 requires companies that continue to follow APB No. 25 to provide proforma disclosure of the impact of applying the fair value method of SFAS No.123. The Company follows SFAS No. 123 in accounting for stock options issued tonon-employees.

 

Pro forma informationregarding net income(loss) and earnings(loss) per share is required by SFAS No.123, “*Accounting for Stock-Based Compensation*,”and has been determined as if the Company had accounted for its stock optionsunder the fair value method of that Statement. The fair value for theseoptions was estimated at the grant date using the Black-Scholes option-pricingmodel using the following weighted average assumptions for 2005 and 2004,respectively: risk-free interest rates of 3.58%, and 2.20%, dividend yields of 0% and 0%, volatilityfactors of the expected market price of the Company’s common stock of 60.79%and 21.51% and expected lives of ten years. Using these assumptions, theweighted average grant-date fair value per share of options granted in 2005 was$1.57 and in 2004 it was $1.21.

 

7

----

 

***Stock-Based Compensation (continued)***

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options, which have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions including the expected stock price volatility. Becausethe Company’s employee stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its employee stock options. For purposes of proforma disclosures, the estimated fair value of the options is amortized toexpense over the options’ vesting period.

 

A total of 50,000 options were granted to directors of the Companyduring the nine months ended September 30, 2005. During the nine months ended September30, 2004 a total of 45,000 options were granted to directors of the Company and5,000 options were granted to employees. The effect on net loss and loss pershare if the Company had applied the fair value recognition provision of theSFAS No. 123, is presented below:

 
| ** **                                                                                                                                   | ** ** | **For the nine months ended Septebmer 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**                                                                  | ** ** | **2004** | ** ** |
| ** **                                                                                                                                   | ** ** | **(Restated)**                                                            | ** ** | ** ** | ** ** |
|                                                                                                                                         |       |                                                                      |       |   |   |
| Net loss as reported                                                                                                                         |       | $                                                                         | (1,345,442 | ) | $ | (1,160,418 | ) |
| Deduct: Stock-based employee compensation expense  determined under the fair value based method for all options, net of related  tax effects |       | (37,902                                                                   | )          | (36,012 | ) |
|                                                                                                                                         |       |                                                                      |       |   |   |
| Pro forma net loss                                                                                                                           |       | $                                                                         | (1,383,344 | ) | $ | (1,196,430 | ) |
|                                                                                                                                         |       |                                                                      |       |   |   |
| Loss per share - Basic                                                                                                                       |       |                                                                      |       |   |   |
| As reported                                                                                                                                  |       | $                                                                         | (0.12      | ) | $ | (0.10 | ) |
| Pro forma                                                                                                                                    |       | $                                                                         | (0.12      | ) | $ | (0.10 | ) |
| Loss per share - Diluted                                                                                                                     |       |                                                                      |       |   |   |
| As reported                                                                                                                                  |       | $                                                                         | (0.12      | ) | $ | (0.10 | ) |
| Pro forma                                                                                                                                    |       | $                                                                         | (0.12      | ) | $ | (0.10 | ) |

 

***Earnings per Share***

 

Basic and diluted loss per share for the three and nine month periodsended September 30, 2005 and 2004 are equal as the effect of the common stockoptions and warrants were antidilutive.

 

8

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## ***IncomeTaxes***

 

The Company recognizesincome taxes under the asset and liability method. Under this method, deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases, and losscarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date. Deferred tax assets arereduced by a valuation allowance when, in the opinion of management, it is morelikely than not that some portion or all of the deferred tax assets will not berealized.

 

***Derivative Financial Instruments***

 

The Company occasionally enters into a financialinstrument that contains a derivative instrument that is embedded in thefinancial instrument. Upon entering into the instrument, the Company assesseswhether the economic characteristics of the embedded derivative are clearly andclosely related to the economic characteristics of the remaining component ofthe financial instrument (i.e. the host contract) and whether a separateinstrument with the same terms as the embedded instrument would meet thedefinition of a derivative instrument. When it is determined that (1) theembedded derivative possesses economic characteristics that are not clearly andclosely related to the economic characteristics of the host contract, and (2) aseparate instrument with the same terms would qualify as a derivativeinstrument, the embedded derivative is separated from the host contract carriedat fair value. In cases where (1) host contract is measure at fair value, withchanges in fair value report in current earnings or (2) the Company is unableto reliably identify and measure an embedded derivative for separation from thehost contract, the entire contract is carried on the balance sheet at fairvalue.

 

#### ***Segment Information***

#### ** **

The Company has adopted SFASNo. 131, “Disclosures about Segments of an Enterprise and RelatedInformation.” SFAS No. 131 establishes standards for the way that publicbusiness enterprises report information about operating segments in annualfinancial statements and requires those enterprises to report selectedinformation about operating segments in interim financial reports issued to stockholders.The Company operates in one segment for management reporting purposes.

