UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K/A

Amendment No. 1

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to

Commission File Number 1-3473

TESORO CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	95-0862768 (I.R.S. Employer Identification No.)
300 Concord Plaza Drive San Antonio, Texas (Address of principal executive offices)	78216-6999 (Zip Code)

Registrant’s telephone number, including area code:

210-828-8484

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $0.162/3 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.  Yes þ     No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No  þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

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

At June 30, 2007, the aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $7.8 billion based upon the closing price of its common stock on the New York Stock Exchange Composite tape. At February 25, 2008, there were 137,602,531 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement to be filed pursuant to Regulation 14A pertaining to the 2008 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. The Company intends to file such Proxy Statement no later than 120 days after the end of the fiscal year covered by this Form 10-K.

EXPLANATORY NOTE

Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year December 31, 2007 (the “Amendment”) is filed to restate financial information required by SEC Regulation S-X Rule 3-10 that was previously omitted. This financial information is included in Note Q to our consolidated financial statements included herein in Item 8, Financial Statements and Supplementary Data. The restatement has no effect on the accompanying Statements of Consolidated Operations, Consolidated Balance Sheets, Statements of Consolidated Comprehensive Income and Stockholders’ Equity or Statements of Consolidated Cash Flows and does not amend, update or change any other information within Item 8 from our original Annual Report on Form 10-K filed on February 29, 2008. This Amendment also does not reflect events that occurred after our initial filing date. Certain exhibits included in the original filing have been updated and are filed herein. The Amendment should be read in conjunction with our filings made subsequent to our original Annual Report on Form 10-K, including any amendments to prior filings.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Tesoro Corporation

We have audited the accompanying consolidated balance sheets of Tesoro Corporation and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive income and stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Tesoro Corporation and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note A to the consolidated financial statements, in 2006 the Company changed its method of accounting for refined product sales and purchases transactions with the same counterparty that have been entered into in contemplation of one another, and for its pension and other postretirement plans.

As discussed in Note Q to the consolidated financial statements, the accompanying consolidated financial statements have been restated to include a previously omitted footnote disclosure.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2008, expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

San Antonio, Texas
February 28, 2008 (October 21, 2008, as to Note Q)

3

TESORO CORPORATION

STATEMENTS OF CONSOLIDATED OPERATIONS

	Years ended December 31,
	2007			2006			2005
	(In millions except
	per share amounts)
REVENUES(1)	$	21,915		$	18,104		$	16,581
COSTS AND EXPENSES:
Costs of sales and operating expenses(1)		20,308			16,314			15,170
Selling, general and administrative expenses		263			176			179
Depreciation and amortization		357			247			186
Loss on asset disposals and impairments		20			50			19
OPERATING INCOME		967			1,317			1,027
Interest and financing costs		(95	)		(77	)		(211	)
Interest income and other		33			46			15
EARNINGS BEFORE INCOME TAXES		905			1,286			831
Income tax provision		339			485			324
NET EARNINGS	$	566		$	801		$	507
NET EARNINGS PER SHARE:
Basic	$	4.17		$	5.89		$	3.72
Diluted	$	4.06		$	5.73		$	3.60
WEIGHTED AVERAGE COMMON SHARES:
Basic		135.7			136.0			136.3
Diluted		139.5			139.8			140.9
DIVIDENDS PER SHARE	$	0.35		$	0.20		$	0.10
SUPPLEMENTAL INFORMATION
(1) Includes excise taxes collected from our retail segment	$	240		$	102		$	108

The accompanying notes are an integral part of these consolidated financial statements.

4

TESORO CORPORATION

CONSOLIDATED BALANCE SHEETS

	December 31,
	2007			2006
	(Dollars in millions except per share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	23		$	986
Receivables, less allowance for doubtful accounts		1,243			861
Inventories		1,200			872
Prepayments and other		134			92
Total Current Assets		2,600			2,811
PROPERTY, PLANT AND EQUIPMENT
Refining		5,021			3,207
Retail		642			210
Corporate and other		193			144
		5,856			3,561
Less accumulated depreciation and amortization		(1,076	)		(874	)
Net Property, Plant and Equipment		4,780			2,687
OTHER NONCURRENT ASSETS
Goodwill		92			89
Acquired intangibles, net		290			112
Other, net		366			205
Total Other Noncurrent Assets		748			406
Total Assets	$	8,128		$	5,904
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	2,004		$	1,270
Accrued liabilities		488			385
Current maturities of debt		2			17
Total Current Liabilities		2,494			1,672
DEFERRED INCOME TAXES		388			377
OTHER LIABILITIES		537			324
DEBT		1,657			1,029
COMMITMENTS AND CONTINGENCIES (Note M)
STOCKHOLDERS’ EQUITY
Common stock, par value $0.162/3; authorized 200,000,000 shares; 144,505,356 shares issued (143,414,204 in 2006)		24			24
Additional paid-in capital		876			829
Retained earnings		2,393			1,876
Treasury stock, 7,460,518 common shares (7,600,892 in 2006), at cost		(151	)		(159	)
Accumulated other comprehensive loss		(90	)		(68	)
Total Stockholders’ Equity		3,052			2,502
Total Liabilities and Stockholders’ Equity	$	8,128		$	5,904

The accompanying notes are an integral part of these consolidated financial statements.

5

TESORO CORPORATION

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME AND STOCKHOLDERS’ EQUITY

				Stockholders’ Equity
																			Accumulated
								Additional											Other
	Comprehensive			Common Stock				Paid-In		Retained			Treasury Stock						Comprehensive
	Income			Shares		Amount		Capital		Earnings			Shares			Amount			Loss
	(In millions)
AT JANUARY 1, 2005					136.5	$	23	$	706	$	609			(2.9	)	$	(11	)	$	—
Net earnings		507			—		—		—		507			—			—			—
Cash dividends		—			—		—		—		(14	)		—			—			—
Repurchases of common stock		—			—		—		—		—			(0.5	)		(15	)		—
Shares issued for stock options and benefit plans		—			5.2		1		47		—			0.3			7			—
Excess tax benefits from stock-based compensation arrangements exercised		—			—		—		27		—			—			—			—
Restricted stock grants and amortization		—			—		—		2		—			—			—			—
Other comprehensive loss:
Minimum pension liability adjustment (net of related tax benefit of $1) adjustment (net of related tax benefit of $1)		(2	)		—		—		—		—			—			—			(2	)
Total Comprehensive Income	$	505
AT DECEMBER 31, 2005					141.7	$	24	$	782	$	1,102			(3.1	)	$	(19	)	$	(2	)
Net earnings		801			—		—		—		801			—			—			—
Cash dividends		—			—		—		—		(27	)		—			—			—
Repurchases of common stock		—			—		—		—		—			(4.8	)		(151	)		—
Shares issued for stock options and benefit plans		—			1.6		—		26		—			0.3			11			—
Excess tax benefits from stock-based compensation arrangements		—			—		—		17		—			—			—			—
Restricted stock grants and amortization		—			0.1		—		4		—			—			—			—
Other comprehensive loss:
Adjustment to initially apply FASB Statement No. 158 (net of related tax benefit of $42)		—			—		—		—		—			—			—			(66	)
Total Comprehensive Income	$	801
AT DECEMBER 31, 2006					143.4	$	24	$	829	$	1,876			(7.6	)	$	(159	)	$	(68	)
Net earnings		566			—		—		—		566			—			—			—
Cash dividends		—			—		—		—		(48	)		—			—			—
Repurchases of common stock		—			—		—		—		—			(0.1	)		(4	)		—
Shares issued for stock options and benefit plans		—			1.0		—		32		—			0.2			12			—
Excess tax benefits from stock-based compensation arrangements		—			—		—		10		—			—			—			—
Restricted stock grants and amortization		—			0.1		—		5		—			—			—			—
Adoption of FASB Interpretation No. 48		—			—		—		—		(1	)		—			—			—
Other comprehensive loss:
Pension and other benefit liability adjustments (net of tax benefit of $14)		(22	)		—		—		—		—			—			—			(22	)
Total Comprehensive Income		544
AT DECEMBER 31, 2007					144.5	$	24	$	876	$	2,393			(7.5	)	$	(151	)	$	(90	)

The accompanying notes are an integral part of these consolidated financial statements.

6

TESORO CORPORATION

STATEMENTS OF CONSOLIDATED CASH FLOWS

	Years ended December 31,
	2007			2006			2005
	(In millions)
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings	$	566		$	801		$	507
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization		357			247			186
Amortization of debt issuance costs and discounts		12			15			17
Write-off of unamortized debt issuance costs and discount		—			—			20
Loss on asset disposals and impairments		20			50			19
Stock-based compensation		53			22			26
Deferred income taxes		(1	)		105			77
Excess tax benefits from stock-based compensation arrangements		(10	)		(17	)		(27	)
Other changes in non-current assets and liabilities		(76	)		(110	)		(29	)
Changes in current assets and current liabilities:
Receivables		(360	)		(143	)		(190	)
Inventories		(50	)		81			(338	)
Prepayments and other		(34	)		(4	)		(20	)
Accounts payable and accrued liabilities		845			92			510
Net cash from operating activities		1,322			1,139			758
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures		(747	)		(436	)		(258	)
Acquisitions		(2,105	)		—			—
Proceeds from asset sales		14			6			4
Net cash used in investing activities		(2,838	)		(430	)		(254	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from debt offerings, net of issuance costs of $6 and $10 in 2007 and 2005, respectively		494			—			890
Borrowings under term loan		700			—			—
Borrowings under revolving credit agreement		1,060			—			463
Repayments on revolving credit agreement		(940	)		—			(463	)
Repayments of debt		(216	)		(12	)		(191	)
Debt refinanced		(500	)		—			(900	)
Repurchases of common stock		(4	)		(151	)		(15	)
Dividend payments		(48	)		(27	)		(14	)
Proceeds from stock options exercised		9			12			30
Excess tax benefits from stock-based compensation arrangements		10			17			27
Financing costs and other		(12	)		(2	)		(76	)
Net cash from (used in) financing activities		553			(163	)		(249	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(963	)		546			255
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		986			440			185
CASH AND CASH EQUIVALENTS, END OF YEAR	$	23		$	986		$	440
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid, net of capitalized interest	$	70		$	50		$	101
Income taxes paid	$	329		$	356		$	289
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
Capital expenditures included in accounts payable and accrued liabilities	$	101		$	59		$	42

The accompanying notes are an integral part of these consolidated financial statements.

7

TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description and Nature of Business

Tesoro Corporation (“Tesoro”) was incorporated in Delaware in 1968 and is an independent refiner and marketer of petroleum products. We own and operate seven petroleum refineries in the western and mid-continental United States with a combined crude oil throughput capacity of 658 thousand barrels per day (“Mbpd”), and we sell refined products to a wide variety of customers. We market refined products to wholesale and retail customers, as well as commercial end-users. Our retail business includes a network of 449 branded stations operated by Tesoro under the Tesoro^®, Mirastar^®, Shell^® and USA Gasoline^tm brands and 462 branded stations operated by independent dealers.

