**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

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**FORM 10-Q**

**(MarkOne)**

**x**                                 **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,2006**

**o****                                   TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

**Commission File No. 0-31267**

**IWT TESORO CORPORATION**(Exact name of registrant as specified in its charter)

 

| **Nevada**                       |   | **91-2048019**          |
|----------------------------------|--------|-------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer        |
| incorporation or  organization)  |   | Identification  Number) |

 

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

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

Indicate by check, markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days:

xYes                                     oNo

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.

Large acceleratedfiler o                    Accelerated filer                                   Non-acceleratedfiler. x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)xYes                     oNo

Indicate the number ofshares outstanding of each of the issuer’s class of common equity, as of June 14,2006: 11,926,900 shares

 

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**IWT TESOROCORPORATION AND SUBSIDIARIESFORM 10-QFor the Three Months Ended March 31, 2006INDEX**

 
|                  | ** **                                                                                                     | **Page** |
|------------------|----------------------------------------------------------------------------------------------------------------|----------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                      | 3        |
|             |                                                                                                           |     |
| Item I.          | Financial Statements                                                                                           | 3        |
|             |                                                                                                           |     |
|             | Consolidated Balance  Sheets as of March 31, 2006 and December 31, 2005                              | 3        |
|             | Consolidated  Statements of Operations for the Three Months Ended March 31, 2006 and  2005                | 4        |
|             | Consolidated  Statement of Stockholders’ Equity Statement for the Three Months Ended  March 31, 2006 | 5        |
|             | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2006 and  2005                | 6        |
|             | Notes to the  Consolidated Interim Financial Statements                                                        | 7        |
|             |                                                                                                           |     |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                    | 17       |
| Item 3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                    | 19       |
| Item 4.          | Controls and  Procedures                                                                                       | 19       |
|             |                                                                                                           |     |
| **PART II** | OTHER  INFORMATION                                                                                             | 20       |
|             |                                                                                                           |     |
| Item 1.          | Legal Proceedings                                                                                              | 20       |
| Item 1A.         | Risk Factors                                                                                                   |     |
| Item 2.          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                   | 20       |
| Item 3.          | Default Upon  Senior Securities.                                                                               | 20       |
| Item 4.          | Submission of  Matters of Security Holders                                                                     | 21       |
| Item 5.          | Other Information                                                                                              | 21       |
| Item 6.          | Exhibits                                                                                                       | 21       |
|             |                                                                                                           |     |

 

2

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PART 1 — FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

**IWTTESORO CORPORATION AND SUBSIDIARIES**

CONSOLIDATEDBALANCE SHEETS

(Unaudited)

 
| ** **                                                                                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                            | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ASSETS                                                                                                                |       |               |       |                  |       |
| Current Assets:                                                                                                       |       |               |       |                  |       |
| Cash                                                                                                                  |       | $                  | 118,856    |                  | $          | 552,042 |   |
| Accounts receivable, net of allowance for doubtful  accounts and returns of $371,722 and $292,662, respectively       |       | 11,926,044         |       | 9,910,551             |       |
| Inventories                                                                                                           |       | 31,430,801         |       | 32,212,007            |       |
| Deposit on purchase of inventories                                                                                    |       | 786,562            |       | 860,614               |       |
| Prepaid expenses                                                                                                      |       | 351,260            |       | 293,047               |       |
| Total current assets                                                                                                  |       | 44,613,523         |       | 43,828,261            |       |
|                                                                                                                  |       |               |       |                  |       |
| Property and  equipment, net                                                                                          |       | 2,357,178          |       | 2,120,422             |       |
|                                                                                                                  |       |               |       |                  |       |
| Other assets                                                                                                          |       | 1,135,504          |       | 1,013,886             |       |
|                                                                                                                  |       | $                  | 48,106,205 |                  | $          | 46,962,569 |   |
|                                                                                                                  |       |               |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                            |       |               |       |                  |       |
|                                                                                                                  |       |               |       |                  |       |
| Current Liabilities:                                                                                                  |       |               |       |                  |       |
| Accounts payable                                                                                                      |       | $                  | 18,736,316 |                  | $          | 20,165,306 |   |
| Accrued expenses and other liabilities                                                                                |       | 1,614,232          |       | 1,561,119             |       |
| Current portion of capital lease obligations                                                                          |       | 69,131             |       | 71,770                |       |
| Current portion of notes payable, other                                                                               |       | 27,282             |       | 29,645                |       |
| Note payable, revolving line of credit                                                                                |       | 23,781,176         |       | 22,625,500            |       |
| Total current liabilities                                                                                             |       | 44,228,137         |       | 44,453,340            |       |
|                                                                                                                  |       |               |       |                  |       |
| Long-Term Debt:                                                                                                       |       |               |       |                  |       |
| Note payable, convertible debt (net of discounts of  $5,415,247 and $4,444,448, respectively)     |       | 1,584,753          |       | 555,552               |       |
| Embedded derivative liability, at fair value                                                                          |       | 1,931,359          |       | 5,954,462             |       |
| Capital lease obligations, net of current portion                                                                     |       | 77,398             |       | 97,860                |       |
| Notes payable other, net of curent portion                                                                            |       | 73,109             |       | 78,157                |       |
| Total long-term debt                                                                                                  |       | 3,666,619          |       | 6,686,031             |       |
| Total liabilities                                                                                                     |       | 47,894,756         |       | 51,139,371            |       |
|                                                                                                                  |       |               |       |                  |       |
| 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;  11,926,900 and 11,701,102 issued and outstanding      |       | 11,927             |       | 11,701                |       |
| Additional paid in capital                                                                                            |       | 5,727,279          |       | 4,189,396             |       |
| Accumulated deficit                                                                                                   |       | (5,527,757         | )          | (8,377,899            | )          |
| Total stockholders’ equity                                                                                       |       | 211,449            |       | (4,176,802            | )          |
|                                                                                                                  |       | $                  | 48,106,205 |                  | $          | 46,962,569 |   |

 

See notes to theconsolidated interim financial statements.