 

**Recent Accounting Pronouncements**

 

InNovember, 2004, the FASB issued SFAS No. 151 “Inventory Costs” anamendment to Accounting Research Bulletin No. 43, “Inventory Pricing,” toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs and wasted material. This Statement requires that those items berecognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.”  Additionallythis statement requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities. The provisions of SFAS No. 151 are effective for fiscal yearsbeginning after June 15, 2005. The adoption of SFAS 151 is not expected tohave an impact on our consolidated results of operations, financial position orcash flows.

 

InDecember 2004, the FASB issued SFAS No. 153, *“Exchanges of Nonmonetary Assets”* anamendment to Accounting Principles Board Opinion No. 29, “*Accounting for Nonmonetary Transactions,”*which is based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of the assets exchanged. The guidance in thatOpinion, however, included certain exceptions to that principle. This Statementamends Opinion 29 to eliminate the exception for nonmonetary exchanges ofsimilar productive assets and replaces it with a general exception forexchanges in which the future cash flows of the entity are not expected tochange significantly as a result of the exchange. The provisions of SFASNo. 153 are effective for nonmonetary asset exchanges in fiscal periodsbeginning after June 15, 2005. The adoption of SFAS 153 is not expected tohave an impact on our consolidated results of operations, financial position orcash flows.

 

In December 2004, theFASB issued SFAS No. 123 (revised 2004), “*Share-BasedPayment*,” (“SFAS No. 123(R)”). SFAS No. 123(R) requirescompanies to recognize the compensation cost relating to share-based paymenttransactions in the financial statements. This Statement eliminates the abilityto account for share-based compensation transactions using AccountingPrinciples Board Opinion No. 25, and requires instead that suchtransactions be accounted for using a fair-value-based method. SFASNo. 123 (R) is effective for the Company’s the interim and annual periodsbeginning after January 1, 2006. Although we have not yet completed ouranalysis of the impact of adopting SFAS No. 123(R), we believe the impact islikely to be material to our financial statements.

 

9

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In March 2005, the FASB issued FIN 47 as an interpretation of FASBStatement 143, *Accounting for AssetRetirement Obligations*(FASB 143). This interpretation clarifiesthat the term conditional asset retirement obligation as used in FASB 143 andrefers to a legal obligation to perform an asset retirement activity in whichthe timing and/or method of settlement are conditional on a future event thatmay or may not be within the control of the entity. The obligation to performthe asset retirement activity is unconditional even though uncertainly existsabout the timing and/or method of settlement. Accordingly, an entity isrequired to recognize a liability for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated. This interpretation also clarifies when an entity would havesufficient information to reasonably estimate the fair value of an assetretirement obligation. FIN 47 is effective no later than the end of fiscalyears ending after December 15, 2005. We are currently assessing theimpact of the adoption of FIN 47.

 

On June 1, 2005, the FASB issued Statement No. 154, *Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20 and FASB Statement No. 3(SFAS 154)*. The Statement applies to all voluntary changes inaccounting principle, and changes the requirements for accounting for and reportingof a change in accounting principle. We will adopt SFAS 154 atDecember 31, 2005 and do not anticipate any material change to ouroperating results as a result of this adoption.

 

***Reclassifications***

 

Certain amounts in the 2004 financial statements havebeen reclassified for comparative purposes to conform to the 2005 presentation.These reclassifications had no effect on net loss.

 

**NOTE 2                 INVENTORIES**

** **

Inventories consisted of the following:

 
| ** **           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                 |       |                   |       |                  |       |
| Tiles                |       | $                      | 26,944,837 |                  | $          | 17,034,540 |   |
| Inventory in transit |       | 2,089,632              |       | 4,544,289             |       |
|                 |       | $                      | 29,034,469 |                  | $          | 21,578,829 |   |

 

Inventoryin transit consists of merchandise purchased overseas, which is not yetreceived in the warehouse. The Company obtains legal title at the shippingpoint.

 

10

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#### **NOTE 3                 PROPERTYAND EQUIPMENT**

#### ** **

Property and equipment consisted of the following:

 
| ** **                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                          |       |                   |       |                  |       |
| Furniture and fixtures        |       | $                      | 293,468    |                  | $          | 289,560 |   |
| Machinery and equipment       |       | 858,189                |       | 657,553               |       |
| Vehicles                      |       | 288,064                |       | 258,272               |       |
| Office and computer equipment |       | 490,239                |       | 533,803               |       |
| Leasehold improvements        |       | 644,340                |       | 719,560               |       |
|                          |       | 2,574,300              |       | 2,458,748             |       |
| Less accumulated depreciation |       | 731,946                |       | 696,683               |       |
|                          |       | $                      | 1,842,354  |                  | $          | 1,762,065 |   |

 

Depreciationexpense for the nine months ended September 30, 2005 and 2004 was approximately$247,500 and $192,000, respectively.

 

#### **NOTE 4                 NOTESPAYABLE, REVOLVING LINE OF CREDIT**

#### ** **

OnDecember 31, 2004, the Company and its commercial lender amended and restatedthe existing revolving line of credit agreement providing up to $25,000,000with interest rates of either (1) LIBOR plus 3.00% or (2) the base rate plus0.50% (interest rates ranging from 6.41% to 7.25% at September 30, 2005)payable monthly. The line of credit is limited by a borrowing base which iscomprised of a percentage of eligible accounts receivable and eligibleinventories, as defined, and is collateralized by substantially all the assetsof the Company. The balance due at September 30, 2005 and December 31, 2004 was$21,461,097 and $16,047,220, respectively. The line matures September 10, 2006and contains certain covenants requiring the Company to maintain a certainleverage ratio, a required minimum fixed charge coverage ratio, and certaininventory turnover ratio.