Tesoro’s earnings, cash flows from operations and liquidity depend upon many factors, including producing and selling refined products at margins above fixed and variable expenses. The prices of crude oil and refined products have fluctuated substantially in our markets. Our operating results have been significantly influenced by the timing of changes in crude oil costs and how quickly refined product prices adjust to reflect these changes. These price fluctuations depend on numerous factors beyond our control, including the demand for crude oil, gasoline and other refined products, which are subject to, among other things, changes in the global economy and the level of foreign and domestic production of crude oil and refined products, geo-political conditions, threatened or actual terrorist incidents or acts of war, availability of crude oil and refined product imports, the infrastructure to transport crude oil and refined products, weather conditions, earthquakes and other natural disasters, seasonal variations, government regulations and local factors, including market conditions and the level of operations of other suppliers in our markets. As a result of these factors, margin fluctuations during any reporting period can have a significant impact on our results of operations, cash flows, liquidity and financial position.

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of Tesoro and its subsidiaries. All intercompany accounts and transactions have been eliminated. Certain investments are carried at cost. These investments are not material, either individually or in the aggregate, to Tesoro’s financial position, results of operations or cash flows.

Share and per share data (except par value) for the periods presented reflect the effect of a two-for-one stock split effected in the form of a stock dividend which was distributed on May 29, 2007 (see Note N). The accompanying financial statements include the results of operations of our Los Angeles refinery and Shell^® branded retail stations since acquired on May 10, 2007 and our USA Gasoline^tm branded retail stations since acquired on May 1, 2007 (see Note C).

Use of Estimates

We prepare Tesoro’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. We review our estimates on an ongoing basis, based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include bank deposits and low-risk short-term investments with original maturities of three months or less at the time of purchase. Our cash investment policy excludes investments with sub-prime market exposure. Cash equivalents are stated at cost, which approximates market value.

8

TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Financial Instruments

The carrying amounts of financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities, approximate fair value because of the short maturities of these instruments. The carrying amounts of Tesoro’s debt and other obligations may vary from our estimates of the fair value of such items. We estimate that the fair market value of our senior notes at December 31, 2007, was approximately $1 million more than its total book value of $1.4 billion.

Inventories

Inventories are stated at the lower of cost or market. We use last-in, first-out (“LIFO”) as the primary method to determine the cost of crude oil and refined product inventories in our refining and retail segments. We determine the carrying value of inventories of oxygenates and by-products using the first-in, first-out (“FIFO”) cost method. We value merchandise and materials and supplies at average cost.

Property, Plant and Equipment

We capitalize the cost of additions, major improvements and modifications to property, plant and equipment. We compute depreciation of property, plant and equipment on the straight-line method, based on the estimated useful life of each asset. The weighted average lives range from 23 to 28 years for refineries, 9 to 16 years for terminals, 11 to 16 years for retail stations, 4 to 27 years for transportation assets and 4 to 16 years for corporate assets. We record property under capital leases at the lower of the present value of minimum lease payments using Tesoro’s incremental borrowing rate or the fair value of the leased property at the date of lease inception. We amortize property under capital leases over the term of each lease. Leasehold improvements are depreciated over the lesser of the lease term or the economic life of the asset.

We capitalize interest and labor as part of the cost of major projects during the construction period. Capitalized interest totaled $30 million, $11 million and $8 million during 2007, 2006 and 2005, respectively and is recorded as a reduction to interest and financing costs in the statements of consolidated operations.

Asset Retirement Obligations

We accrue for asset retirement obligations in the period in which the obligations are incurred and a reasonable estimate of fair value can be made. We accrue these costs at estimated fair value. When the related liability is initially recorded, we capitalize the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, we recognize a gain or loss for any difference between the settlement amount and the liability recorded. We consider our past practice, industry practice, management’s intent and estimated economic lives to estimate settlement dates or a range of settlement dates.

Environmental Matters

We capitalize environmental expenditures that extend the life or increase the capacity of facilities, as well as expenditures that mitigate or prevent environmental contamination that is yet to occur. We expense costs that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation. We record liabilities when environmental assessments and/or remedial efforts are probable and can be reasonably estimated. Cost estimates are based on the expected timing and the extent of remedial actions required by applicable governing agencies, experience gained from similar sites on which environmental assessments or remediation have been completed, and the amount of our anticipated liability considering the proportional liability and financial abilities of other responsible parties. Generally, the timing of these accruals coincides with the completion of a feasibility study or our commitment to a formal plan of action. Estimated liabilities are not discounted to present value.

9

TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Goodwill and Acquired Intangibles

Goodwill represents the excess of cost (purchase price) over the fair value of net assets acquired. Goodwill acquired in a business combination is not amortized. We review goodwill for impairment annually or more frequently, if events or changes in business circumstances indicate the carrying values of the assets may not be recoverable. Acquired intangibles consist primarily of air emissions credits, customer agreements and contracts, the USA Gasoline^tm trade name and software, which we recorded at fair value as of the date acquired. We amortize acquired intangibles on a straight-line basis over estimated useful lives of 2 to 28 years, and we include the amortization in depreciation and amortization expense.

Other Assets

We defer turnaround and catalyst costs and amortize the costs on a straight-line basis over the expected periods of benefit, generally ranging from 2 to 6 years. We periodically shut down refinery processing units for scheduled maintenance or turnarounds. Certain catalysts are used in refinery processing units for periods exceeding one year. Amortization for these deferred costs, which is included in depreciation and amortization expense, amounted to $111 million, $64 million and $50 million in 2007, 2006 and 2005, respectively.

We defer debt issuance costs related to our credit agreement and senior notes and amortize the costs over the estimated terms of each instrument. We include the amortization in interest and financing costs in our statements of consolidated operations. We evaluate the carrying value of debt issuance costs when modifications are made to the related debt instruments (see Note I).

Impairment of Long-Lived Assets

We review property, plant and equipment and other long-lived assets, including acquired intangible assets for impairment whenever events or changes in business circumstances indicate the carrying values of the assets may not be recoverable. We would record impairment losses if the undiscounted cash flows estimated to be generated by those assets were less than the carrying amount of those assets. Factors that would indicate potential impairment include, but are not limited to, significant decreases in the market value of a long-lived asset, a significant change in the long-lived asset’s physical condition, and operating or cash flow losses associated with the use of the long-lived asset.

Revenue Recognition

We recognize revenues from petroleum product sales upon delivery to customers, which is the point at which title is transferred, and when payment has either been received or collection is reasonably assured. We include certain crude oil and refined product purchases and resales used for trading purposes in revenues on a net basis. Nonmonetary crude oil and refined product exchange transactions, which are entered into primarily to optimize our refinery supply requirements, are included in costs of sales and operating expenses on a net basis.

We enter into a limited number of refined product sales and purchases transactions with the same counterparty that have been entered into in contemplation with one another. We record these transactions for new arrangements or modifications of existing arrangements on a net basis in costs of sales and operating expenses in connection with our adoption of the Emerging Issues Task Force (“EITF”) Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty” on January 1, 2006. Prior to our adoption of this standard, we recorded these purchases and sales on a gross basis in revenues and costs of sales. Refined product sales and purchases associated with these arrangements reported on a gross basis in 2005 totaled approximately $670 million and $640 million, respectively.

We include transportation fees charged to customers in revenues, and we include the related costs in costs of sales in our statements of consolidated operations. Federal excise and state motor fuel taxes, which are remitted to governmental agencies through our refining segment and collected from customers in our retail segment, are

10

TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

included in both revenues and costs of sales. These taxes, primarily related to sales of gasoline and diesel fuel, totaled $240 million, $102 million and $108 million in 2007, 2006 and 2005, respectively. Excise taxes on other product sales in our refining segment are not included in revenues and costs of sales.

Income Taxes

We record deferred tax assets and liabilities for future income tax consequences that are attributable to differences between financial statement carrying amounts of assets and liabilities and their income tax bases. We base the measurement of deferred tax assets and liabilities on enacted tax rates that we expect will apply to taxable income in the year when we expect to settle or recover those temporary differences. We recognize the effect on deferred tax assets and liabilities of any change in income tax rates in the period that includes the enactment date. We provide a valuation allowance for deferred tax assets if it is more likely than not that those items will either expire before we are able to realize their benefit or their future deductibility is uncertain. Beginning January 1, 2007 with the adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) we recognize the financial statement effects of a tax position when it is more likely than not that the position will be sustained upon examination. Tax positions taken or expected to be taken that are not recognized under the pronouncement are recorded as liabilities (See “New Accounting Standards and Disclosures” for additional information). For interest and penalties relating to income taxes we recognize accrued interest in interest and financing costs, and penalties in selling, general and administrative expenses in the statements of consolidated operations.

Pension and Other Postretirement Benefits

Effective December 31, 2006, Tesoro adopted Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statement No. 87, 88, 106 and 132R”. SFAS No. 158 requires the recognition of an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in the statement of financial position, measurement of the funded status of a plan as of the date of its year-end statement of financial position and recognition for changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur as a component of other comprehensive income. No measurement adjustment was required as Tesoro measures the funded status of its defined benefit pension and postretirement plans as of year end. Upon adoption of SFAS No. 158, we recorded an after-tax charge totaling $66 million to accumulated other comprehensive loss of stockholder’s equity at December 31, 2006. See Note L for further information on our pension and other postretirement benefits.

Stock-Based Compensation

We estimate the fair value of certain stock-based awards using the Black-Scholes option-pricing model. The fair value of our restricted stock awards on the date of grant is equal to the fair market price of our common stock. We amortize the fair value of our stock options and restricted stock using the straight-line method. The fair value of our stock appreciation rights and phantom stock is estimated at the end of each reporting period and is recorded as a liability in our consolidated balance sheets.

Derivative Instruments

We account for derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted. Tesoro periodically enters into non-trading derivative arrangements primarily to manage exposure to commodity price risks associated with the purchase of feedstocks and blendstocks and the purchase and sale of manufactured and purchased refined products. To manage these risks, we typically enter into exchange-traded futures and over-the-counter swaps, generally with durations of one year or less. We do not hold or issue derivative instruments for trading purposes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We mark to market our non-hedging derivative instruments and recognize the changes in their fair values in earnings. We include the carrying amounts of our derivatives in other current assets or accrued liabilities in the consolidated balance sheets. We did not designate or account for any derivative instruments as hedges during 2007, 2006 or 2005. Accordingly, no change in the value of the related underlying physical asset is recorded. During 2007, we settled derivative positions of approximately 466 million barrels of crude oil and refined products, which resulted in losses of $10 million. Gains on our settled derivative positions in 2006 totaled $33 million, while losses in 2005 totaled $23 million. At December 31, 2007, we had open net derivative positions of approximately 21 million barrels, which will expire at various times during 2008. We recorded the fair value of our open positions, which resulted in an unrealized loss position of $39 million at December 31, 2007 for an unrealized mark-to-market net loss of $51 million, as compared to an unrealized mark-to-market net gain totaling $10 million during 2006. Our unrealized mark-to-market net gain during 2005 was nominal.