3

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 
| ** **                                   | ** ** | **The three months ended** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **March 31,**                        | ** ** |
| ** **                                   | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
|                                         |       |                                      |       |   |   |
| Net Sales                                    |       | $                                         | 16,031,219 |   | $ | 13,692,978 |   |
| Cost of Goods  Sold                          |       | 10,217,790                                |       | 8,562,993 |   |
| Gross Profit                                 |       | 5,813,429                                 |       | 5,129,985 |   |
| Operating Expenses:                          |       |                                      |       |   |   |
| Warehouse and distribution                   |       | 2,354,354                                 |       | 1,685,391 |   |
| Sales and marketing                          |       | 1,536,730                                 |       | 1,689,678 |   |
| General and administrative                   |       | 1,983,648                                 |       | 1,520,756 |   |
|                                         |       | 5,874,732                                 |       | 4,895,825 |   |
| Income (Loss)  from Operations               |       | (61,303                                   | )          | 234,160 |   |
| Other Income (Expense):                      |       |                                      |       |   |   |
| Interest expense                             |       | (1,081,376                                | )          | (269,590 | ) |
| Change in fair value of derivative           |       | 4,023,103                                 |       | — |   |
| Other                                        |       | (30,282                                   | )          | 86,911 |   |
|                                         |       | 2,911,445                                 |       | (182,679 | ) |
| Income Before  Income Taxes                  |       | 2,850,142                                 |       | 51,481 |   |
|                                         |       |                                      |       |   |   |
| Income Tax  Benefit (Expense)                |       | —                                    |       | — |   |
| Net Income                                   |       | $                                         | 2,850,142  |   | $ | 51,481 |   |
| Earnings Per Share:                          |       |                                      |       |   |   |
| Basic                                        |       | $                                         | .24        |   | $ | .00 |   |
| Diluted                                      |       | $                                         | .22        |   | $ | .00 |   |
| Weighted Average Common  Shares Outstanding: |       |                                      |       |   |   |
| Basic                                        |       | 11,731,856                                |       | 11,697,102 |   |
| Diluted                                      |       | 12,901,966                                |       | 11,697,102 |   |

 

See notes to theconsolidated interim financial statements.

4

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

** **

CONSOLIDATEDSTATEMENTS OF  STOCKHOLDERS' EQUITY

(Unaudited)

 

 
| ** **                                                           | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|-----------------|------------|------------|------------|
| ** **                                                           | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Earnings**   | ** ** | ** **      | ** ** |
| ** **                                                           | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Total**  | ** ** |
|                                                                 |       |                  |       |             |       |           |       |            |       |       |       |
| Balance,  December 31, 2005                                          |       | 11,701,102            |       | $                | 11,701     |           | $          | 4,189,396       |       | $          | (8,377,899 | ) | $ | (4,176,802 | ) |
|                                                                 |       |                  |       |             |       |           |       |            |       |       |       |
| Issuance of shares to employees and directors for  services rendered |       | 4,600                 |       | 5                |       | 11,495         |       | —          |       | 11,500     |       |
|                                                                 |       |                  |       |             |       |           |       |            |       |       |       |
| Stock option compensation expense                                    |       | —                |       | —           |       | 30,437         |       | —          |       | 30,437     |       |
|                                                                 |       |                  |       |             |       |           |       |            |       |       |       |
| Issuance of shares as prepaid interest on  subordinated debt         |       | 221,198               |       | 221              |       | 486,415        |       | —          |       | 486,636    |       |
|                                                                 |       |                  |       |             |       |           |       |            |       |       |       |
| Discount on convertible debt                                         |       | —                |       | —           |       | 1,009,536      |       | —          |       | 1,009,536  |       |
|                                                                 |       |                  |       |             |       |           |       |            |       |       |       |
| Net income, three months ended March 31, 2006                        |       | —                |       | —           |       | —         |       | 2,850,142       |       | 2,850,142  |       |
|                                                                 |       |                  |       |             |       |           |       |            |       |       |       |
| Balance, March 31, 2006                                              |       | 11,926,900            |       | 11,927           |       | $              | 5,727,279  |            | $          | (5,527,757 | )          | $ | 211,449 |   |
|                                                                      |            |                       |            |                  |            |                |            |                 |            |            |            |  |  |  |  |

 

See notes to theconsolidated interim financial statements.

5

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**IWTTESORO CORPORATION AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| ** **                                                                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                         |       |                             |       |   |   |
| Net income                                                                     |       | 2,850,142                        |       | 51,481 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                  |       | 155,648                          |       | 82,179 |   |
| Amortization of loan discount                                                  |       | 525,373                          |       | — |   |
| Change in fair value of embedded derivative                                    |       | (4,023,103                       | )          |   |   |
| Common stock issued for services and compensation                              |       | 11,500                           |       | — |   |
| Stock option compensation expense                                              |       | 30,437                           |       | — |   |
| Provision for doubtful accounts and reserve for  returns                       |       | 79,060                           |       | — |   |
| Loss on disposal of property and equipment                                     |       | 11,161                           |       | — |   |
| Changes in  operating assets and liabilities:                                  |       |                             |       |   |   |
| (Increase)  Decrease in:                                                       |       |                             |       |   |   |
| Accounts receivable                                                            |       | (2,094,553                       | )          | (743,077 | ) |
| Inventories                                                                    |       | 781,206                          |       | (1,466,934 | ) |
| Deposit on purchase of inventories                                             |       | 74,052                           |       | — |   |
| Prepaid expenses and other assets                                              |       | (144,191                         | )          | (46,452 | ) |
| Increase  (Decrease) in:                                                       |       |                             |       |   |   |
| Accounts payable                                                               |       | (1,428,990                       | )          | (929,240 | ) |
| Accrued expenses and other liabilities                                         |       | (68,461                          | )          | 138,411 |   |
| Net cash used in operating activities                                          |       | (3,240,719                       | )          | (2,913,632 | ) |
|                                                                           |       |                             |       |   |   |
| Cash flows from  investing activities:                                         |       |                             |       |   |   |
| Acquisitions of property and equipment                                         |       | (364,005                         | )          | (34,005 | ) |
| Proceeds from sale of equipment                                                |       | 5,300                            |       | — |   |
| Net cash used in investing activities                                          |       | (358,705                         | )          | (34,005 | ) |
|                                                                           |       |                             |       |   |   |
| Cash flows from  financing activities:                                         |       |                             |       |   |   |
| Proceeds from revolving line of credit                                         |       | 17,625,018                       |       | 16,062,508 |   |
| Payments on revolving line of credit                                           |       | (16,347,768                      | )          | (13,074,776 | ) |
| Proceeds from issuance of convertible debt and  warrant                        |       | 2,000,000                        |       | — |   |
| Debt issuance costs                                                            |       | (80,500                          | )          | — |   |
| Payments of long-term debt and capital lease  obligations                      |       | (30,512                          | )          | (27,278 | ) |
| Loan financing costs                                                           |       | —                           |       | (35,654 | ) |
| Net cash provided by financing activities                                      |       | 3,166,238                        |       | 2,924,800 |   |
|                                                                           |       |                             |       |   |   |
| Net Decrease in  Cash                                                          |       | (433,186                         | )          | (22,837 | ) |
|                                                                           |       |                             |       |   |   |
| Cash, Beginning                                                                |       | 552,042                          |       | 507,677 |   |
| Cash, Ending                                                                   |       | 118,856                          |       | 484,840 |   |
|                                                                           |       |                             |       |   |   |
| Cash Paid During the  Period for:                                              |       |                             |       |   |   |
| Interest expense                                                               |       | 556,004                          |       | 269,590 |   |
| Non-Cash Operating  Activities:                                                |       |                             |       |   |   |
| Inventory acquired through deposit with vendor                                 |       | $                                | 48,215     |   | $ | 57,861 |   |
|                                                                                |            |                                  |            |  |  |  |  |

 

See notes to theconsolidated interim financial statements.