 

For the three months ended September 30, 2005 and 2004, interestexpense related to the credit line amounted to $365,011 and $170,868,respectively. For the nine months ended September 30, 2005 and 2004, interestexpense related to the credit line amounted to $941,312 and $391,511respectively.

 

#### **NOTE 5                 STOCKHOLDERS’EQUITY**

#### ** **

**Common Stock**

 

Duringthe nine months ended September 30, 2005, the Company issued 4,000 shares ofcommon stock to several employees under the Stock Incentive Plan for servicesrendered, based on the trading price at the date of issuance, for a total of$10,600, resulting in an immediate charge to operations.

 

11

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#### **NOTE 6                 INCOME TAXES**

#### ** **

Income tax expense for the three and nine month periods ended September30, 2005 and 2004 were $-0- as the benefit for income taxes, computed byapplying the Federal statutory rate to loss before income taxes, was reduced bythe increase in the deferred tax valuation allowance during the period, toadjust deferred taxes to the amount considered by management more likely thannot to be realized

 

**NOTE 7                 NOTEPAYABLE – CONVERTIBLE DEBT**

 

OnAugust 25, 2005, the Company issued a secured revolving note in the aggregateamount of $5,000,000 resulting in net proceeds of $4,733,000 after debtissuance costs of $267,000. Interest accrues on the principal balance of thenote at an annual interest rate equal to prime plus 1.5%. On December 31, 2005,the interest rate was 8.75%. The note matures on August 25, 2008. The note isconvertible into common stock of the Company at an initial conversion rate of$2.74 per share. Because the agreement contains certain non-standardanti-dilution provisions and requirements to settle any conversion option withregistered shares, the Company is required to account for the conversion optionas an embedded derivative requiring separate accounting treatment in accordancewith *SFAS No. 133 Accounting for Derivative Instrumentsand Hedging Activities*. Based upon the closing price per share ofthe Company’s common stock on the date of issuance, the Company estimated thefair value of the embedded conversion option and classified $2,068,000 as aderivative liability that is adjusted to fair value at each reporting date withchanges in fair value reported in earnings. In connection with the convertiblenotes, the Company issued to the holder of the note a five-year warrant topurchase 511,883 shares of the Company’s common stock at an exercise price of$3.15 per share and an option to purchase 1,170,110 shares of the Company’scommon stock at an exercise price of $0.001 per share. Based upon the closingprice per share of the Company’s common stock on the date of issuance, the Companyestimated the fair value of the warrant and option and classified $3,100,000and $692,000, respectively, as a derivative liability that is adjusted to fairvalue at each reporting date with changes in fair value reflected in earnings. Thefair value of the options, warrants, and embedded conversion option wasestimated at the date of issuance using the Black-Scholes option-pricing modelusing the following weighted average assumptions: risk-free rate of 4.06%,dividend yields of 0%, and volatility factors of the expected market price ofthe Company’s common stock of 60.79%.

 

Theexcess of the fair value of the derivative liability over the principal amountof the notes of $860,486 was recorded as an expense in the period of issuanceand the remaining fair value of $5,000,000 was recorded as a discount to theconvertible debt to be amortized into expense over the three-year terms of thenotes.

 

Thebalance of the note and embedded derivative as of September 30, 2005, net ofunamortized discounts is as follows:

 
| Derivative liability at date of issuance                        |   | $          | 5,000,000 |   |
|-----------------------------------------------------------------|--------|------------|-----------|--------|
| Change of Fair value                                            |   | 910,773    |      |
| Derivative liability as of December 31,  2005                   |   | 5,910,733  |      |
|                                                            |   |       |      |
| Principal amount of Notes                                       |   | $          | 5,000,000 |   |
| Fair value-Conversion Features                                  |   | (1,764,629 | )         |
| Fair value-Warrants and options                                 |   | (3,235,371 | )         |
| Accretion of discount to interest expense                       |   | 138,888    |      |
| Balance as of September 30, 2005, net of  Unamortized discounts |   | $          | 138,888   |   |

 

12

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Interest expense related to the note amounted to $40,382 during theperiod of August 25, 2005 to September 30, 2005.

 

Amortizationof discounts for the warrant and option resulted in charges to interest expensetotaling $138,888 during the three months and nine months ended September 30,2005.

 

Theincrease in the fair value of the embedded conversion option resulted incharges to expense totaling $910,773 during the three and nine months endedSeptember 30, 2005.

 

Thenote is secured by a lien on substantially all the assets of the Company, subjectto a first priority lien of the Company’s primary financial lender.

 

Theholder of the note has agreed that it will not convert the note, or exerciseany warrant or option, into common stock in amounts that would cause the holder’saggregate beneficial ownership of the Company’s common stock to exceed 4.99%,without 120 days prior notice, or 19.199%, without stockholder approval.