New Accounting Standards and Disclosures

FIN No. 48

In July 2006, the FASB issued FIN 48, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. We adopted the provisions of FIN 48 on January 1, 2007 and recognized an increase of approximately $1 million in the liability for unrecognized tax benefits, the cumulative effect of which was accounted for as an adjustment to decrease retained earnings. As of the date of adoption and after the impact of recognizing the increase in the liability noted above, our unrecognized tax benefits totaled $44 million and we had accrued approximately $19 million for interest and penalties. At January 1, 2007, unrecognized tax benefits of $18 million (net of the tax benefit on state issues and interest) would lower the effective tax rate in any future periods, if recognized.

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective beginning January 1, 2008. However, in February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157.” The FSP delays the effective date of SFAS No. 157 for Tesoro until January 1, 2009 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis. The provisions of the standard effective as of January 1, 2008 had no material impact on our financial position or results of operations. We are currently evaluating the impact, if any, the provisions of the standard for other nonfinancial assets and liabilities will have on our financial position and results of operations.

SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to measure many financial instruments and certain other items at fair value at specified election dates that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings at each subsequent reporting date. The provisions of SFAS No. 159 were effective for Tesoro as of January 1, 2008. This standard is not expected to have a material impact on our financial position or results of operations.

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SFAS No. 141(R)

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which requires that the assets acquired and liabilities assumed in a business combination to be recorded at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment for certain specific acquisition related items, including: (i) expensing acquisition related costs as incurred; (ii) valuing noncontrolling interests at fair value at the acquisition date; and (iii) expensing restructuring costs associated with an acquired business. The provisions of SFAS No. 141(R) shall be applied prospectively to business combinations occurring on or after January 1, 2009. We have not yet determined the impact of SFAS No. 141(R) related to future acquisitions, if any, on our financial position or results of operations.

NOTE B — EARNINGS PER SHARE

We compute basic earnings per share by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share include the effects of potentially dilutive shares, common stock options and unvested restricted stock outstanding during the period. Share and per share amounts have been adjusted to reflect the May 2007 two-for-one stock split. Earnings per share calculations are presented below (in millions, except per share amounts):

	2007		2006		2005
Basic:
Net earnings	$	566	$	801	$	507
Weighted average common shares outstanding		135.7		136.0		136.3
Basic Earnings Per Share	$	4.17	$	5.89	$	3.72
Diluted:
Net earnings	$	566	$	801	$	507
Weighted average common shares outstanding		135.7		136.0		136.3
Dilutive effect of stock options and unvested restricted stock		3.8		3.8		4.6
Total diluted shares		139.5		139.8		140.9
Diluted Earnings Per Share	$	4.06	$	5.73	$	3.60

NOTE C — ACQUISITIONS

Los Angeles Assets

On May 10, 2007 we acquired a 100 Mbpd refinery and a 42 Mbpd refined products terminal located south of Los Angeles, California along with a network of 276 Shell^® branded retail stations (128 are company-operated) located throughout Southern California (collectively, the “Los Angeles Assets”) from Shell Oil Products U.S. (“Shell”). We will continue to operate the retail stations using the Shell^® brand under a long-term agreement. The purchase price for the Los Angeles Assets was $1.82 billion (which includes $257 million for petroleum inventories and direct costs of $16 million). To fund the acquisition, we issued $500 million aggregate principal amount of 61/2% senior notes due 2017, borrowed $500 million under our amended and restated credit agreement and paid the remainder with cash on-hand. The borrowings totaling $500 million under our revolver were repaid in 2007 with cash flows from operating activities. The Los Angeles Assets complement our operations on the Pacific Rim and enable us to realize synergies through our crude oil purchasing and unique shipping logistics as well as optimizing the output of our refineries to maximize the production of clean fuels for the California market. Shell, subject to certain limitations, retained certain obligations, responsibilities, liabilities, costs and expenses, including environmental matters arising out of the pre-closing operations of the Los Angeles Assets. We assumed certain

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

obligations, responsibilities, liabilities, costs and expenses arising out of or incurred in connection with decrees, orders and settlements Shell entered into with governmental and non-governmental entities prior to closing.

The purchase price was allocated to the assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. Our purchase price allocation is substantially complete pending potential changes to certain employee benefits that are not expected to be material. Acquired intangibles of $160 million include primarily air emission credits and software licenses. The acquired intangibles will be amortized on a straight-line basis over their estimated useful lives ranging from 3 to 28 years or a weighted-average life of 23 years. Our assumed liabilities include employee costs of $12 million primarily for postretirement benefits associated with granted prior service credits, unfavorable leases of $6 million associated with the acquired Shell stations and environmental obligations of $3 million primarily related to assessing environmental conditions and assuming monitoring requirements. The purchase price allocation, including direct costs incurred in the Los Angeles Assets acquisition, is as follows (in millions):

Inventories (including materials and supplies of $7 million)	$	264
Property, plant and equipment		1,304
Acquired intangibles		160
Other assets		112
Assumed employee costs and other liabilities		(21	)
Total purchase price	$	1,819

Our unaudited pro forma financial information for the years ended December 31, 2007 and 2006 gives effect to the acquisition of the Los Angeles Assets and the related financings, including (i) the issuance of $500 million 61/2% senior notes due 2017, and (ii) $500 million in borrowings under our credit agreement (see Note I), as if each had occurred at the beginning of the periods presented. Included in the unaudited pro forma results below are allocations of corporate overhead reflected in the historical financial statements of the Los Angeles Assets totaling $21 million, and $51 million for the years ended December 31, 2007 and 2006, respectively. The unaudited pro forma information is based on historical data (in millions except, per share amounts) and we believe it is not indicative of the results of future operations.

	Years ended
	December 31,
	2007		2006
	(Unaudited)
Revenues	$	22,787	$	20,978
Net earnings	$	554	$	839
Net earnings per share:
Basic	$	4.08	$	6.17
Diluted	$	3.97	$	6.00

USA Petroleum Retail Stations

On May 1, 2007, we acquired 138 retail stations located primarily in California from USA Petroleum (the “USA Petroleum Assets”). The purchase price of the assets and the USA Gasoline^tm brand name was paid in cash totaling $286 million (including inventories of $15 million and direct costs of $3 million). We recorded $3 million of goodwill, none of which is expected to be deductible for tax purposes. This acquisition provides us with retail stations near our Golden Eagle and Los Angeles refineries that will allow us to optimize production, invest in refinery improvements and deliver more clean products into the California market. We assumed the obligations under USA Petroleum’s leases, contracts, permits and other agreements arising after the closing date. USA Petroleum has retained certain pre-closing liabilities, including environmental matters.

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The purchase price was allocated based upon fair market values at the date of acquisition. Acquired intangibles of $35 million represent the USA Gasoline^tm brand name, which will be amortized on a straight-line basis over 20 years. Our assumed liabilities include employee post-retirement benefits associated with prior service credits. The purchase price allocation, including direct costs incurred in the acquisition of the USA Gasoline^tm stations, is as follows (in millions):

Inventories	$	15
Property, plant and equipment		238
Goodwill		3
Deferred tax asset		2
Acquired intangibles		35
Assumed employee post-retirement benefits		(7	)
Total purchase price	$	286

Pro forma financial information has not been presented for the USA Petroleum Assets acquisition as it is insignificant to our consolidated financial statements.

NOTE D — RECEIVABLES

Concentrations of credit risk with respect to accounts receivable are influenced by the large number of customers comprising Tesoro’s customer base and their dispersion across various industry groups and geographic areas of operations. We perform ongoing credit evaluations of our customers’ financial condition, and in certain circumstances, require prepayments, letters of credit or other collateral arrangements. We include an allowance for doubtful accounts as a reduction in our trade receivables, which amounted to $7 million and $6 million at December 31, 2007 and 2006, respectively.

NOTE E — INVENTORIES

Components of inventories at December 31, 2007 and 2006 were (in millions):

	2007		2006
Crude oil and refined products, at LIFO cost	$	1,107	$	798
Oxygenates and by-products, at FIFO cost		17		16
Merchandise, at average cost		15		8
Materials and supplies, at average cost		61		50
Total Inventories	$	1,200	$	872

Inventories valued at LIFO cost were less than replacement cost by approximately $1.4 billion and $770 million, at December 31, 2007 and 2006, respectively. During 2006, a reduction in inventory quantities resulted in a liquidation of applicable LIFO inventory quantities carried at higher costs in the prior year. This LIFO liquidation resulted in an increase in costs of sales of $5 million and a decrease in earnings of $3 million aftertax or $0.04 per share.

NOTE F — GOODWILL AND ACQUIRED INTANGIBLES

Goodwill is not amortized but tested for impairment at least annually. We review the recorded value of goodwill for impairment during the fourth quarter of each year, or sooner if events or changes in circumstances indicate the carrying amount may exceed fair value. Our annual evaluation of goodwill impairment requires us to make significant estimates to determine the fair value of our reporting units. Our estimates may change from period to period because we must make assumptions about future cash flows, profitability and other matters. It is

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

reasonably possible that future changes in our estimates could have a material effect on the carrying amount of goodwill. Goodwill in our refining segment totaled $84 million at both December 31, 2007 and 2006. In our retail segment, goodwill totaled $8 million and $5 million at December 31, 2007 and 2006, respectively.

All of our acquired intangible assets are subject to amortization. The following table provides the gross carrying amount and accumulated amortization for each major class of acquired intangible assets, excluding goodwill (in millions):

	December 31, 2007						December 31, 2006
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Amount		Amortization		Value		Amount		Amortization		Value
Air emissions credits	$	211	$	24	$	187	$	99	$	17	$	82
Refinery permits and plans		17		4		13		11		3		8
Customer agreements and contracts		50		25		25		39		22		17
USA Gasolinetm tradename		35		1		34		—		—		—
Software		20		4		16		—		—		—
Favorable leases		12		—		12		—		—		—
Other intangibles		6		3		3		8		3		5
Total	$	351	$	61	$	290	$	157	$	45	$	112

The weighted average estimated lives of acquired intangible assets are: air emission credits — 23 years; refinery permits and plans — 20 years; customer agreements and contracts — 12 years; USA Gasoline^tm tradename — 20 years; software — 3 years; favorable retail station leases — 18 years; and other intangible assets — 21 years. Amortization expense of acquired intangible assets amounted to $16 million, $7 million and $8 million for the years ended December 31, 2007, 2006 and 2005, respectively. Our estimated amortization expense for each of the following five years is: 2008 — $22 million, 2009 — $22 million, 2010 — $18 million, 2011— $15 million; and 2012 — $9 million.