6

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IWT TESORO CORPORATIONAND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

THREE MONTHS ENDEDMARCH 31, 2006

###### **NOTE 1.               SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

#### ***Principlesof Consolidation***

The consolidatedfinancial statements include IWT Tesoro Corporation and its wholly ownedsubsidiaries International Wholesale Tile, Inc., IWT Tesoro International,Ltd, IWT Tesoro Transport, Inc. and The Tile Club, Inc and The Tile Club, Inc.’swholly owned subsidiary Import Flooring Group, Inc. All significantinter-company balances and transactions have been eliminated in consolidation.

#### ***Basis 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 three months of the year arenot necessarily indicative of the results of operations which might be expectedfor the 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 10-10of Regulation S-X of the Securities and Exchange Commission. Accordinglycertain information and footnote disclosure required by accounting principlesgenerally accepted in the United States of America for complete financialstatements have been omitted. These condensed financial statements should beread in conjunction with the Company’s financial statements and notes theretoincluded in the Company’s audited financial statements on Form 10-K,for the fiscal year ended December 31, 2005.

The Consolidated BalanceSheet at December 31, 2005 has been derived from the audited financialstatements of IWT Tesoro Corporation at that date, but does not include all ofthe information and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements.

***Earnings per Share***

Basic earnings (loss) per share is computed by dividing net earnings(loss) by the weighted average number of common shares outstanding each period.Diluted earnings (loss) per share is computed by dividing net earnings (loss)by the diluted weighted average number of common shares outstanding during theperiod. Diluted earnings per share reflects the potential dilution from commonshares issuable through stock options and restricted stock.

## ***IncomeTaxes***

The Companyrecognizes income taxes under the asset and liability method. Under thismethod, deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases, and loss carryforwards. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date. Deferredtax assets are reduced by a valuation allowance when, in the opinion ofmanagement, it is more likely than not that some portion or all of the deferredtax assets will not be realized.

## ***Segment Information***

The Company hasadopted SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information.” SFAS No. 131 establishes standards for the way thatpublic business enterprises report information about operating segments inannual financial statements and requires those enterprises to report selectedinformation about operating segments in interim financial reports issued tostockholders. The Company operates in one segment for management reportingpurposes.

7

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***Reclassifications***

Certain amounts inthe 2005 financial statements have been reclassified for comparative purposesto conform to the 2006 presentation. These reclassifications had no effect onnet income.

***RecentAccounting Pronouncements***

In November, 2004,the FASB issued SFAS No. 151 “Inventory Costs” an   amendment to Accounting Research         Bulletin No. 43, “InventoryPricing,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material. This Statement requiresthat those items be recognized as current-period charges regardless of whetherthey meet the criterion of “so abnormal.” Additionally this statement requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. The provisions of SFAS No. 151 are effective forfiscal years beginning after June 15, 2005. The Company adopted SFAS 151on January 1, 2006 and its adoption did not have an effect on ourconsolidated results of operations, financial position or cash flows.

In December 2004,the FASB issued SFAS No. 153, *“Exchangesof Nonmonetary Assets”* an amendment to Accounting Principles BoardOpinion No. 29, “*Accounting forNonmonetary Transactions,”* which is based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged. The guidance in that Opinion, however, included certainexceptions to that principle. This Statement amends Opinion 29 to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges in which the future cash flows of theentity are not expected to change significantly as a result of the exchange. Theprovisions of SFAS No. 153 are effective for nonmonetary asset exchangesin fiscal periods beginning after June 15, 2005. The Company adopted SFAS153 on January 1, 2006 and its adoption did not have an effect on ourconsolidated results of operations, financial position or cash flows.

In December 2004,the FASB issued SFAS No. 123 (revised 2004) (“SFAS No. 123R”), “*Share-Based Payment*,” which requires that the compensationcost relating to share-based payment transactions be recognized in thefinancial statements. SFAS No. 123R replaces SFAS No. 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” Share-based compensation arrangements includeshare options, restricted share plans, performance-based awards, shareappreciation rights and employee share purchase plans. SFAS No. 123Rrequires all share-based payments to employees be valued using a fair valuemethod on the date of grant and expensed based on that fair value generallyover the applicable vesting period. SFAS No. 123R also amends SFAS No. 95“ Statement of Cash Flows,” requiring the benefits of tax deductions in excessof recognized compensation cost be reported as financing cash inflow ratherthan as a reduction of taxes paid. In March 2005, the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107, (“SABNo. 107”) which expresses the SEC’s views regarding the interactionbetween SFAS No. 123R and certain SEC rules and regulations and,accordingly, provides guidance related to share-based payment transactions forpublic companies. The Company adopted SFAS 123R on January 1, 2006 and itsadoption did not have a material effect on our consolidated results ofoperations, financial position or cash flows. The Company’s compensationexpense for the period ended March 31, 2006 was approximately $30,400, asfurther described in Note 9. The financial impact of any stock options grantedis determined using the Black-Scholes option-pricing model with the followingassumptions: option price, dividend yield, expected volatility, risk freeinterest rate and the expected life.

8

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**NOTE 2                LIQUIDITYAND PROFITABILITY CONSIDERATIONS**

The Company’s net earnings for the three months ended March 31,2006 are approximately $2,850,000 of which approximately $4.0 million relatesto the change in the fair value of the derivative liability, as more fullydescribed in Note 6. This follows net losses of approximately $4,344,000,$1,209,000 and $1,865,000 for the years ended December 31, 2005, 2004 and2003, respectively. As reflected in the consolidated balance sheet as of March 31,2006, the Company had working capital of approximately $846,000, an improvementof approximately $1,471,000 from December 31, 2005 which had a workingcapital deficit of approximately $625,000.

***Profitability***

In January 2006 management implemented a plan to improveprofitability by reducing projected operating costs in sales and marketing andadministrative overhead. Operating expenses were reduced 4.2%, approximately $708,000for the three months ended March 31, 2006 as compared to the three monthsended December 31, 2005. The Company expanded its plan by reducing operatingcost and in May 2006 realigned the operations of its subsidiary ImportFlooring Group, Inc. The Company implemented a 3.5% price increase in February 2006,opened a small warehouse in Ohio to service existing and new customers in theMidwest and began selling products to two additional home center companies.

***Liquidity***

In February 2006, as more fully described in Note 6 herein, theCompany obtained $2.0 million through the issuance of a three year subordinatedconvertible term note. In May 2006, as more fully described in Note 10herein, the Company obtained $2.0 million through the issuance of a one yearsubordinated term note. These funds will generally be used for the Company’sworking capital requirements.

The Company hired a consultant to review purchasing and inventorymanagement procedures. The goal of the study is to determine the optimuminventory necessary to maintain the high levels of customer satisfaction whileimproving working capital. The Company continues to work with the consultant toascertain the optimum inventory levels and has improved inventory turnover andreduced inventory levels 2.4% from December 31, 2005 to March 31, 2006.