 

**NOTE 8                 NEWSUBSIDIARIES**

 

On June 6th, 2005, the Company organizedthe Import Flooring Group, Inc. (IFG). IFG will provide agency services bydirectly importing tile, natural stone, hardwood, laminate, and carpet and rugfloor coverings from foreign factories to wholesale tile distributors withinthe United States.

 

**NOTE 9                 RESTATEMENT**

 

The Company has restated the consolidatedbalance sheet as of September 30, 2005, and the consolidated statements ofoperations for the three and nine months then ended and stockholders’ equityand cash flows for the nine months then ended as described below:

 

Note Payable – Convertible Debt

 

Management initially accounted for this transaction as if derivativeaccounting for the embedded option was not required under EITF 00-19. Subsequentlythe Company determined that derivative accounting was required. The adjustmentresulting from the restatement increased the net loss by approximately $943,400for the three and nine months ended September 30, 2005. This change alsoincreased other assets by approximately $234,300, increased long term debt byapproximately $5,004,700 and decreased paid in capital by approximately $3,827,000as of September 30, 2005.

 
| ** **                                       | ** ** | **September 30, 2005** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **As Previously**           | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                       | ** ** | **Reported**                     | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Consolidated Balance Sheet:                      |       |                             |       |   |   |   |   |
| Other assets                                     |       | $                                | 820,901    |   | $ | 234,306 |   | 1,055,207 |   |
| Note payable, convertible debt net of  discounts |       | 1,045,000                        |       | 906,112 |   | 138,888 |   |
| Embedded derivatives liability                   |       | —                           |       | (5,910,773 | ) | 5,910,773 |   |
| Additional paid in capital                       |       | 8,016,396                        |       | 3,827,000 |   | 4,189,396 |   |
| Accumulated deficit                              |       | (4,436,529                       | )          | 943,355 |   | (5,379,884 | ) |
|                                                  |            |                                  |            |  |  |  |  |  |  |

 

13

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| ** **                                           | ** ** | **The three months ended September 30, 2005** | ** ** | **The nine months ended September 30, 2005** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **As Previously**                                                      | ** ** | ** **                                                                 | ** ** | **As** | ** ** | **As Previously** | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                           | ** ** | **Reported**                                                                | ** ** | **Adjustments**                                                            | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| Consolidated Statement of Operations: |       |                                                                        |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Operations                                           |       |                                                                        |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Net Sales:                                           |       | $                                                                           | 14,006,762 |                                                                       | $          | — |   | $ | 14,006,762 |   | $ | 42,141,461 |   | $ | — |   | $ | 42,141,461 |   |
| Gross profit                                         |       | 5,728,836                                                                   |       | —                                                                     |       | 5,728,836 |   | 16,698,146 |   | — |   | 16,698,146 |   |
| Operating  expenses                                  |       | 5,809,391                                                                   |       | 6,694                                                                      |       | 5,816,085 |   | 16,106,831 |   | 6,694 |   | 16,113,525 |   |
| Interest expense                                     |       | 528,524                                                                     |       | 25,888                                                                     |       | 554,412 |   | 1,133,285 |   | 25,888 |   | 1,159,173 |   |
| Change in fair  value of derivative                  |       | —                                                                      |       | 910,773                                                                    |       | 910,773 |   | — |   | 910,773 |   | 910,773 |   |
| Loss  before-income taxes                            |       | (617,878                                                                    | )          | (943,355                                                                   | )          | (1,561,233 | ) | (402,087 | ) | (943,355 | ) | (1,345,442 | ) |
| Income tax  benefit (expense)                        |       | —                                                                      |       | —                                                                     |       | — |   | — |   | — |   | — |   |
| Net Loss                                             |       | $                                                                           | (617,878   | )                                                                          | $          | (943,355 | ) | $ | (1,561,233 | ) | $ | (402,087 | ) | $ | (943,355 | ) | $ | (1,345,442 | ) |
| Loss per share:                                      |       |                                                                        |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | $                                                                           | (0.05      | )                                                                          | $          | (0.08 | ) | $ | (0.13 | ) | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.12 | ) |
| Diluted                                              |       | $                                                                           | (0.05      | )                                                                          | $          | (0.08 | ) | $ | (0.13 | ) | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.12 | ) |
| Weighted Average  Common Shares Outstanding:         |       |                                                                        |       |                                                                       |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | 11,701,102                                                                  |       |                                                                       |       | 11,701,102 |   | 11,698,417 |   |   |   | 11,698,417 |   |
| Diluted                                              |       | 11,701,102                                                                  |       |                                                                       |       | 11,701,102 |   | 11,698,417 |   |   |   | 11,698,417 |   |

 

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

 

IWTTesoro Corporation (the Company) was organized in Nevada on May 3rd, 2000,originally under the name “Ponca Acquisition Corporation”. EffectiveOctober 1, 2002, Tesoro acquired all of International Wholesale Tile, Inc.’s(IWT) common stock from IWT’s three shareholders. IWT was organized in Floridaand has been in continuous operations since 1994. In exchange for the IWTstock, the IWT shareholders each received 3.0 million Tesoro shares,representing 87% of Tesoro’s then outstanding common stock.