NOTE G — OTHER NONCURRENT ASSETS

Other noncurrent assets at December 31, 2007 and 2006 consisted of (in millions):

	2007		2006
Deferred maintenance costs, including refinery turnarounds, net of amortization	$	310	$	166
Debt issuance costs, net of amortization		26		14
Notes receivable from employees		1		2
Other assets, net of amortization		29		23
Total Other Assets	$	366	$	205

At December 31, 2006, notes receivable from employees included two non-interest bearing notes due from an employee who subsequently became an executive officer. These notes, assumed in connection with the acquisition of our Golden Eagle refinery in May 2002, totaled approximately $1 million at December 31, 2006. During 2007 one of these notes was paid in full. The remaining balance on the other note at December 31, 2007 is nominal.

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE H — ACCRUED LIABILITIES

The Company’s current accrued liabilities and noncurrent other liabilities at December 31, 2007 and 2006 included (in millions):

	2007		2006
Accrued Liabilities — Current:
Taxes other than income taxes, primarily excise taxes	$	205	$	139
Employee costs		108		79
Environmental liabilities		38		6
Asset retirement obligations		36		18
Interest		14		20
Liability for unrecognized tax benefits, including interest and penalties		12		—
Casualty insurance payable		9		7
Pension and other postretirement benefits		8		6
Deferred income tax liability		2		53
Income taxes payable		—		8
Other		56		49
Total Accrued Liabilities — Current	$	488	$	385
Other Liabilities — Noncurrent:
Pension and other postretirement benefits	$	348	$	240
Liability for unrecognized tax benefits, including interest and penalties		55		—
Asset retirement obligations		46		34
Environmental liabilities		52		17
Other		36		33
Total Other Liabilities — Noncurrent	$	537	$	324

NOTE I — DEBT

At December 31, 2007 and 2006, debt consisted of (in millions):

	2007		2006
Credit Agreement — Revolving Credit Facility	$	120	$	—
61/2% Senior Notes Due 2017		500		—
61/4% Senior Notes Due 2012		450		450
65/8% Senior Notes Due 2015		450		450
95/8% Senior Subordinated Notes Due 2012		—		14
Junior subordinated notes due 2012 (net of unamortized discount of $38 in 2007 and $46 in 2006)		112		104
Capital lease obligations and other		27		28
Total debt		1,659		1,046
Less current maturities		2		17
Debt, less current maturities	$	1,657	$	1,029

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The aggregate maturities of Tesoro’s debt for each of the five years following December 31, 2007 were: 2008 — $2 million; 2009 — $2 million; 2010 — $3 million; 2011 — $1 million; and 2012 — $721 million.

See Note N for information related to limits imposed by our debt agreements on restricted payments (as defined in our debt agreements) which include cash dividends, stock repurchases or voluntary prepayments of subordinated debt.

Credit Agreement — Revolving Credit Facility

On May 11, 2007, we amended and restated our revolving credit agreement to increase the revolver’s total available capacity to $1.75 billion from $750 million and borrowed $500 million under the revolving credit facility to partially fund the acquisition of the Los Angeles Assets. The five-year amended credit agreement provides for borrowings (including letters of credit) up to the lesser of the agreement’s total capacity or the amount of a periodically adjusted borrowing base ($2.2 billion as of December 31, 2007), consisting of Tesoro’s eligible cash and cash equivalents, receivables and petroleum inventories, as defined. As of December 31, 2007, we had $120 million in borrowings and $254 million in letters of credit outstanding under the amended credit agreement, resulting in total unused credit availability of $1.4 billion or 80% of the eligible borrowing base. Borrowings under the revolving credit facility bear interest at either a base rate (7.25% at December 31, 2007) or a Eurodollar rate (4.85% at December 31, 2007) plus an applicable margin. The applicable margin at December 31, 2007 was 1.00% in the case of the Eurodollar rate, but varies based upon our credit facility availability and credit ratings. Letters of credit outstanding under the revolving credit facility incur fees at an annual rate tied to the applicable margin described above (1.00% at December 31, 2007). We also incur commitment fees for the unused portion of the revolving credit facility at an annual rate of 0.25% as of December 31, 2007.

The credit agreement contains covenants and conditions that, among other things, limit our ability to pay cash dividends, incur indebtedness, create liens and make investments. Tesoro is also required to maintain a certain level of available borrowing capacity and specified levels of tangible net worth. For the year ended December 31, 2007, we satisfied all of the financial covenants under the credit agreement. The credit agreement is guaranteed by substantially all of Tesoro’s active subsidiaries and is secured by substantially all of Tesoro’s cash and cash equivalents, petroleum inventories and receivables. In February 2008, we amended our credit agreement to allow up to $100 million of restricted payments during any four quarter period subject to credit availability exceeding 20% of the borrowing base.

Letter of Credit Agreements

We also have two separate letter of credit agreements for the purchase of foreign crude oil providing up to $250 million and $80 million in letters of credit. The $250 million letter of credit agreement is secured by the crude oil inventories supported by letters of credit issued under the agreement and will remain in effect until terminated by either party. Letters of credit outstanding under this agreement incur fees at an annual rate of 1.00%. As of December 31, 2007, we had $127 million in letters of credit outstanding under this agreement, resulting in total unused credit availability of $123 million, or 49% of total capacity under this credit agreement.

The $80 million letter of credit agreement is secured by the crude oil inventories supported by letters of credit issued under the agreement and will remain in effect until terminated by either party. Letters of credit outstanding under this agreement incur fees at an annual rate of 0.80%. As of December 31, 2007, we had $77 million in letters of credit outstanding under this agreement, resulting in total unused credit availability of $3 million, or 4% of total capacity under this credit agreement.

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

364-Day Term Loan

On May 11, 2007, we entered into a $700 million 364-day term loan, which was used to partially fund the acquisition of the Los Angeles Assets. On May 29, 2007, we repaid and terminated this loan, using the net proceeds from the 61/2% senior notes offering and cash on-hand.

61/2% Senior Notes Due 2017

On May 29, 2007, we issued $500 million aggregate principal amount of 61/2% senior notes due June 1, 2017. The proceeds from the notes offering, together with cash on hand, were used to repay borrowings under our 364-day term loan. The notes have a ten-year maturity with no sinking fund requirements and are subject to optional redemption by Tesoro beginning June 1, 2012 at premiums of 3.25% through May 31, 2013; 2.17% from June 1, 2013 through May 31, 2014; 1.08% from June 1, 2014 through May 31, 2015; and at par thereafter. We have the right to redeem up to 35% of the aggregate principal amount at a redemption price of 106.5% with proceeds from certain equity issuances through June 1, 2010. The indenture for the notes contains covenants and restrictions that are customary for notes of this nature. Substantially all of these covenants will terminate before the notes mature if either Standard and Poor’s or Moody’s assigns the notes an investment grade rating and no events of default exist under the indenture. The terminated covenants will not be restored even if the credit rating assigned to the notes subsequently falls below investment grade. The notes are unsecured and are guaranteed by substantially all of our domestic subsidiaries.

61/4% Senior Notes Due 2012

In November 2005, we issued $450 million aggregate principal amount of 61/4% senior notes due November 1, 2012. The notes have a seven-year maturity with no sinking fund requirements and are not callable. We have the right to redeem up to 35% of the aggregate principal amount at a redemption price of 106% with proceeds from certain equity issuances through November 1, 2008. The indenture for the notes contains covenants and restrictions that are customary for notes of this nature and are identical to the covenants in the indenture for Tesoro’s 65/8% senior notes due 2015. Substantially all of these covenants will terminate before the notes mature if one of two specified ratings agencies assigns the notes an investment grade rating and no events of default exist under the indenture. The terminated covenants will not be restored even if the credit rating assigned to the notes subsequently falls below investment grade. The notes are unsecured and are guaranteed by substantially all of Tesoro’s active subsidiaries.

65/8% Senior Notes Due 2015

In November 2005, we issued $450 million aggregate principal amount of 65/8% senior notes due November 1, 2015. The notes have a ten-year maturity with no sinking fund requirements and are subject to optional redemption by Tesoro beginning November 1, 2010 at premiums of 3.3% through October 31, 2011, 2.2% from November 1, 2011 to October 31, 2012, 1.1% from November 1, 2012 to October 31, 2013, and at par thereafter. We have the right to redeem up to 35% of the aggregate principal amount at a redemption price of 106% with proceeds from certain equity issuances through November 1, 2008. The indenture for the notes contains covenants and restrictions that are customary for notes of this nature and are identical to the covenants in the indenture for Tesoro’s 61/4% senior notes due 2012. Substantially all of these covenants will terminate before the notes mature if one of two specified ratings agencies assigns the notes an investment grade rating and no events of default exist under the indenture. The terminated covenants will not be restored even if the credit rating assigned to the notes subsequently falls below investment grade. The notes are unsecured and are guaranteed by substantially all of Tesoro’s active subsidiaries.

95/8% Senior Subordinated Notes Due 2012

On April 9, 2007, we voluntarily prepaid the remaining $14 million outstanding principal balance of our 95/8% senior subordinated notes at a redemption price of 104.8%. At December 31, 2006, the notes were included in current maturities of debt.

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Junior Subordinated Notes Due 2012

In connection with our acquisition of the Golden Eagle refinery, Tesoro issued to the seller two ten-year junior subordinated notes with face amounts totaling $150 million. The notes consist of: (i) a $100 million junior subordinated note, due July 2012, which was non-interest bearing through May 16, 2007, and carries a 7.5% interest rate thereafter, and (ii) a $50 million junior subordinated note, due July 2012, which incurred interest at 7.47% from May 17, 2003 through May 16, 2007 and 7.5% thereafter. We initially recorded these two notes at a combined present value of approximately $61 million, discounted at rates of 15.625% and 14.375%, respectively. We are amortizing the discount over the term of the notes.

Capital Lease Obligations

Our capital lease obligations are comprised primarily of 30 retail stations that we sold and leased-back in 2002 with initial terms of 17 years, with four 5-year renewal options. The portions of the leases attributable to land are classified as operating leases, and the portions attributable to depreciable buildings and equipment are classified as capital leases. The combined present value of minimum lease payments related to the leased buildings and equipment totaled $22 million at December 31, 2007. Tesoro also has capital leases for tugs and barges used to transport refined products, over varying terms ending in 2008 through 2010, in which the combined present value of minimum lease payments totaled $4 million at December 31, 2007. At both December 31, 2007 and 2006, the total cost of assets under capital leases was $39 million gross, with accumulated amortization of $19 million and $16 million at December 31, 2007 and 2006, respectively. We include amortization of the cost of assets under capital leases in depreciation and amortization.