In December 2005 the Company signed an agreement with a company toprovide market capitalization support services. Additionally, in February 2006the Company signed an agreement with an investment banking firm to providegeneral financial advisory services to develop and implement a plan to raisenew debt and / or equity capital. The Company continues to work with both ofthese companies to improve the Company’s financial structure and raise new debtand / or equity capital.

Summary

Management believes the results of the plan described above will provideimprovements in the Company’s profitability, cash flow and liquidity and toensure its viability and to sustain its operations.

9

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**NOTE 3                INVENTORIES**

Inventoriesconsisted of the following:

|                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------|------------|--------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2006**           | ** ** | **2005**              | ** ** |
|                  |       |               |       |                  |       |
| Tiles                 |       | $                  | 29,515,537 |                  | $          | 28,858,620 |   |
| Inventory in  transit |       | 1,915,264          |       | 3,353,387             |       |
|                  |       | $                  | 31,430,801 |                  | $          | 32,212,007 |   |

 

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

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

Property and equipment consisted of the following:

|                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**           | ** ** | **2005**              | ** ** |
|                           |       |               |       |                  |       |
| Furniture and fixtures         |       | $                  | 423,805    |                  | $          | 423,806 |   |
| Machinery and  equipment       |       | 1,111,080          |       | 859,996               |       |
| Vehicles                       |       | 312,371            |       | 307,195               |       |
| Office and  computer equipment |       | 723,197            |       | 676,304               |       |
| Leasehold  improvements        |       | 695,068            |       | 676,094               |       |
|                           |       | 3,265,521          |       | 2,943,395             |       |
| Less accumulated  depreciation |       | 908,343            |       | 822,973               |       |
|                           |       | $                  | 2,357,178  |                  | $          | 2,120,422 |   |

 

Depreciation expense for the three months ended March 31, 2006 and2005 was approximately $85,400 and $78,100, respectively.

#### **NOTE 5                NOTESPAYABLE, REVOLVING LINE OF CREDIT**

On December 31, 2004, the Company amended and restated theexisting revolving line of credit agreement providing up to $25,000,000 withinterest rates of either (1) LIBOR plus 3.00% or (2) the base rateplus 0.50% (interest rates ranging from 7.00% to 8.25% at March 31, 2006)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 March 31, 2006 and December 31,2005 was $23,781,176 and $22,625,500, respectively. The line matures September 10,2006 and contains certain covenants requiring the Company to maintain a certainleverage ratio, a required minimum fixed charge coverage ratio, and certaininventory turnover ratio. At March 31, 2006 the Company was not incompliance with the leverage and fixed charge coverage ratio requirement. TheCompany was granted a waiver of these covenants from its commercial lender.

For the three months ended March 31, 2006 and 2005, interestexpense related to the credit line amounted to $436,073 and $255,625respectively.

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**NOTE6                NOTES PAYABLE —CONVERTIBLE DEBT**

On February 10, 2006, the Company issued a secured term note inthe amount of $2,000,000 resulting in net proceeds of $1,919,500. Interestaccrues on the principal balance of the note at an annual interest rate equalto prime plus 2.0%, payable monthly in arrears commencing on March 1, 2006.On March 31, 2006, the interest rate was 9.75%. The note requires monthlyprincipal payments of $66,667 commencing on August 1, 2006 and continuinguntil maturity. The note matures on February 10, 2009.   The note is convertible into common stock ofthe Company at a fixed conversion rate of $2.17 per share. Based upon theclosing price per share of the Company’s common stock on the date of issuance,there was a beneficial conversion feature with an estimated intrinsic value of$553,593, which is presented as a discount on the note to be amortized intoexpense over the three year term of the loan using the effective interestmethod. In connection with the convertible note, the Company issued to theholder of the note a seven-year warrant to purchase 460,829 shares of theCompany’s common stock at an exercise price of $2.39 per share. The Companyestimated the fair value of the warrant and allocated $455,943 of the proceedsof the debt to the warrant which is presented as a discount on the note to beamortized into interest expense over the three-year term of the note using theeffective interest method. The aggregate discount allocated to the beneficialconversion feature and the options and warrants was recorded as additional paidin capital at March 31, 2006. The fair value of the warrant was estimatedat the date of issuance using the Black-Scholes option-pricing model using thefollowing assumptions: risk-free rate of 4.59%, dividend yields of 0%, and avolatility factor of the expected market price of the Company’s common stock of58.2%. The Company also issued to the holder, 221,198 shares of the Company’scommon stock as prepayment of interest in the amount of $486,636, which wascalculated based upon the closing price per share of the Company’s common stockon the date of issuance of $2.20 per share. The prepaid interest is presentedas a discount on the note to be amortized into interest expense over the threeyear term using the effective interest method.

On August 25, 2005, the Company issued a secured revolving note inthe aggregate amount of $5,000,000 resulting in net proceeds of $4,733,000after debt issuance costs of $267,000. Interest accrues on the principalbalance of the note at an annual interest rate equal to prime plus 1.5%. On March 31,2006, the interest rate was 8.25%. The note matures on August 25, 2008. Thenote is convertible into common stock of the Company at an initial conversionrate 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 DerivativeInstruments and Hedging Activities*. Based upon the closing price pershare of the Company’s common stock on the date of issuance, the Companyestimated the fair value of the embedded conversion option and classified$2,068,317 as a derivative liability that is adjusted to fair value at eachreporting date with changes in fair value reported in earnings. In connectionwith the convertible notes, the Company issued to the holder of the note afive-year warrant to purchase 511,883 shares of the Company’s common stock atan exercise price of $3.15 per share and an option to purchase 1,170,110 sharesof the Company’s common stock at an exercise price of $0.001 per share. Basedupon the closing price per share of the Company’s common stock on the date ofissuance, the Company estimated the fair value of the warrant and option andclassified $3,099,835 and $692,334, respectively, as derivative liabilitiesthat are adjusted to fair value at each reporting date with changes in fairvalue reflected in operations. The estimated fair value of the derivativeliabilities as of March 31, 2006 is $1,931,359. This is a decrease in fairvalue of $4,023,103 from the value of December 31, 2005. This decrease is primarilydue to the decrease in the Company’s closing stock prices as of March 31,2006 compared to the closing stock price as of December 31, 2005. TheCompany has recognized this change in fair value as other income in theConsolidated Statement of Operations for the three months ended March 31,2006. The fair values of the options, warrants, and embedded conversion optionwas estimated at the date of issuance using the Black-Scholes option-pricingmodel using the following weighted average assumptions: risk-free rate of4.06%, dividend yields of 0%, and volatility factors of the expected marketprice of the Company’s common stock of 60.79%.

On March 31, 2006, the Company issued Amendment #2 to the SecurityAgreement, dated August 25, 2005 and the Convertible Minimum BorrowingNote, dated August 25, 2005 with Laurus Master Fund, LTD. As a result ofthe Amendment, the Company is no longer required to make any modifications tothe fixed conversion price, or issue additional securities in the event theCompany issues common stock at a price less than $2.74 per share.