 

In addition to IWT, Tesoro’s primary operatingsubsidiary, Tesoro has three additional wholly owned subsidiaries. Theseinclude IWT Tesoro Transport, IWT Tesoro International, Ltd and The Tile Club,Inc. The Tile Club, Inc has a wholly owned subsidiary named Import FlooringGroup, Inc.

 

•                  IWTTesoro Transport, a USDOT licensed common carrier, organized to act as ourfreight carrier outside of Florida and to back haul non-household goods intoFlorida to help generate outside revenue, which has been insignificant throughJune 30, 2005;

 

•                  IWTTesoro International, Ltd., a Bermuda corporation to act as a holdingcompany for activities and assets such as agency agreements and investments inforeign operations; and

 

•                  TheTile Club, Inc., formed in 2004, was organized to acquire licensing,manufacturing and distribution rights for high-end designer and artistic baseddecorative tiles and to also act as an agent for foreign manufacturers fromwhom IWT has acquired exclusive distribution rights.

 

•                  ImportFlooring Group, Inc., formed in June 2005, was organized to support the Company’sgrowth strategy with an agent- oriented business model in the floor coveringmarket.

 

Ourprincipal executive office 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 not part of this report.

 

IWT Tesoro Corporation (The Company) deliverspremium floor covering products such as porcelain, ceramic and natural stonetiles, hardwood, laminate, carpet and rugs from around the world, to floorcovering dealers, home center stores, national homebuilder buying groups, andto wholesalers. The Company’s primary operating subsidiary,IWT distributes its product lines which include porcelain, ceramic and naturalstone tiles, through its network of regional distribution centers located inthe southern regions of the United States using its company-operated trucks,common carrier or commercial delivery services. The Company’s new subsidiary, IFGprovides floor covering product lines that include natural stone and tiles,hardwood, laminate, carpet and rug to large flooring distributors throughout theUnited States and Canada. IFG maintains a relatively small amount of backupinventory to support its customers’ short term product needs.

 

The Company reported a net loss of $1,561,233or diluted loss per share of $0.13, for the third quarter of 2005 compared to anet loss of $453,125 or loss per share of $.04 for the third quarter of 2004.The increased net loss resulted from the change in the fair value of theembedded derivative and the start up costs associated with the new subsidiary,IFG. These start-up costs include salaries, office and warehouse rent, traveland related expenses and marketing material. The expenses exceeded revenue byapproximately $240,000 in IFG’s first quarter of operation. IWT’s results wereapproximately unchanged for the three months ended September 30, 2005 compared toSeptember 30, 2004. Both quarters were hampered by hurricanes that disruptedthe distribution chain. IWT continues to expand its business north and west tominimize the effects of these weather related business disruptions. Managementexpects that the IFG’s revenues will grow in the final quarter of the year to apoint where they become profitable for the year ended December 31, 2005.

 

**Resultsof Operations**

 

*Results of Operationsfor the three months ended September 30, 2005, 2004 and 2003*

 

The following discussion and analysis shouldbe read in conjunction with the financial statements and notes thereto thatappear elsewhere in this document. The table below sets forth certain operatingdata for the periods indicated. Percentagesare relative to total revenue for the periods indicated.

 

14

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| ** **              | ** ** | **Quarter ending September 30,** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|
| ** **              | ** ** | **September 30,**                          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **              | ** ** | **2005**                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **              | ** ** | **(Restated)**                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
|                    |       |                                            |       |   |   |   |   |
| Revenues                |       | $                                               | 14,006,762 |   | $ | 11,052,268 |   | $ | 8,955,693 |   |
| Cost of Goods Sold      |       | 8,277,926                                       |       | 6,733,909 |   | 5,373,248 |   |
| Gross Margin            |       | 5,728,836                                       |       | 4,318,359 |   | 3,582,445 |   |
| Gross Margin Percentage |       | 40.90                                           | %          | 39.07 | % | 40.00 | % |
| Operating Expenses      |       | $                                               | 5,816,085  |   | $ | 4,640,226 |   | $ | 3,525,027 |   |

 

*Quarter ended September30, 2005 Compared to Quarter September 30, 2004*

 

Net sales for the three months ended September30, 2005 increased $2,954,494 or approximately 26.7% over thereported net sales for the three months ended September 30, 2004. This growthfollows a 23.4% increase in net sales for the three months ended September 30,2004 over the three months ended September 30, 2003. The Company’s continuedgrowth rate exceeds industry growth rates. We believe we will continue toexceed industry growth rates as a result of continued expansion into nationalmarkets.

 

Gross profit for the three months ended September 30, 2005 was $5,728,836(40.9% of net sales) compared to $4,318,359 (39.1% of net sales) for the threemonths ended September 30, 2004. The third quarter 2005 gross profit increasewas a direct result of a new pricing structure implemented in March 2005. Thisnew pricing structure will enable us to maintain an approximate gross margin of38%.