Future minimum annual lease payments, including interest, as of December 31, 2007 for capital leases were (in millions):

2008	$	5
2009		5
2010		4
2011		3
2012		3
Thereafter		24
Total minimum lease payments		44
Less amount representing interest		18
Capital lease obligations	$	26

NOTE J — ASSET RETIREMENT OBLIGATIONS

We have recorded asset retirement obligations for requirements imposed by certain regulations pertaining to hazardous materials disposal and other cleanup obligations. These efforts consist primarily of projects at our Golden Eagle refinery to retire certain above-ground storage tanks currently estimated between 2008 and 2012 and to modify our existing coker unit to a delayed coker (see “Environmental Capital Expenditures” in Note M). Asset retirement obligations have also been recorded for certain lease agreements associated with our retail and terminal operations which generally require that we remove certain improvements, primarily underground storage tanks, upon lease termination. In connection with the acquisitions of the Los Angeles Assets and USA Petroleum Assets, we recorded asset retirement obligations for asbestos removal associated with the replacement of certain processing

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

equipment, pipeline removal and underground storage tank removal at certain leased stations. Changes in asset retirement obligations for the years ended December 31, 2007 and 2006 were as follows (in millions):

	Years ended
	December 31,
	2007			2006
Balance at beginning of year	$	52		$	46
Additions to accrual		—			1
Accretion expense		3			3
Additions to accrual resulting from acquisitions		19			—
Settlements		(1	)		(1	)
Changes in timing and amount of estimated cash flows		9			3
Balance at end of year	$	82		$	52

We cannot currently make reasonable estimates of the fair values of some retirement obligations. These retirement obligations primarily include (i) hazardous materials disposal (such as petroleum manufacturing by-products, chemical catalysts and sealed insulation material containing asbestos), site restoration, removal or dismantlement requirements associated with the closure of our refining and terminal facilities or pipelines, (ii) hazardous materials disposal and other removal requirements associated with the demolition or removal of certain major processing units, buildings, tanks, pipelines or other equipment and (iii) removal of underground storage tanks at our owned retail stations at or near the time of closure. We cannot estimate the fair value for these obligations primarily because we cannot estimate settlement dates or a range of settlement dates associated with these assets. Such obligations will be recognized in the period in which sufficient information exists to determine a reasonable estimate. We believe that these assets have indeterminate useful lives which preclude development of assumptions about the potential timing of settlement dates based on the following: (i) there are no plans or expectations of plans to retire or dispose of these core assets; (ii) we plan on extending these core assets’ estimated economic lives through scheduled maintenance projects at our refineries and other normal repair and maintenance and by continuing to make improvements based on technological advances; (iii) we have rarely or never retired similar assets in the past; and (iv) industry practice for similar assets has historically been to extend the economic lives through regular repair and maintenance and implementation of technological advances. Also, we have not historically incurred significant retirement obligations for hazardous materials disposal or other removal costs associated with asset retirements or replacements during scheduled maintenance projects.

NOTE K — INCOME TAXES

The income tax provision was comprised of (in millions):

	2007			2006		2005
Current:
Federal	$	279		$	315	$	195
State		59			65		52
Deferred:
Federal		2			99		71
State		(1	)		6		6
Income Tax Provision	$	339		$	485	$	324

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We provide deferred income taxes and benefits for differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Temporary differences and the resulting deferred tax assets and liabilities at December 31, 2007 and 2006 were (in millions):

	2007			2006
Deferred Tax Assets:
Accrued pension and other postretirement benefits	$	131		$	100
Asset retirement obligations		32			20
Stock-based compensation		23			15
Other accrued employee costs		10			8
Accrued environmental remediation liabilities		14			9
Other accrued liabilities		35			19
Other		38			9
Total Deferred Tax Assets	$	283		$	180
Deferred Tax Liabilities:
Accelerated depreciation and property related items	$	(434	)	$	(438	)
Deferred maintenance costs, including refinery turnarounds		(108	)		(57	)
Amortization of intangible assets		(45	)		(29	)
Inventory		(54	)		(58	)
Other		(27	)		(28	)
Total Deferred Tax Liabilities	$	(668	)	$	(610	)
Net Deferred Tax Liabilities	$	(385	)	$	(430	)

The net deferred income tax liability is classified in the consolidated balance sheets as follows (in millions):

	2007		2006
Current Assets	$	5	$	—
Current Liabilities	$	2	$	53
Noncurrent Liabilities	$	388	$	377

The realization of deferred tax assets depends on Tesoro’s ability to generate future taxable income. Although realization is not assured, we believe it is more likely than not that we will realize the deferred tax assets, and therefore, we did not record a valuation allowance as of December 31, 2007 or 2006. The reconciliation of income tax expense at the U.S. statutory rate to the income tax expense follows (in millions):

	2007			2006			2005
Income Taxes at U.S. Federal Statutory Rate	$	317		$	450		$	291
Effect of:
State income taxes, net of federal income tax effect		36			40			35
Manufacturing activities deduction		(18	)		(11	)		(7	)
Other		4			6			5
Income Tax Provision	$	339		$	485		$	324

As of December 31, 2007, we had $8 million in state alternative minimum tax credits, no Federal alternative minimum tax credits and no Federal or state net operating loss carry-forwards.

22

TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We account for uncertainties in income taxes in accordance with FIN 48 and are subject to U.S. federal income tax, and income tax in multiple state jurisdictions and a few foreign jurisdictions. Our unrecognized tax benefits totaled $44 million as of December 31, 2007, of which $19 million (net of the tax benefit on state issues and interest) would affect the effective tax rate if recognized. Within the next twelve months we expect to settle or otherwise conclude approximately $18 million of the liability for uncertain tax positions, including all federal income tax assessments for years through 2003. At January 1, 2007 and December 31, 2007, we had accrued approximately $19 million and $23 million, respectively, for interest and penalties. During the year ended December 31, 2007, we recognized $4 million in interest associated with unrecognized tax benefits. The federal tax years 1997 to 2006 remain open to audit, and in general the state tax years open to audit range from 1994 to 2006. A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows (in millions):

Balance upon adoption at January 1, 2007	$	44
Increases related to prior year tax positions		1
Decreases related to prior year tax positions		(4	)
Increases related to current year tax positions		3
Balance at December 31, 2007	$	44

NOTE L — BENEFIT PLANS

Pension and Other Postretirement Benefits

Tesoro sponsors four defined benefit pension plans, including a funded employee retirement plan, an unfunded executive security plan, an unfunded non-employee director retirement plan and an unfunded restoration retirement plan. The funded employee retirement plan provides benefits to all eligible employees based on years of service and compensation. Although our funded employee retirement plan fully meets all of the funding requirements under applicable laws and regulations, during 2007 and 2006, we voluntarily contributed $36 million and $26 million, respectively, to improve the funded status of the retirement plan. We also expect to voluntarily contribute $20 million to the retirement plan during 2008. The retirement plan’s assets are primarily comprised of common stock and bond funds.

Tesoro’s unfunded executive security plan provides certain executive officers and other key personnel with supplemental death or retirement benefits. These benefits are provided by a nonqualified, noncontributory plan and are based on years of service and compensation. During 2007, we made payments of $1 million for current retiree obligations under the plan.

Tesoro had previously established an unfunded non-employee director retirement plan that provided eligible directors retirement payments upon meeting certain age and other requirements. In 1997, that plan was frozen with accrued benefits of current directors transferred to the board of directors phantom stock plan (see Note O). After the amendment and transfer, only those retired directors or beneficiaries who had begun to receive benefits remained participants in the previous plan.

Our unfunded restoration retirement plan, which became effective July 1, 2006, provides for the restoration of retirement benefits to certain executives and other senior employees of Tesoro that are not available due to the limits imposed by the Internal Revenue Code on our funded employee retirement plan. During 2007, we voluntarily contributed $5 million to the plan for payment of current retiree obligations.

Tesoro provides to retirees who met certain service requirements and were participating in our group insurance program at retirement, health care benefits and, to those who qualify, life insurance benefits. Health care is available to qualified dependents of participating retirees. These benefits are provided through unfunded, defined benefit plans or through contracts with area health-providers on a premium basis. The health care plans are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing features such as deductibles and

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

coinsurance. The life insurance plan is noncontributory. We fund our share of the cost of postretirement health care and life insurance benefits on a pay-as-you go basis.

Our total pension and other postretirement liability was $356 million and $246 million at December 31, 2007 and 2006, respectively. Changes in benefit obligations and plan assets and the funded status for our pension plans and other postretirement benefits as of December 31, 2007 and 2006, were (in millions):

							Other Postretirement
	Pension Benefits						Benefits
	2007			2006			2007			2006
Change in benefit obligations:
Benefit obligations at beginning of year	$	320		$	259		$	192		$	194
Service cost		28			21			15			12
Interest cost		20			15			16			10
Actuarial (gain) loss		18			28			35			(27	)
Business combinations		5			—			38			—
Benefits paid		(16	)		(14	)		(4	)		(4	)
Plan amendments		—			11			—			7
Benefit obligations at end of year		375			320			292			192
Change in plan assets:
Fair value of plan assets at beginning of year		266			224			—			—
Actual return on plan assets		24			30			—			—
Employer contributions		37			26			4			4
Benefits paid		(16	)		(14	)		(4	)		(4	)
Fair value of plan assets at end of year		311			266			—			—
Funded status at end of year	$	(64	)	$	(54	)	$	(292	)	$	(192	)

The accumulated benefit obligation for our pension plans at December 31, 2007 and 2006 was $291 million and $252 million, respectively. Amounts included in our consolidated balance sheet related to our defined benefit pension and postretirement plans as of December 31, 2007 and 2006 consisted of (in millions):

	2007		2006
Accrued liabilities	$	8	$	6
Other liabilities	$	348	$	240
Total amount recognized	$	356	$	246

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of pension and postretirement benefit expense included in the consolidated statements of operations for the years ended December 31, 2007, 2006 and 2005 were (in millions):

										Other
										Postretirement
	Pension Benefits									Benefits
	2007			2006			2005			2007		2006		2005
Components of net periodic benefit expense:
Service cost	$	27		$	21		$	19		$	15	$	12	$	9
Interest cost		20			15			13			16		10		9
Expected return on plan assets		(22	)		(19	)		(11	)		—		—		—
Amortization of prior service cost		4			2			2			1		—		—
Recognized net actuarial loss		7			5			4			3		1		—
Special termination benefits		—			—			2			—		—		—
Net periodic benefit expense	$	36		$	24		$	29		$	35	$	23	$	18

Amounts included in accumulated other comprehensive loss before income taxes at December 31, 2007 and 2006 for our defined benefit pension and postretirement plans are presented below (in millions):

					Other
					Postretirement
	Pension Benefits				Benefits				Total
	2007		2006		2007		2006		2007		2006
Net loss	$	77	$	69	$	45	$	12	$	122	$	81
Prior service cost		18		21		7		9		25		30
Total	$	95	$	90	$	52	$	21	$	147	$	111

The following table summarizes the pretax change in accumulated other comprehensive income for the year ended December 31, 2007 related to our pension and postretirement plans (in millions):