On April 15, 2006, the Company issued Amendment #3 to the SecurityAgreement dated August 25, 2005 and the Registration Rights Agreementdated August 25, 2005, with Laurus Master Fund, LTD. As a result of theAmendment, the Company has extended the deadline by which the RegistrationStatement is required to be filed and declared effective by the Commission.

11

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The balance of the notes, net of unamortized discounts and the embeddedderivative as of March 31, 2006 is as follows:

| Derivative liability at  December 31, 2005                  |   | $          | 5,954,462 |   |
|------------------------------------------------------------------|--------|------------|-----------|--------|
| Change in fair value                                             |   | (4,023,103 | )         |
| Derivative  liability as of March 31, 2006                  |   | $          | 1,931,359 |   |
|                                                             |   |       |      |
| Principal amount  of notes                                       |   | $          | 7,000,000 |   |
| Fair value -  Conversion feature                                 |   | (2,318,222 | )         |
| Fair value -  Warrants and options                               |   | (4,177,950 | )         |
| Accretion of  discount to interest expense                       |   | 1,080,926  |      |
| Balance as of  March 31, 2006, net of unamortized discounts |   | $          | 1,584,753 |   |

 

Interest expense related to the notes announced to $138,007 during theperiod ended March 31, 2006.

Amortization of discounts for the conversion features and warrant andoption resulted in charges to interest expense totaling $192,161 during thethree months ended March 31, 2006.

Amortization of discounts for the detachable warrants and optionsresulted to charges to interest expense totaling $306,767 during the threemonths ended March 31, 2006.

The note is secured by a lien on substantially all the assets of theCompany, subject to a first priority lien of the Company’s primary financiallender.

#### The holder of the note has agreed that it will notconvert the note, or exercise any warrant or option, into common stock inamounts that would cause the holder’s aggregate beneficial ownership of theCompany’s common stock to exceed 4.99%, without 120 days prior notice, or 19.99%,without stockholder approval.

#### **NOTE 7                STOCKHOLDERS’EQUITY**

**Common Stock**

During the three months ended March  31, 2006, the Company issued4,600 shares of common stock to several employees under the Stock IncentivePlan for services rendered, based on the closing stock price at the date of issuance,for a total of $11,500, resulting in an equivalent charge to operations.

On February 10, 2006, the Company issued 221,198 shares of commonstock to the holder of a secured term note as prepayment of interest in theamount of $486,636, which was calculated based upon the closing price per shareof the Company’s common stock on the date of issuance.

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#### **NOTE 8                INCOMETAXES**

Income tax expense for the three month period ended March 31, 2006was $-0-as the provision for income taxes, computed by applying theFederal statutory rate to income before income taxes, was reduced by thedecrease in the deferred tax valuation allowance during the period, resultingfrom the utilization of a portion of the Company’s net operating losscarryforward.

Income tax expense for the three month period ended March 31, 2005was $-0- as the benefit for income taxes, computed by applying theFederal statutory rate to loss before income taxes, was reduced by the increasein the deferred tax valuation allowance during the period, to adjust deferredtaxes to the amount considered by management more likely than not to berealized.

The significant components of deferred tax assets and deferred taxliabilities at March 31, 2006 and December 31, 2006 are presentedbelow:

|                                                  | ** ** | **March 31,** | ** ** | **December 31** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **2006**           | ** ** | **2005**             | ** ** |
| Deferred tax asset:                              |       |               |       |                 |       |
| Net operating loss carry forward                 |       | $                  | 1,708,160  |                 | $          | 1,302,015 |   |
| Accounts receivable                              |       | 76,999             |       | 52,630               |       |
| Accrued expense                                  |       | 29,067             |       | 25,355               |       |
| Deferred compensation - stock options            |       | 262,320            |       | 250,867              |       |
| Accumulated depreciation                         |       | 796,843            |       | 822,168              |       |
| Derivative liability                             |       | 62,880             |       | 57,499               |       |
| Debt basis difference                            |       | (1,154,730         | )          | 359,164              |       |
| Discount on debt - beneficial conversion feature |       | (191,342           | )          | —               |       |
| Other                                            |       | 15,326             |       | 24,336               |       |
|                                             |       | 1,605,523          |       | 2,894,034            |       |
| Less: Valuation allowance                        |       | (1,605,523         | )          | (2,894,034           | )          |
|                                             |       | $                  | —     |                 | $          | — |   |

 

The following table summarizes the classification of the deferred taxasset as of March 31, 2006 and December 31, 2005.

|                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Current                 |       |               |       |                  |       |
| Non-current             |       | $                  | 165,450    |                  | $          | 135,484 |   |
| Total                   |       | 1,440,073          |       | 2,758,550             |       |
| Valuation  allowance    |       | 1,605,523          |       | 2,894,034             |       |
| Net deferred tax  asset |       | (1,605,523         | )          | (2,894,034            | )          |
|                    |       | $                  | —     |                  | $          | — |   |

 

At March 31, 2006, the Company had net operating losscarryforwards for federal income tax purposes of approximately $4,539,000,which are available to offset future federal taxable income through 2026. Ofthe $1,288,511 change in the valuation allowance, approximately $208,000 wasrecorded as a reduction to the deferred tax effect of the beneficial conversionfeature recorded in additional paid in capital.

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#### **NOTE 9               ****STOCK-BASEDCOMPENSATION**

The Company entered into a Stock Incentive Plan on December 27,2001. Under the plan,non-qualified stock options, incentive stock options and restricted stock maybe granted to eligible employees, consultants and affiliates.

Effective January 1, 2006, the Company adopted the fair value measurementand recognition provisions of SFAS No. 123R using themodified-prospective-transition method. Prior to the adoption of SFAS No. 123Rstock option grants were accounted for in accordance with Accounting PrinciplesBoard Opinion No. 25,  “*Accounting  for Stock Issued toEmployees*” (APB No. 25), and related interpretations, andaccordingly recognized no compensation expense for stock option grants.

Under the modified-prospective-transition method, SFAS No. 123Rapplies to new awards and to awards that were outstanding on January 1,2006 that are subsequently modified, repurchased or cancelled. Under themodified-prospective-transition method compensation cost recognized in thethree-month period ended March 31, 2006, includes compensation cost forall shared-based payments granted prior to, but not yet vested as of January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of Statement 123, and compensation cost for all share-basedpayments granted subsequent to January 1, 2006, based on the grant-datefair value estimated in accordance with the provisions of SFAS No. 123R.Prior periods were not restated to reflect the impact of adopting the newstandard.

As a result of adopting SFAS No. 123R on January 1, 2006,during the three month period ended March 31, 2006, the Company recognizedadditional compensation costs of $30,437. The adoption of SFAS No. 123Rhad no impact on basic and diluted earnings per share for the three monthsended March 31, 2006.