 

Our operating expenses for the three months ended September 30, 2005 were$5,816,085 (41.5% of net sales) compared to $4,640,226 (42.0% of net sales) forthe three months ended September 30, 2004. The operating expense to sales ratiohas remained relatively stable for the quarter ended September 30, 2005 whencompared to the quarter ended September 30, 2004. IWT’s operating expensestructure is primarily variable with sales revenue. A large component of theseoperating expenses include sales commissions, marketing and merchandizing costsand delivery costs, of which each grow proportionately with sales. Whilemanagement believes that there are economies of scale to be gained related towarehousing and administrative costs; we estimate that the operating expensesof IWT will remain in the range experienced in the most recent quarter.However, the IFG’s operating expense structure is primarily fixed with regardsto sales revenue. A large component of IFG’s operating expenses includesfacilities rent and administrative costs which remain constant as sales grow,therefore resulting in a decreasing operating expense ratio. As IFG continuesto grow and becomes a larger proportion of the Company’s business, managementexpects the overall operating ratio to decrease.

 

The Net Loss before Income Taxes for the three months ended September30, 2005 was $1,561,233 compared to a Net Loss before Income Taxes of $453,125 forthe three months ended September 30, 2004. The increased loss result from thechange in the fair value of the embedded derivative and increase interest costassociated with the convertible debt instrument entered into August 2005, asmore fully describe in Note 7 to September 30, 2005 consolidated financialstatements and the start up costs associated with the new subsidiary, IFG. Netinterest costs for the quarter ended September 30, 2005 were approximately $554,000as compared to $151,000 for the quarter ended September 30, 2004. The Companyincreased its debt through the placement of a $5,000,000 convertible debtfacility during the quarter ended September 30, 2005. The increased debt, the discountaccretion and the general increase in the effective interest rate have all contributedto the increase in the cost of borrowed money

 

*Results of Operations for the Nine months ended September 30, 2005,2004 and 2003*

 

The following discussion and analysis shouldbe read in conjunction with the financial statements and notes thereto thatappear elsewhere in this document. The table below sets forth certain operatingdata for the periods indicated.Percentages are relative to total revenue for the periods indicated.

 

15

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| ** **              | ** ** | **Nine Months Ending September 30,** | ** ** |
|-------------------------|------------|----------------------------------------------------------|------------|
| ** **              | ** ** | **September 30,**                                   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **              | ** ** | **2005**                                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **              | ** ** | **(restated)**                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                    |       |                                                     |       |   |   |   |   |
| Revenues                |       | $                                                        | 42,141,461 |   | $ | 32,171,915 |   | $ | 24,147,078 |   |
| Cost of Goods Sold      |       | 25,443,315                                               |       | 19,688,729 |   | 14,464,855 |   |
| Gross Margin            |       | 16,698,146                                               |       | 12,483,186 |   | 9,682,223 |   |
| Gross Margin Percentage |       | 39.62                                                    | %          | 38.80 | % | 40.10 | % |
| Operating Expenses      |       | $                                                        | 16,113,525 |   | $ | 13,281,245 |   | $ | 9,211,664 |   |

 

 *Nine months ended September 30, 2005Compared to Nine months ended September 30,, 2004 and 2003*

 

Sales for the nine months ended September 30, 2005 were $42,141,461, a31.0% increase over sales for the nine months ended September 30, 2004. Thisgrowth follows a 33.2% increase for the same period ended in 2004 compared with2003. The Company’s growth rate continues to exceed industry growthrates. We believe we will continue to exceed industry growth rates as a resultof our continued expansion into national markets.

 

The gross margin for the nine months ended September 30, 2005 was $16,698,146(39.62% of net sales) compared to $12,483,186 (38.8% of net sales) for the ninemonths ended September 30, 2004. The slightly higher gross margin for the ninemonths ended September 30, 2005 is a result of the March 2005 new pricingstructure. This new price structure was implemented as a direct result ofincreasing material and import costs.

 

Our operating expenses for the nine months ended September 30, 2005have increased by $2,832,280 over the same period in 2004, an increase of 21.3%.This compares with a 44.2% increase for the period ended September 30, 2004from 2003. The decrease in the current percentage of operating expenses was aresult of the Company’s incremental costs incurred in 2003 and 2004 to buildingan infrastructure to support the most recent past year’s growth, current growthand plans for future growth.

 

The Net Loss before Income Taxes for the nine months ended September 30,2005 is $1,345,442 compared to a net loss of $1,160,418 for the nine monthsended September 30, 2004. The increase in loss is the result of the change inthe fair value of the embedded derivative and increase cost associated with theconvertible debt instrument entered into in August 2005, as more fully describein Note 7 to the consolidated financial statement and the start up costsassociated with the new subsidary, IFG.