				Other
	Pension			Postretirement
	Benefits			Benefits
Accumulated other comprehensive income at beginning of year	$	90		$	21
Prior service cost recognized during the year		(4	)		(1	)
Net losses recognized during the year		(6	)		(3	)
Net gains occurring during the year		15			35
Accumulated other comprehensive income at end of year	$	95		$	52

Amounts included in accumulated other comprehensive loss before income taxes as of December 31, 2007 that are expected to be recognized as components of net periodic benefit cost in 2008 for our defined benefit pension and postretirement plans was as follows (in millions):

			Other
	Pension		Postretirement
	Benefits		Benefits		Total
Net loss	$	5	$	1	$	6
Prior service cost		4		1		5
Total	$	9	$	2	$	11

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant assumptions included in estimating Tesoro’s pension and other postretirement benefits obligations were:

							Other
							Postretirement
	Pension Benefits						Benefits
	2007		2006		2005		2007		2006		2005
Projected Benefit Obligation:
Assumed weighted average % as of December 31:
Discount rate(a)		6.10		6.00		5.50		6.40		6.00		5.50
Rate of compensation increase		3.81		3.72		3.23		—		—		—
Net Periodic Pension Cost:
Assumed weighted average % as of December 31:
Discount rate(a)		6.00		5.52		5.75		6.00		5.50		5.75
Rate of compensation increase		3.95		3.61		3.70		—		—		—
Expected return on plan assets(b)		8.50		8.50		8.50		—		—		—

(a)	We determine the discount rate primarily by reference to rates of high-quality, long-term corporate bonds that mature in a pattern similar to the expected payments to be made under the plans.
(b)	The expected return on plan assets reflects the weighted-average of the expected long term rates of return for the broad categories of investments held in the plans. The expected long-term rate of return is adjusted when there are fundamental changes in expected returns on the plan’s investments.

The assumed health care cost trend rates used to determine the projected postretirement benefit obligation are as follows:

	2007			2006
Health care cost trend rate assumed for next year		9.00	%		9.00	%
Ultimate health care cost trend rate		5.00	%		5.00	%
Year that the rate reaches the ultimate trend rate		2011			2011

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care and life insurance plans. A one-percentage-point change in assumed health care cost trend rates could have the following effects (in millions):

	1-Percentage-Point		1-Percentage-Point
	Increase		Decrease
Effect on total of service and interest cost components	$	6	$	(5	)
Effect on postretirement benefit obligations	$	46	$	(37	)

Our pension plans follow an investment return approach in which investments are allocated to broad investment categories, including equities, debt and real estate, to maximize the long-term return of the plan assets at a prudent level of risk. The 2007 target allocations for the pension plan assets were 68% equity securities (with sub-category allocation targets), 26% debt securities and 6% real estate. Investments that have potential exposure to sub-prime markets totaled less than one percent of total pension plan assets at December 31, 2007. Our other

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

postretirement benefit plans contained no assets at December 31, 2007 and 2006. The weighted-average asset allocations in our pension plans at December 31, 2007 and 2006 were:

	Plan Assets at
	December 31,
Asset Category	2007			2006
Equity Securities		68	%		69	%
Debt Securities		26			25
Real Estate		6			6
Total		100	%		100	%

The following estimated future benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated (in millions):

			Other
	Pension		Postretirement
	Benefits		Benefits
2008	$	27	$	7
2009		31		8
2010		33		10
2011		38		12
2012		43		13
2013-2017		256		94

Thrift Plan

Tesoro sponsors an employee thrift plan that provides for contributions, subject to certain limitations, by eligible employees into designated investment funds with a matching contribution by Tesoro. Employees may elect tax-deferred treatment in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Tesoro matches 100% of employee contributions, up to 7% of the employee’s eligible earnings, with at least 50% of the matching contribution directed for initial investment in Tesoro’s common stock. The maximum matching contribution is 6% for employees covered by collective bargaining agreement at the Golden Eagle refinery. Participants with the exception of executive officers are eligible to transfer out of Tesoro’s common stock at any time, on an unlimited basis. Tesoro’s contributions to the thrift plan amounted to $20 million, $16 million and $15 million during 2007, 2006 and 2005, respectively, of which $12 million, $11 million and $8 million consisted of treasury stock reissuances in 2007, 2006 and 2005, respectively.

The unfunded executive deferred compensation plan, which became effective January 1, 2007, provides to certain executives and other employees the ability to defer compensation and receive a matching contribution by Tesoro that is not available under the employee thrift plan due to salary deferral limits imposed by the Internal Revenue Code.

Retail Savings Plan

Tesoro sponsors a savings plan, in lieu of the thrift plan, for eligible retail employees who have completed one year of service and have worked at least 1,000 hours within that time. Eligible employees receive a mandatory employer contribution equal to 3% of eligible earnings. If employees elect to make pretax contributions, Tesoro also contributes an employer match contribution equal to $0.50 for each $1.00 of employee contributions, up to 6% of eligible earnings. At least 50% of the matching employer contributions must be directed for initial investment in Tesoro common stock. Participants are eligible to transfer out of Tesoro’s common stock at any time, on an unlimited basis. Tesoro’s contributions amounted to $0.5 million in 2007 and $0.4 million in both 2006 and 2005, of which $0.1 million consisted of treasury stock reissuances in 2007, 2006 and 2005.

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE M — COMMITMENTS AND CONTINGENCIES

Operating Leases

Tesoro has various cancellable and noncancellable operating leases related to land, office and retail facilities, ship charters and equipment and other facilities used in the storage, transportation, production and sale of crude oil feedstocks and refined products. These leases have remaining primary terms generally up to 10 years and generally contain multiple renewal options. Total rental expense for all operating leases, excluding marine charters, amounted to approximately $64 million in 2007, $45 million in 2006 and $52 million in 2005. Total marine charter expense for our time charters was $161 million in 2007, $148 million in 2006 and $117 million in 2005. See Note I for information related to capital leases.

As of December 31, 2007, we term-chartered four U.S. flagged ships and six foreign-flagged ships, used to transport crude oil and refined products with remaining terms through 2010. Most of our time charters contain terms of three to eight years with renewal options. We have also entered into term-charters for four U.S. flag tankers to be built and delivered between 2009 and 2010, each with three-year terms. All four time charters have options to renew. In January 2008, we took delivery of a foreign flagged term-charter, which runs through 2011, and we have an agreement for one additional foreign-flagged tanker to be delivered in 2008 with a term through 2013. We have also entered into various lease agreements for tugs and barges at our Hawaii and Washington refineries to transport our refined products. Our operating leases for tugs and barges have remaining terms up through September 2015 with options to renew. Our annual lease commitments for our ship charters is summarized below.

Tesoro has operating leases for most of its retail stations with primary remaining terms up to 36 years, and generally containing renewal options. As part of the acquisitions discussed in Note C, we assumed operating leases for 50 Shell retail stations and 30 USA Gasoline retail stations. Our aggregate annual lease commitments for our retail stations total approximately $9 million to $16 million over the next five years. These leases include the 30 retail stations that we sold and leased back in 2002 with initial terms of 17 years and four five-year renewal options. We classified the portion of each lease attributable to land as an operating lease, and the portion attributable to depreciable buildings and equipment as a capital lease (See Note I). Tesoro also has an agreement with Wal-Mart to build and operate retail stations at selected existing and future Wal-Mart stores in the western United States. Under the agreement, each site is subject to a lease with a ten-year primary term and an option, exercisable at our discretion, to extend a site’s lease for two additional five-year options.

Prior to 2006, we leased our corporate headquarters from a limited partnership, in which we owned a 50% limited interest. In February 2006, the limited partnership sold the building to a third-party resulting in a gain to Tesoro of $5 million. We continue to lease our corporate headquarters from the third-party with an initial lease term through 2014 and two five-year renewal options. In 2007, we entered into a lease agreement for a new office campus expected to be completed in mid-2009. The initial lease term is 20 years with four 5-year renewal options and has annual payments of approximately $13 million with a 1.5% escalation provision. The lease term will commence upon occupancy of the office campus. The lease agreement will be accounted for as an operating lease.

Tesoro’s minimum annual lease payments as of December 31, 2007, for operating leases having initial or remaining noncancellable lease terms in excess of one year were (in millions):

	Ship
	Charters(a)		Other		Total
2008	$	116	$	84	$	200
2009		113		91		204
2010		101		76		177
2011		84		67		151
2012		57		57		114
Thereafter		20		397		417

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(a) Includes minimum annual lease payments for tugs and barges, which range between $16 million and $33 million over the next five years.

Purchase Obligations and Other Commitments

Tesoro’s contractual purchase commitments consist primarily of crude oil supply contracts for our refineries from several suppliers with noncancellable remaining terms ranging up to 4 years with renewal provisions. Prices under the term agreements generally fluctuate with market prices. Assuming actual market crude oil prices as of December 31, 2007, ranging by crude oil type from $71 per barrel to $90 per barrel, our minimum crude oil supply commitments for the following years are: 2008 — $33.6 billion; 2009 — $1.3 billion; 2010 — $1.1 billion; and 2011 — $618 million. We also purchase crude oil at market prices under short-term renewable agreements and in the spot market. In addition to these purchase commitments, we also have minimum contractual capital spending commitments, totaling approximately $61 million in 2008.

We also have long-term take-or-pay commitments to purchase industrial gases, chemical processing services and utilities associated with the operation of our refineries. The minimum annual payments under these take-or-pay agreements are estimated to total $51 million in 2008, $51 million in 2009, $51 million in 2010, $52 million in 2011, and $43 million in 2012. The remaining minimum commitments total approximately $31 million over 13 years. Tesoro paid approximately $108 million, $125 million and $90 million in 2007, 2006 and 2005, respectively, under these take-or-pay contracts, which included a power agreement containing a take or pay provision through 2007.

Environmental and Other Matters

We are a party to various litigation and contingent loss situations, including environmental and income tax matters, arising in the ordinary course of business. Where required, we have made accruals in accordance with SFAS No. 5, “Accounting for Contingencies,” in order to provide for these matters. We cannot predict the ultimate effects of these matters with certainty, and we have made related accruals based on our best estimates, subject to future developments. We believe that the outcome of these matters will not result in a material adverse effect on our liquidity and consolidated financial position, although the resolution of certain of these matters could have a material adverse impact on interim or annual results of operations.

Tesoro is subject to audits by federal, state and local taxing authorities in the normal course of business. It is possible that tax audits could result in claims against Tesoro in excess of recorded liabilities. We believe, however, that when these matters are resolved, they will not materially affect Tesoro’s consolidated financial position or results of operations.

Tesoro is subject to extensive federal, state and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment and may require us to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites, install additional controls, or make other modifications or changes in certain emission sources.

Conditions may develop that cause increases or decreases in future expenditures for our various sites, including, but not limited to, our refineries, tank farms, pipelines, retail stations (operating and closed locations) and refined products terminals, and for compliance with the Clean Air Act and other federal, state and local requirements. We cannot currently determine the amounts of such future expenditures.