The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofStatement 123(R) to options granted under the Company’s stock option planfor the three-month period ended March 31, 2005. For purposes of thisproforma disclosure, the value of the options is estimated using theBlack-Scholes option-pricing model and amortized to expense over the options’vesting periods. 

|                                                                                                                                              | ** ** | **For the  three months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **March 31, 2005**                   | ** ** |
| Net income as  reported                                                                                                                      |       | $                                              | 51,481     |   |
| Deduct: Stock-based employee compensation expense  determined under the fair value based method for all options, net of related  tax effects |       | (19,740                                        | )          |
| Pro forma net  income                                                                                                                        |       | $                                              | 31,741     |   |
| Earnings per share -  Basic and Diluted                                                                                                      |       |                                           |       |
| As reported                                                                                                                                  |       | $                                              | 0.00       |   |
| Pro forma                                                                                                                                    |       | $                                              | 0.00       |   |

 

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The following assumptions were utilized in theBlack-Scholes option pricing model used to estimate the fair value ofstock-based awards.

|                                         | ** ** | **Three Months Ended  March 31** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Dividend yield                          |       | 0                                               | %          | 0 | % |
| Expected  volatility                    |       | 58.8                                            | %          | 75.6 | % |
| Risk-free  interest rate                |       | 4.4                                             | %          | 4.3 | % |
| Expected life of  options (in years)    |       | 5.5                                             |       | 5.5 |   |
| Weighted-average  grant-date fair value |       | $                                               | 1.42       |   | $ | 1.70 |   |
|                                         |            |                                                 |            |  |  |  |  |

 

The assumptions above are based on multiple factors,including historical exercise patterns of employees in relative homogeneousgroups with respect to exercise and post-vesting employment terminationbehaviors, expected future exercising patterns for these same homogenous groupsand the implied volatility of our stock price.

At March 31, 2006, there was $240,506 ofunrecognized compensation cost related to share-based payments which isexpected to be recognized over a weighted-average period of 1.84 years.

The following table represents employee based stockoption activity for the three months ended March 31, 2006:

|                                             | ** ** | **Number of  Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining Contract  Life in Years** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|-------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Outstanding  options at beginning of period |       | 567,749                    |       | $                                         | 3.21       | ** **                                                             | ** ** | ** ** |
| Granted                                     |       | 50,000                     |       | 2.50                                      | ** ** | ** **                                                             | ** ** |
| Exercised                                   |       | 0                          | ** ** | ** **                                | ** ** | ** **                                                             | ** ** |
| Forfeited                                   |       | (8,000                     | )          | 4.80                                      |       |                                                                   |       |
| Outstanding  options at end of period       |       | 609,749                    |       | $                                         | 3.14       |                                                                   | 4.42       |   |
| Outstanding exercisable  at end of period   |       | 458,883                    |       | $                                         | 3.22       |                                                                   | 4.42       |   |

 

Shares available for future stock option grants toemployees and directors under the existing plan were 3,243,918 and 3,293,918,respectively, at March 31, 2006 and 2005. At March 31, 2006 theaggregate intrinsic value of shares outstanding was $1,109,625, and theaggregate intrinsic value of options exercisable was 863,005.  Total intrinsic value of options exercised was$0 for the three months ended March 31, 2006.

15

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The following table summarizes our nonvested stockoption activity for the three months ended March 31, 2006:

|                                                 | ** ** | **Number of  Shares** | ** ** | **Weighted-Average  Grant Date Fair Value** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|
| Nonvested stock  options at beginning of period |       | 158,866                    |       | $                                                          | —     |   |
| Granted                                         |       | 50,000                     |       | 1.42                                                       |       |
| Vested                                          |       | (50,000                    | )          | 1.56                                                       |       |
| Forfeited                                       |       | (8,000                     | )          | 0.95                                                       |       |
|                                            |       |                       |       |                                                       |       |
| Nonvested stock options  at end of period       |       | 150,866                    |       | $                                                          | 1.63       |   |

 

**NOTE 10              SUBSEQUENTEVENT**

***Financing***

On May 3rd, 2006, the Company issued a$2,000,000 secured term note with Laurus Master Fund, LTD which matures on May 3rd, 2007. As a part of thefinancing arrangement, the Company issued the Purchaser a ten-year warrant topurchase up to 333,333 shares of the Company’s Common Stock at $1.12 per share.Interest accrues on the principal balance of the note at an annual interestrate equal to 15.0% per annum, payable monthly, commencing on June 1st, 2006.

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ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

IWT Tesoro Corporation (theCompany) was organized in Nevada on May 3rd, 2000, originally under thename “Ponca Acquisition Corporation”.  Effective October 1, 2002, Tesoroacquired all of International Wholesale Tile, Inc.’s (IWT) common stockfrom IWT’s three shareholders. IWT was organized in Florida and has been incontinuous operations since 1994. In exchange for the IWT stock, the IWTshareholders each received 3.0 million Tesoro shares, representing 87% ofTesoro’s then outstanding common stock.

In addition to IWT, Tesoro’sprimary operating subsidiary, Tesoro has three additional wholly ownedsubsidiaries. These include IWT Tesoro Transport, IWT Tesoro International, Ltdand The Tile Club, Inc. The Tile Club, Inc has a wholly owned subsidiarynamed Import Flooring Group, Inc.

·                  IWT Tesoro Transport, a USDOT licensed commoncarrier, organized to act as our freight carrier outside of Florida and to backhaul non-household goods into Florida to help generate outside revenue, whichhas been insignificant through March 31, 2006;

·                  IWT Tesoro International, Ltd., a Bermudacorporation to act as a holding company for activities and assets such asagency agreements and investments in foreign operations; and

·                  The Tile Club, Inc., formed in 2004, wasorganized to acquire licensing, manufacturing and distribution rights forhigh-end designer and artistic based decorative tiles and to also act as anagent for foreign manufacturers from whom IWT has acquired exclusivedistribution rights.

·                  Import Flooring Group, Inc., formed in June 2005,was organized to support the Company’s growth strategy with an agent- orientedbusiness model in the floor covering market.

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

 

 

*Resultsof Operations for the Quarters ended March 31, 2006, 2005 and 2004.*

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

|                                | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **March 31,  2004** | ** ** |
|--------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                     | ** ** | ** **               | ** ** | ** **               | ** ** | **(Restated)**           | ** ** |
| Revenues                       |       | $                        | 16,031,219 |                     | $          | 13,692,978               |       | $ | 9,534,632 |   |
| Cost of Goods  Sold            |       | 10,217,790               |       | 8,562,993                |       | 5,810,414                |       |
| Gross Margin                   |       | 5,813,429                |       | 5,129,985                |       | 3,724,218                |       |
| Gross Margin                   |       | 36.26                    | %          | 37.46                    | %          | 39.06                    | %          |
| Percentage Operating  Expenses |       | $                        | 5,874,732  |                     | $          | 4,895,825                |       | $ | 4,248,909 |   |

 

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*Quarter ended March 31,2006 Compared to Quarter March 31, 2005*

Net sales for the threemonths ended March 31, 2006 increased $2,338,241 or approximately 17.1%over the reported net sales for the three months ended March 31, 2005.This growth follows a 43.6% increase in net sales for the three months ended March 31,2005 over the three months ended March 31, 2004. Despite the period overperiod increase, management believes that the sales growth for the three monthsended March 31, 2006 was lower than expected due to the slow economic recoveryfrom the severe weather that impacted building activities in the southeasternand gulf coast areas of the United States in the fall of 2005. The Companycontinues to try to mitigate the impact of weather on its sales growth byexpanding its geographic operations and expects to maintain a strong growthrate.