 

**Changes in Financial Position for the nine months ended September 30,2005 from the year ended December 31, 2004**

 

Accounts receivable and inventory haveincreased by $1,470,660 and $7,455,640 respectively during the nine monthperiod ended September 30, 2005 from the year ended December 31, 2004. Theincreases in these account balances relate primarily to our growth in sales andthe expansion of our distribution channels. At September 30, 2005 our accountsreceivable balance represented approximately 2.0 months of sales and atDecember 31, 2004 it represented 2.11 months of sales. This decrease isattributed to a slight improvement in our rate of collections. At September 31,2005 inventory turns were 1.22 and at December 31, 2004 inventory turns were1.38. The decrease in inventory turns is a result of expansion efforts whichrequire a minimum stock level within these various markets.

 

We had a net increase in our investment in property and equipment of $80,289net of depreciation for the nine months ended September 30, 2005 from the yearended December 31, 2004. The net increase was primarily due to investments in leaseholdfurnishings for the IFG and warehouse machinery and computer equipment for theIWT.

 

Our liabilities for accounts payable decreased $11,111 and revolvingline of credit increased $5,413,877 for the nine months ended September 30,2005 from the year ended December 31, 2004. The net increase in our long term debtrelates directly to the placement of a $5,000,000 subordinated debt facilityresulting in net proceeds of $4,733,000, net of issuance costs of $267,000, asmore fully described in Note 7 of the consolidated financial statement. TheCompany accounts for the subordinated debt facility as an embedded derivative. Theexcess fair value of the derivative liability over the principal amount of thenote of $910,773 was record as an expense in the period ended September 30,2005, resulting in a derivative liability of $5,910,773. The Company issued warrantsand options in connection with the

 

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subordinated debt facility and recorded their fair value of $5,000,000 asa discount to the debt amortized these costs of $138,888 into interest expenseover the three-year term of the note

 

# **Liquidity and Capital Resources**

# ** **

We had cash balances of approximately $713,000 at September30, 2005 and $507,700 at December 31, 2004. We have financed our growth withnew convertible debt and increased borrowings from our commercial lender.

 

Our senior bank credit facility is $25 million andour subordinated facility is $5 million for a total of $30 million; The Companyexpects the combination of these credit facilities to be sufficient to supportits growth in accounts receivable and inventory through 2005. Our rapid growthis expected to continue requiring the Company to seek outside capital tosupplement earnings and strengthen our balance sheet. We believe that theworking capital required to finance the necessary growth in inventory will beprovided by our existing line of credit. The current balance of our commercialline of credit is approximately $21.5 million which leaves approximately $3.5million of available working capital. We expect to raise additional capital, eitherdebt or equity, through both the public and private markets during 2005. However,we cannot assure anyone that we will be able to obtain outside capital, or ifwe do, that it will be on terms beneficial to us.

 

The balance due at September 30, 2005 for oursubordinated debt was $5 million. The balance due at September 30, 2005 to ourcommercial lender for the use of the revolving line of credit was approximately$21.5 million. The loan and security agreement contains certain covenants,which include financial covenants that require us to maintain a certainleverage ratio, limit our unfunded capital expenditures, a required minimumfixed charge coverage ratio, and a certain inventory turnover ratio. At September30, 2005 the Company was in compliance with these covenants.

 

# **Critical Accounting Policies**

# ** **

There were no significant changes to the Company’s critical accountingpolicies and estimates during the period. The Company’s 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, 2004.

 

**Forward-Looking Information**

 

Somestatements made in this Quarterly Report on Form 10-Q, are “forward-lookingstatements” and are not historical facts. For example, statements regarding ourfinancial position, business strategy and other plans and objectives for futureoperations, and assumptions and predictions about future demand for ourservices and products, supply, costs, marketing and pricing factors are allforward-looking statements. When we use words like “intend,” “would”, “anticipate,”“believe,” “estimate,” “plan” or “expect” or the negative of these terms andsimilar expressions, we are making forward- looking statements. You should beaware that these forward-looking statements are subject to risks anduncertainties. Additionally, our forward-looking statements speak only as ofthe date of this report. Other than as required by law, we undertake noobligation to update or revise these statements, whether as a result of newinformation, future events or otherwise. New factors emerge from time to timethat may cause our business not to develop as we expect, and it is not possiblefor us to predict all of them. Factors that may cause our actual results,performance or achievements to be materially different from the results,performance or achievements expressed or implied by the forward-lookingstatements include, among other things are changes in the industry, energycosts, timing and level of capital expenditures and introduction of newproducts.

 

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

 

**Quantitative andQualitative Disclosures About Market Risk**

 

Information about the Company’s exposure tomarket risk was disclosed in its Annual Report on Form 10-K for the year endedDecember 31, 2004, which was filed with the Securities and Exchange Commissionon April 15, 2005. No material quantitative or qualitative changes in marketrisk exposure has occurred since the date of that filings

 

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**ITEM 4 – CONTROLS AND PROCEDURES**

 

As of the end of theperiod covered by this Quarterly Report on Form 10-Q, Tesoro’smanagement, with participation of the Company’s principal executive officer andprincipal financial officer, have performed an evaluation of the Company’sdisclosure controls and procedures, (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (“Exchange Act”) to ensure that information required to bedisclosed by Tesoro in the reports that Tesoro files or submits under theExchange Act is recorded, processed, summarized, and reported within the timeperiods specified by the SEC’s rules and forms.