Environmental Liabilities

We are currently involved in remedial responses and have incurred and expect to continue to incur cleanup expenditures associated with environmental matters at a number of sites, including certain of our previously owned properties. Our accruals for environmental expenses include retained liabilities for previously owned or operated properties, refining, pipeline and terminal operations and retail stations. We believe these accruals are adequate,

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

based on currently available information, including the participation of other parties or former owners in remediation actions. These estimated environmental liabilities require judgment to assess and estimate the future costs to remediate. It is reasonably possible that additional remediation costs will be incurred as more information becomes available related to these environmental matters. Changes in our environmental liabilities for the years ended December 31, 2007 and 2006 were as follows (in millions):

	Years ended
	December 31,
	2007			2006
Balance at beginning of year	$	23		$	32
Additions		29			10
Expenditures		(24	)		(19	)
Acquisitions		3			—
Settlement agreement		59			—
Balance at end of year	$	90		$	23

On March 2, 2007, we settled our dispute with Tosco Corporation (“Tosco”) concerning soil and groundwater conditions at the Golden Eagle refinery. We received $58.5 million from ConocoPhillips as successor in interest to Tosco and Phillips Petroleum, both former owners and operators of the refinery. In exchange for the settlement proceeds we assumed responsibility for certain environmental liabilities arising from operations at the refinery prior to August of 2000. At December 31, 2007, our accrual for these environmental liabilities totaled $64 million. We expect to have valid insurance claims under certain environmental insurance policies that provide coverage up to $140 million for liabilities in excess of the settlement proceeds attributable to Tosco. Amounts recorded for these environmental liabilities have not been reduced by possible insurance recoveries.

We are continuing to investigate environmental conditions at certain active wastewater treatment units at our Golden Eagle refinery. This investigation is driven by an order from the San Francisco Bay Regional Water Quality Control Board that names us as well as two previous owners of the Golden Eagle refinery. A reserve for this matter is included in the environmental accruals referenced above.

In March 2007, we received an offer from the Bay Area Air Quality Management District (the “District”) to settle 77 Notices of Violation (“NOVs”) for $4 million. The NOVs allege violations of air quality at our Golden Eagle refinery. In January 2008, we agreed to settle this matter for $1.5 million pending the negotiation of a final agreement with the District. A reserve for this matter is included in the environmental accruals referenced above.

In October 2005, we received an NOV from the United States Environmental Protection Agency (“EPA”) concerning our Washington refinery. The EPA alleges certain modifications made to the fluid catalytic cracking unit at our Washington refinery prior to our acquisition of the refinery were made in violation of the Clean Air Act. We have investigated the allegations and believe the ultimate resolution of the NOV will not have a material adverse effect on our financial position or results of operations. A reserve for our response to the NOV is included in the environmental accruals referenced above.

Other Environmental Matters

We are a defendant, along with other manufacturing, supply and marketing defendants, in ten pending cases alleging MTBE contamination in groundwater. In December 2007 we agreed to participate in a proposed settlement of seven and part of an eighth of the pending cases subject to negotiation of settlement documents. The defendants are being sued for having manufactured MTBE and having manufactured, supplied and distributed gasoline containing MTBE. The plaintiffs, all in California, are generally water providers, governmental authorities and private well owners alleging, in part, the defendants are liable for manufacturing or distributing a defective product. The suits generally seek individual, unquantified compensatory and punitive damages and attorney’s fees. A reserve

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TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for the cases included in the proposed settlement is included in other accrued liabilities. We believe the final resolution of these cases will not have a material adverse effect on our financial position or results of operations, but at this time we cannot estimate the amount or the likelihood of the ultimate resolution of the cases not subject to the settlement. We believe we have defenses to the claims in the remaining cases and intend to vigorously defend ourselves in those lawsuits.

On January 25, 2008 we received an offer of settlement from the Alaska Department of Environmental Conservation (“ADEC”) related to the grounding of a vessel in the Alaska Cook Inlet on February 2, 2006. The ADEC has alleged two vessels chartered by us violated provisions of our Cook Inlet Vessel Oil Prevention and Contingency Plan during the period from December 2004 to February 2006. The resolution of this matter will not have a material adverse effect on our financial position or results of operations.

In the ordinary course of business, we become party to or otherwise involved in lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. Large and sometimes unspecified damages or penalties may be sought from us in some matters for which the likelihood of loss may be reasonably possible but the amount of loss is not currently estimable, and some matters may require years for us to resolve. As a result, we have not established reserves for these matters. On the basis of existing information, we believe that the resolution of these matters, individually or in the aggregate, will not have a material adverse effect on our financial position or results of operations. However, we cannot provide assurance that an adverse resolution of the matter described below during a future reporting period will not have a material adverse effect on our financial position or results of operations in future periods.

On December 12, 2007 we received an NOV from ADEC alleging that our Alaska refinery violated provisions of its Clean Air Act Title V operating permit. We are negotiating a resolution of the NOV with ADEC and do not believe the resolution will have a material adverse effect on our financial position or results of operations.

Environmental Capital Expenditures

EPA regulations related to the Clean Air Act require reductions in the sulfur content in gasoline. We are installing a gasoline hydrotreater at our Utah refinery to satisfy the requirements of the regulations. During 2007, we spent $9 million and have budgeted an additional $60 million through 2009 to complete the project. Our other refineries will not require additional capital spending to meet the low sulfur gasoline standards.

EPA regulations related to the Clean Air Act also require reductions in the sulfur content in diesel fuel manufactured for on-road consumption. In general, the new on-road diesel fuel standards became effective on June 1, 2006. In May 2004, the EPA issued a rule regarding the sulfur content of non-road diesel fuel. The requirements to reduce non-road diesel sulfur content will become effective in phases between 2007 and 2012. In May 2007, we completed the diesel desulfurizer unit at our Alaska refinery, enabling the refinery to manufacture ultra-low sulfur diesel. We spent $28 million on this project in 2007. We are currently evaluating alternative projects that will satisfy the future requirements under existing regulations at our North Dakota, Utah and Hawaii refineries. Our Golden Eagle, Los Angeles, Washington and Alaska refineries will not require additional capital spending to meet the new diesel fuel standards.

In February 2007, the EPA issued regulations for the reduction of benzene in gasoline. We are still evaluating the impact of this standard; however, based on our most recent estimates we expect to spend approximately $300 million to $400 million between 2008 and 2011 to meet the new regulations at five of our refineries. These cost estimates are subject to further review and analysis. Our Golden Eagle and Los Angeles refineries will not require capital spending to meet the new benzene reduction standards.

During the fourth quarter of 2005, we received approval by the Hearing Board for the Bay Area Air Quality Management District to modify our existing fluid coker unit to a delayed coker at our Golden Eagle refinery which is designed to lower emissions while also enhancing the refinery’s capabilities in terms of reliability, lengthening turnaround cycles and reducing operating costs. We negotiated the terms and conditions of the Second Conditional

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Abatement Order with the District in response to the January 2005 mechanical failure of the fluid coker boiler at the Golden Eagle refinery. The total capital for this project is estimated to be $575 million, which includes remaining spending of $76 million in 2008. The project is currently scheduled to be substantially completed during the first quarter of 2008, with spending through the first half of 2008. We have spent $499 million from inception of the project, of which $372 million was spent in 2007.

The Los Angeles refinery is subject to extensive environmental requirements. The Los Angeles refinery will reduce NOx emissions by the end of 2010 in response to regulations imposed by the South Coast Air Quality Management District. Our current plans for compliance include the replacement of our less efficient power cogeneration units and steam boilers. We expect to spend approximately $250 million to $325 million with estimated completion in late 2010. We also will replace underground pipelines with above-ground pipelines as required by an Order from the California Regional Water Quality Control Board. This project is estimated to be completed in 2014 and will cost approximately $80 million. Our regulatory requirements also include a fuel gas treating unit designed to reduce fuel gas sulfur and new flare gas recovery compressors designed to meet flaring requirements of the South Coast Air Quality Management District. We project to spend approximately $75 million through 2011 to complete the fuel gas treating unit project and approximately $50 million through 2009 to install the flare gas recovery compressors. These cost estimates are subject to further review and analysis.

We have developed a plan to eliminate the use of any atmospheric blowdown towers by constructing alternative emission control units at our refineries. We believe that this plan will provide for safer operating conditions for our employees and will address environmental regulatory issues related to monitoring potential air emissions from components connected to the blowdown towers. We have spent $41 million during 2007 and we have budgeted an additional $135 million through 2010 to complete this project at two of our refineries.

In connection with the 2002 acquisition of our Golden Eagle refinery, we agreed to undertake projects at our Golden Eagle refinery to reduce air emissions required by a Consent Decree with the EPA concerning the Section 114 refinery enforcement initiative under the Clean Air Act. We spent $1 million during 2007 and have budgeted an additional $17 million through 2011 to satisfy the requirements of the Consent Decree.

We will spend additional capital at the Golden Eagle refinery for reconfiguring and replacing above-ground storage tank systems and upgrading piping within the refinery. We spent $19 million during 2007 and we have budgeted an additional $90 million through 2011. We also spent $3 million during 2007 and we expect to spend an additional $65 million through 2010 to upgrade a marine oil wharf at the Golden Eagle refinery to meet engineering and maintenance standards issued by the State of California in February 2006. This cost estimate is preliminary and subject to further review.

In connection with our 2001 acquisition of our North Dakota and Utah refineries, Tesoro assumed the seller’s obligations and liabilities under a consent decree among the United States, BP Exploration and Oil Co. (“BP”), Amoco Oil Company and Atlantic Richfield Company. BP entered into this consent decree for both the North Dakota and Utah refineries for various alleged violations. As the owner of these refineries, Tesoro is required to address issues to reduce air emissions. We spent $7 million during 2007 and we have budgeted an additional $10 million through 2009 to comply with this consent decree. We also agreed to indemnify the sellers for all losses of any kind incurred in connection with the consent decree.

The California Air Resources Board regulations require the installation of enhanced vapor recovery systems at all California gasoline retail stations by April 2009. The enhanced vapor recovery systems control and contain gasoline vapor emissions during motor vehicle fueling. We spent $2 million during 2007 and have budgeted approximately $17 million through 2009 to satisfy the requirements of the enhanced vapor recovery regulations.

In December 2007, the U.S. Congress passed the Energy Independence and Security Act, which, among other things sets a target of 35 miles per gallon for the combined fleet of cars and light trucks by model year 2020 and modified the industry requirements for Renewable Fuel Standard (RFS). The RFS now stands at 9 billion gallons in 2008 rising to 36 billion gallons by 2022. Both requirements could reduce demand growth for petroleum products in

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the future. In the near term, the RFS presents ethanol production and logistics challenges for both the ethanol and refining industries and may require additional capital expenditures or expenses by us to accommodate increased ethanol use. These requirements are currently under study.