Gross profit forthe three months ended March 31, 2006 was $5,813,429 (36.3% of net sales)compared to $5,129,985 (37.5% of net sales) for the three months ended March 31,2005. Gross profit was impacted by higher than expected cost of goods soldrelating to the start up of the Company’s agency based subsidiary, ImportFlooring Group Inc. The Company expects to return to and maintain a grossprofit sales ratio of approximately 38% in the future.

Our operatingexpenses for the three months ended March 31, 2006 were $5,874,733 (36.6%of net sales) compared to $4,895,825 (35.7% of net sales) for the three monthsended March 31, 2005. There was a increase turn in our operating expenseratio for the three months ended March 31, 2006 compared to the threemonths ended March 31, 2005, caused primarily by the start up cost of ouragency based subsidiary, Import Flooring Group, Inc. however managementexpects to continue to realize benefits from increased economies of scale andits operating expense management efforts and anticipate future declines in theoperating expense ratio.

**Changesin Financial Position for the three months ended March 31, 2006 from theyear ended December 31, 2005**

Current assets at March 31,2006 are approximately $44.6 million compared to $43.8 million at December 31,2005, an increase of approximately $0.8 million. The increase is attributableto an increase in accounts receivable of approximately $2.0 million at March 31,2006 which is primarily due to our continued growth in sales. Inventorydecreased by $781,206 at March 31, 2006 from the year ended December 31,2005. The decrease in inventory relates primarily to our efforts to improve ourinventory turnover rate and utilization of resources.

Currentliabilities at March 31, 2006 are approximately $44.2 million compared to$ 44.5 million at December 31, 2005, a decrease of approximately $0.3million. The decrease is attributable to a decrease in accounts payable ofapproximately $1.4 million and an increase in our revolving line of credit ofapproximately $1.2 million. These changes are consistent with our ability tofund our growth through financing arrangements.

Long termliabilities at March 31, 2006 are approximately $3.7 million compared to$6.7 million at December 31, 2005, a decrease of approximately $3.0million. The decrease is due to a change in fair value of the embeddedderivative liability relating to a convertible secured note of approximately$4.0 million and an increase in convertible debt, net of discounts ofapproximately $1.0 million, as more fully described in Note 6 of theconsolidated financial statements. The decrease in the embedded derivativeliability is primarily attributable to decrease in the instruments fair marketvalue which is driven by the trading price of the Company’s common stock.

**Liquidityand Capital Resources**

We had cash balances of approximately $118,900 at March 31,2006 and $552,000 at December 31, 2005.  We have financed our growth with new subordinateddebt and increased borrowings from our commercial lender.

The cash outflowsused in operations during the quarter ended March 31, 2006 wereapproximately $3.2 million compared to $2.9 million for the quarter endedMarch, 31 2005. The increased outflow was primarily attributable to an increasein accounts receivable, which increased from approximately $9.9 million at thebeginning of 2006 to $11.9 million at March 31, 2006. Inventories, whichdecreased from approximately $32.2 million at the beginning of 2006 to $31.4million at March 31, 2006 contributed to minimizing the impact of thegrowth in the accounts receivables.

Net cash used ininvesting activities during the quarter ended March 31, 2006 wasapproximately $359,000 compared to $34,000 for the quarter ended March 31,2005. Capital expenditures consisted of tile finishing equipment to enhance ourbreadth of products offered.

Net cash providedby financing activities during the quarter ended March 31, 2006 wasapproximately $3.2 million compared to $2.9 million during the quarter ended March 31,2005. The increase is primarily attributable to the increased outstanding 

18

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balance on ourrevolving line of credit and the proceeds from the issuance of convertible debtand warrant of $2.0 million. The cash provided by these financing activitieswas used to fund our growth and expansion efforts.

During the quarter ended March 31,2006, we issued a $2,000,000 secured term note to an institutional investor asmore fully described in Note 6 to the consolidated financial statements. Thenote is subordinate to a revolving credit line with our commercial lender. Thecombination of this note and our two revolving credit facilities provides uswith up to $32 million of working capital. We expect that this debt will besufficient to support our normal growth in accounts receivable and inventorythrough 2006. However, our growth through geographical expansion andacquisition is expected to continue to require us to seek additional outsidecapital to supplement earnings and to strengthen our balance sheet. We expectto raise additional equity through both the public and private debt and equitymarkets during 2006. However, we cannot assure anyone that we will be able toobtain outside capital, or if we do, that it will be on terms beneficial to us.

The balance due at March 31, 2006 for oursubordinated debt was $7 million. The balance due at March 31, 2006 to ourcommercial lender for the use of the revolving line of credit was approximately$23.8 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 March 31,2006 the Company was not in compliance with two of these covenants and obtaineda waiver from its commercial lender.

# **Critical Accounting Policies**

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

We believe thatour application of accounting policies, and the estimates what are inherentlyrequired by these policies, are reasonable. We believe that significantaccounting policies are described in Note 1 to the consolidated financialstatements included in the Company’s Annual Report on Form 10-K, for the yearended December 31, 2005 and the stock-based compensation expense policy adoptedJanuary 1, 2006 may involve a higher degree of judgment and complexity.

***Stock-basedcompensation expense***

On January 1,2006, we adopted Statement of Financial Accounting Standards SFAS No. 123R,Share-Based Payment, which requires us to recognize compensation expense forstock-based compensation based on the grant date fair value. Stock-basedcompensation expense is then recognized ratably over the service period relatedto each grant. We used the modified prospective transition method under which financialstatements covering periods prior to adoption have not been restated. Wedetermine the fair value of stock-based compensation using the Black-Scholesoption pricing model, which requires us to make assumptions regarding futuredividends, expected volatility of our stock, and the expected lives of theoptions. Under SFAS 123R we also make assumptions regarding the number ofoptions and the number of restricted and performance shares that willultimately vest. The assumptions and calculations required by SFAS 123R arecomplex and require a high degree of judgment. Assumptions regarding thevesting of grants are accounting estimates that must be updated as necessarywith any resulting change recognized as an increase or decrease in compensationexpense at the time the estimate is changed.