 

Based onthat 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 sufficient i)to ensure that data errors, control problems, or acts of fraud aredetected and ii) to confirm that appropriate corrective action, includingprocess improvements, is undertaken in a timely manner.

 

Attached as Exhibits 31.1 and 31.2 to thisQuarterly Report are certifications of the CEO and the CFO, which are requiredin accordance with Rule 13a-14 of the Securities Exchange Act of 1934 (theExchange Act). This Controls and Procedures section includes the informationconcerning the controls evaluation referred to in the certifications and itshould be read in conjunction with the certifications.

 

We are in the processof implementing the requirements of Section 404 of the Sarbanes-Oxley Actof 2002 which requires our management to assess the effectiveness of ourinternal control over financial reporting and include an assertion in our 2007annual report as to the effectiveness of our internal controls over financialreporting. Subsequently, our independent registered public accounting firm,McGladrey & Pullen LLP, will be required to attest to whether ourassessment of the effectiveness of our internal controls over financialreporting is fairly stated in all material respects and separately report onwhether it believes we maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2007. We are in theprocess of performing the system and process documentation, evaluation andtesting required for management to make this assessment and for the registered publicaccounting firm to provide its attestation report. We have not completed thisprocess or its assessment, and this process will require significant amounts ofmanagement time and resources. In the course of evaluation and testing,management may identify deficiencies that would need to be addressed andremediate.

 

**PART II**

 

###### **ITEM 1: LEGALPROCEEDINGS**

###### ** **

Weare not a party to any material pending legal proceedings and, to the best ofour knowledge; no such action by or against us is contemplated, threatened orexpected.

 

**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

On August 25, 2005, as part of the closing of a $5.0 million privateoffering of debt securities with Laurus Master Fund, Ltd., Laurus provided uswith a secured revolving note with a maximum availability of $5.0 million,which is currently convertible into 1,824,818 shares of common stock at aconversion price of $2.74 per share, including the amount under the securedconvertible minimum borrowing note. We also issued warrants that allow Laurus topurchase up 511,883 shares of our common stock at $3.15 per share throughAugust 25, 2010, and options to purchase 1,170,110 shares of our common stockat $.001 per share through August 25, 2010, but which are subject to a one-yearlock-up through August 25, 2006. Of the $5.0 million in proceeds received,$45,000 was paid to Laurus’ counsel for legal fees and $2,000 for escrow fees. Wealso paid $195,000 to Laurus Capital Management, LLC for management fees inconnection with the transaction through closing and to Laurus of $25,000 fordue diligence fees. These offering expenses paid on behalf of Laurus totaled$267,000 and were paid in cash. After these expenses, we received net proceedsof approximately $4,733,000. Of the net proceeds, we extinguished debtstotaling $338,662 to three Tesoro executive officers and directors and theremaining proceeds were used for general corporate purposes.

 

The sale of these securities were deemed tobe exempt from registration under the Securities act in reliance on Section4(2) of the Securities Act, or Regulation D promulgated thereafter, astransactions by an issuer not involving a public offering. Laurus representedits intention to acquire the securities for investment only and not with a viewfor sale in connection with any distribution thereof and appropriate legendswere affixed to the share certificates and instruments issued in suchtransactions. The sales of these securities were made without generalsolicitation or advertising. Laurus is an accredited

 

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investor and had adequate access, throughtheir relationship with the Company, to information, including financial, aboutthe Company. None of these transactions involved any underwriters, underwritingdiscounts or commissions.

 

**ITEM 6:                  EXHIBITSAND REPORTS ON FORM 10-Q-A**

 

(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)                                                                                                           |
| 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 Forrest Jordan (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 Forrest Jordan’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  Forrest Jordan’s Employment Agreement with the exception of the employee’s  name and address)                                    |
| 10.13               |       | Subordination Agreement between Congress Financial Corporation  (Florida). and Forrest Jordan (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 Forrest Jordan’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  Forrest Jordan’s Subordination Agreement with the exception of the employee’s  name and address)                            |

 

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| 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)                                                                                                                                         |
| 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, and on May 10, 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                                                                                                                                                                                                                                                                                            |

 

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|   |   | 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).                                                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 Forrest Jordan, 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 Forrest Jordan, 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. |
|--------|--------|----------------------------------------------------------------------------------------------|
|   |   |                                                                                         |
| (6)    |   | Reports on Form 8-K.                                                                         |
|   |   |                                                                                         |

 

(b)   Reports on Form 8-K

 

Form 8-K, filed on August 26, 2005, regarding the Company’s subordinated debt agreements with Laurus Master Fund, Ltd for $5.0 million.

 

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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                     |
|--------------|--------|--------|--------------------------------------------|
|         |   |   |                                       |
|         |   |   |                                       |
| May 18, 2006 |   |   | /s/ Henry J. Boucher, Jr.                  |   |
|         |   |   | Henry J. Boucher, Jr., President           |
|         |   |   |                                       |
| May 18, 2006 |   |   | /s/Forrest P. Jordan                       |   |
|         |   |   | Forrest P. Jordan, Chief Financial Officer |
|              |        |        |                                            |  |  |

 

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