**Forward-LookingInformation**

Some statements made in this Quarterly Report on Form 10-Q,are “forward-looking statements” and are not historical facts. Forexample, statements regarding our financial position, business strategy andother plans and objectives for future operations, and assumptions andpredictions about future demand for our services and products, supply, costs,marketing and pricing factors are all forward-looking statements. When weuse words like “intend,” “would”, “anticipate,” “believe,” “estimate,” “plan”or “expect” or the negative of these terms and similar expressions, we aremaking forward- looking statements. You should be aware that theseforward-looking statements are subject to risks and uncertainties. Additionally,our forward-looking statements speak only as of the date of this report. Otherthan as required by law, we undertake no obligation to update or revise thesestatements, whether as a result of new information, 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 — QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

**Quantitative andQualitative Disclosures about Market Risk**

Information about theCompany’s exposure to market risk was disclosed in its Annual Report on Form 10-Kfor the year ended December 31, 2005, which was filed with the Securitiesand Exchange Commission on May 19, 2006. No material quantitative orqualitative changes in market risk exposure has occurred since the date of thatfilings.

**ITEM 4 — CONTROLSAND PROCEDURES**

As of the end of the period covered by thisQuarterly 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 in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (“ExchangeAct”) to ensure that information required to be disclosed by Tesoro in thereports that Tesoro files or 

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submitsunder the Exchange Act is recorded, processed, summarized, and reported withinthe time periods specified by the SEC’s rules and forms.

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

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

Weare in the process of implementing the requirements of Section 404 of theSarbanes-Oxley Act of 2002 which requires our management to assess theeffectiveness of our internal control over financial reporting and include anassertion in our 2007 annual report as to the effectiveness of our internalcontrols over financial reporting. Subsequently, our independent registeredpublic accounting firm, McGladrey & Pullen LLP, will be required toattest to whether our assessment of the effectiveness of our internal controlsover financial reporting is fairly stated in all material respects andseparately report on whether it believes we maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2007. We are in the process of performing the system and process documentation,evaluation and testing required for management to make this assessment and forthe registered public accounting firm to provide its attestation report. Wehave not completed this process or its assessment, and this process willrequire significant amounts of management time and resources. In the course ofevaluation and testing, management may identify deficiencies that would need tobe addressed and remediated.

**PART II**

**ITEM 1.  LEGAL PROCEEDINGS.**

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

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

On February 10 2006,as part of the closing of a $2.0 million private offering of debt securitieswith Laurus Master Fund, Ltd., Laurus provided us with a secured term note of$2.0 million, which is currently convertible into 921,659 shares of commonstock at a conversion price of $2.17 per share. We also issued a warrant thatwill allow Laurus to purchase up 460,829 shares of our common stock at $2.39per share through February 10, 2013. Of the $2.0 million in proceedsreceived, $14,500 was paid to Laurus’ counsel for legal fees and $56,000 toLaurus Capital Management, LLC for management fees in connection with thetransaction through closing and to Laurus of $10,000 for due diligence fees. Theseoffering expenses paid on behalf of Laurus totaled $80,500 and were paid incash. After these expenses, we received net proceeds of approximately$1,919,500. The net proceeds were used for general corporate purposes.

The sale of thesesecurities were deemed to be exempt from registration under the Securities actin reliance on Section 4(2) of the Securities Act, or Regulation Dpromulgated thereafter, as transactions by an issuer not involving a publicoffering. Laurus represented its intention to acquire the securities forinvestment only and not with a view for sale in connection with anydistribution thereof and appropriate legends were affixed to the sharecertificates and instruments issued in such transactions. The sales of thesesecurities were made without general solicitation or advertising. Laurus is anaccredited investor and had adequate access, through their relationship withthe Company, to information, including financial, about the Company. None ofthese transactions involved any underwriters, underwriting discounts orcommissions.

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**

None

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**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

None

**ITEM. 5. OTHER INFORMATION.**

*SubsequentEvents*

On May 3, 2006, IWT Tesoro Corporation and Laurus Master Fund, Ltd.entered into an Amended and Restated Registration Rights Agreement thatreplaces a registration rights agreement between the parties dated February 10,2006. The Amended and Restated Registration Rights Agreement extended the datethat Tesoro must file a registration statement to register certain sharesissued to Laurus. This filing date to file a registration statement wasextended to July 15, 2006. This extension relates to all securitiesrequired to be registered by Tesoro on behalf of Laurus.

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

(a)          **Exhibits**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                               | ** ** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 3.1             |       | Articles of Incorporation (filed as an  Exhibit to the Company’s Form 10-SB, filed with the  Securities and Exchange Commission on August 7, 2000)                                                                                                                        |       |
| 3.1.1           |       | Articles  of Amendment to Articles of Incorporation dated September 23, 2002  (filed as an Exhibit to the Company’s Report on Form 8-K,  filed with the Securities and Exchange Commission on October 1, 2002)                                                       |       |
| 3.2.2           |       | Amended  and Restated Bylaws (filed as an Exhibit to the Company’s Report on  Form 8-K, filed with the Securities and Exchange Commission on  February 4, 2003)                                                                                                           |       |
| 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)                                     |       |

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| 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)                                                                                                                                    |   |
| 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) |   |
| 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                                                                                                                                                                                                                                                                                            |   |

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|       |   | exhibit  to the Company’s periodic report on Form 8-K, filed with the  Securities and Exchange Commission on May 9, 2006).                                                                                                                                                            |   |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.35 |   | Amended  and Restated Registration Rights Agreement dated May 3, 2006 between IWT  Tesoro Corporation and Laurus Master Funds, Ltd. (filed as an exhibit to the  Company’s periodic report on Form 8-K, filed with the Securities  and Exchange Commission on May 9, 2006).      |   |
| 10.36 |   | Reaffirmation  and Ratification Agreement dated May 3, 2006 by Tesoro and its  subsidiaries (filed as an exhibit to the Company’s periodic report on  Form 8-K, filed with the Securities and Exchange Commission on May 9,  2006).                                              |   |
| 10.37 |   | Second  Amended and Restated Senior Subordination Agreement between Laurus Master  Fund, Ltd. and Bank of America, N.A dated May 3, 2006 (filed as an  exhibit to the Company’s periodic report on Form 8-K, filed with  the Securities and Exchange Commission on May 9, 2006). |   |
| 10.38 |   | Amendment  dated as of March 31, 2006 to the August 25, 2006 $3.0 million  Minimum Borrowing Note*                                                                                                                                                                                         |   |
| 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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*                    Includedin this filing. Exhibits are available without charge, upon request of IWTTesoro.

(b)   Reports on Form 8-K

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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                     |
|---------------------|--------|--------------------------------------------|
|                |   |                                       |
|                |   |                                       |
| June 15,  2006 |   | /s/ Henry J. Boucher, Jr.             |
|                |   | Henry J. Boucher, Jr., President      |
|                |   |                                       |
| June 15,  2006 |   | /s/Forrest P. Jordan                       |
|                |   | Forrest P. Jordan, Chief Financial Officer |

 

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