In June 2007, the California Resources Air Board proposed amendments to the predictive model for compliant gasoline in the state of California that decreases the allowable sulfur levels to a cap of 20 parts per million and allows for additional ethanol to be blended into gasoline. The requirements begin December 31, 2009 but may be postponed by individual companies until December 31, 2011 through the use of the Alternative Emission Reduction Plan which allows for the acquisition of emissions offsets from sources not directly related to petroleum fuel use. We expect both of our California refineries to be in compliance with the regulation by the 2009 deadline and expect to spend approximately $32 million through 2010 to meet the requirements.

The cost estimates for the environmental projects described above are subject to further review and analysis and include estimates for capitalized interest and labor costs.

Claims Against Third-Parties

In 1996, Tesoro Alaska Company filed a protest of the intrastate rates charged for the transportation of its crude oil through the Trans Alaska Pipeline System (“TAPS”). Our protest asserted that the TAPS intrastate rates were excessive and should be reduced. The Regulatory Commission of Alaska (“RCA”) considered our protest of the intrastate rates for the years 1997 through 2000. The RCA set just and reasonable final rates for the years 1997 through 2000 in Order 151, and held that we are entitled to receive approximately $52 million in refunds, including interest through the conclusion of appeals in 2008. In February 2008, the Alaska Supreme Court affirmed the RCA’s Order 151.

In 2002, the RCA rejected the TAPS Carriers’ proposed intrastate rate increases for 2001-2003 and maintained the permanent rate of $1.96 to the Valdez Marine Terminal. That ruling is currently on appeal to the Alaska Superior Court. The rate decrease has been in effect since June 2003. The TAPS Carriers subsequently attempted to increase their intrastate rates for 2004, 2005, 2006, 2007 and 2008 without providing the supporting information required by the RCA’s regulations and in a manner inconsistent with the RCA’s prior decision in Order 151. These filings were rejected by the RCA. The rejection of these filings is currently on appeal to the Alaska Superior Court where the decision is being held in abeyance pending the decision in the appeals of the rates for 1997-2003. If the RCA’s decisions are upheld on appeal, we could be entitled to refunds resulting from our shipments from January 2001 through mid-June 2003. If the RCA’s decisions are not upheld on appeal, we could potentially have to pay the difference between the TAPS Carriers’ filed rates from mid-June 2003 through December 31, 2007 (averaging approximately $3.87 per barrel) and the RCA’s approved rate for this period ($1.96 per barrel) plus interest for the approximately 48 million barrels we have transported through TAPS in intrastate commerce during this period. We cannot give any assurances of when or whether we will prevail in these appeals. We also believe that, should we not prevail on appeal, the amount of additional shipping charges cannot reasonably be estimated since it is not possible to estimate the permanent rate which the RCA could set, and the appellate courts approve, for each year. In addition, depending upon the level of such rates, there is a reasonable possibility that any refunds for the period January 2001 through mid-July 2003 could offset some or all of any additional payments due for the period mid-June 2003 through December 31, 2007.

In January of 2005, Tesoro Alaska Company intervened in a protest before the Federal Energy Regulatory Commission (“FERC”), of the TAPS Carriers’ interstate rates for 2005 and 2006. If Tesoro Alaska Company prevails and lower rates are set, we could be entitled to refunds resulting from our interstate shipments for 2005 and 2006. We cannot give any assurances of when or whether we will prevail in this proceeding. In July 2005, the TAPS Carriers filed a proceeding at the FERC seeking to have the FERC assume jurisdiction under Section 13(4) of the Interstate Commerce Act and set future rates for intrastate transportation on TAPS. We filed a protest in that proceeding, which has been consolidated with the other FERC proceeding seeking to set just and reasonable interstate rates on TAPS for 2005 and 2006. On May 17, 2007, the presiding judge in this consolidated FERC

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proceeding lowered the interstate rates and refused to revise the current intrastate rates. The TAPS Carriers have requested that the FERC reverse the presiding judge. We cannot give assurances of when or whether we will prevail in this proceeding. If the TAPS carriers should prevail, then the rates charged for all shipments of Alaska North Slope crude oil on TAPS could be revised by the FERC, but any FERC changes to rates for intrastate transportation of crude oil supplies for our Alaska refinery should be prospective only and should not affect prior intrastate rates, refunds or additional payments.

NOTE N — STOCKHOLDERS’ EQUITY

Our credit agreement and the 61/2%, 61/4% and 65/8% senior notes each limit our ability to pay cash dividends or repurchase stock. The limitation in each of our debt agreements is based on limits on restricted payments (as defined in our debt agreements), which include dividends, stock repurchases or voluntary prepayments of subordinate debt. The aggregate amount of restricted payments cannot exceed an amount defined in each of the debt agreements. We do not believe that the limitations will restrict our ability to pay dividends or repurchase stock under our current programs.

See Note O for information relating to stock-based compensation and common stock reserved for exercise of options.

Stock Split

On May 1, 2007, our Board of Directors approved a two-for-one stock split effected in the form of a stock dividend, which was distributed on May 29, 2007 to shareholders of record at the close of business on May 14, 2007. All references to the number of shares of common stock and per share amounts (other than par value) have been adjusted to reflect the split for all periods presented.

Cash Dividends

On January 30, 2008, our Board of Directors declared a quarterly cash dividend on common stock of $0.10 per share, payable on March 17, 2008 to shareholders of record on March 3, 2008. During 2007, we paid cash dividends on common stock totaling $0.35 per share. In May 2007, our Board of Directors increased our quarterly cash dividend from $0.05 per share (post stock split) to $0.10 per share.

Common Stock Repurchase Program

In November 2005, our Board of Directors authorized a $200 million share repurchase program, which represented approximately 5% of our common stock then outstanding. Under the program, we may repurchase our common stock from time to time in the open market. Purchases will depend on price, market conditions and other factors. Under the program, we repurchased 4.8 million shares of common stock for $148 million in 2006, or an average cost per share of $31.17, and 0.5 million shares for $14 million in 2005, or an average cost per share of $29.42. No shares were repurchased under the plan during 2007. As of December 31, 2007, $38 million remained available for future repurchases under the program.

Stockholder Rights Plan

On November 20, 2007, our Board of Directors adopted a stockholder rights plan, declaring that each stockholder of record on December 3, 2007 receive a dividend of one right for each outstanding share of common stock held. The dividend entitles the registered holder to purchase one one-thousandth (1/1000) of a share of Series B Junior Participating Preferred Stock, no par value, at a price of $200, subject to adjustment. The shareholder rights are not exercisable until the tenth day following a public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of 20% or more of the outstanding shares of our common stock. The rights will expire on November 20, 2010, unless our Boards of Directors extends, redeems, or exchanges the rights.

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Tender Offer

On October 26, 2007, Tracinda Corporation, a private investment corporation, announced that it intended to make a cash tender offer for up to 21,875,000 shares of our common stock (or 16% of our total outstanding shares at October 25, 2007) at a price of $64.00 per share. On November 27, 2007, Tracinda Corporation withdrew their tender offer, which was scheduled to expire on December 6, 2007.

NOTE O — STOCK-BASED COMPENSATION

Stock-based compensation expense for our stock-based awards for 2007, 2006 and 2005 was as follows (in millions):

	2007		2006		2005
Stock options	$	22	$	13	$	15
Restricted stock		6		5		4
Stock appreciation rights		15		3		—
Phantom stock		10		1		7
Total Stock-Based Compensation	$	53	$	22	$	26

Stock-based compensation during 2005 included charges totaling $5 million associated with the termination and retirement of certain executive officers. The income tax benefit realized from tax deductions associated with stock-based compensation totaled $26 million, $20 million and $29 million during 2007, 2006 and 2005, respectively.

Incentive Stock Plans

We issue stock-based awards as described below to employees under the 2006 Long-Term Incentive Plan and non-employee directors under the 1995 Non-Employee Director Stock Option Plan, as amended. We also issue common stock to our eligible non-employee directors as payment for a portion of director fees under the 2005 Director Compensation Plan. Prior to May 2006, we issued stock-based awards under the Amended and Restated Executive Long-Term Incentive Plan, which has expired. We also have outstanding stock options under our Key Employee Stock Option Plan for which future grants have been suspended. At December 31, 2007, Tesoro had 9,925,062 shares of unissued common stock reserved for these plans.

The 2006 Long-Term Incentive Plan (“2006 Plan”) permits the grant of options, restricted stock, deferred stock units, performance stock awards, other stock-based awards and cash-based awards. The 2006 Plan became effective in May 2006 and no awards may be granted under the 2006 Plan on or after May 3, 2016. The maximum amount of common stock which may be issued under the 2006 Plan may not exceed 3,000,000 shares of which up to 750,000 shares in the aggregate may be granted as restricted stock, deferred stock units, performance shares, performance units and other stock-based awards. Stock options may be granted at exercise prices not less than the fair market value on the date the options are granted. The options granted become exercisable after one year in 33% annual increments and expire ten years from the date of grant. Generally, when stock options are exercised or when restricted stock is granted we issue new shares rather than issuing treasury shares. At December 31, 2007, we had 1,498,600 options and 111,100 restricted stock outstanding and 1,390,300 shares available for future grants under this plan.

Under the Amended and Restated Executive Long-Term Incentive Plan, shares of common stock were granted in a variety of forms, including restricted stock, nonqualified stock options, stock appreciation rights and performance share and performance unit awards. The plan expired as to the issuance of awards in May 2006 upon shareholder approval of the 2006 Plan. At December 31, 2007, we had 6,022,472 options and 850,144 restricted shares outstanding under this plan.

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The Key Employee Stock Option Plan provided stock option grants to eligible employees who were not executive officers of Tesoro. We granted stock options to purchase 1,594,000 shares of common stock, of which 252,738 shares were outstanding at December 31, 2007, which become exercisable one year after grant in 25% annual increments. The options expire ten years after the date of grant. Our Board of Directors has suspended future grants under this plan.

The 1995 Non-Employee Director Stock Option Plan provides for the grant of up to 900,000 nonqualified stock options over the life of the plan to eligible non-employee directors of Tesoro. These automatic, non-discretionary stock options are granted at an exercise price equal to the fair market value per share of Tesoro’s common stock at the date of grant. The term of each option is ten years, and an option becomes exercisable six months after it is granted. This plan will expire, unless earlier terminated, as to the issuance of awards in February 2010. At December 31, 2007, Tesoro had 316,000 options outstanding and 364,000 shares available for future grants under this plan.

Stock Options

A summary of stock option activity for all plans is set forth below (shares in thousands):

						Weighted-Average
	Number of			Weighted-Average		Remaining		Aggregate
	Options			Exercise Price		Contractual Term		Intrinsic Value
								(In millions)
Outstanding at January 1, 2007		7,528		$	12.80		6.1 years	$	151
Granted		1,567		$	43.13
Exercised		(972	)	$	9.40
Forfeited or expired		(33	)	$	29.14
Outstanding at December 31, 2007		8,090		$	19.02		5.9 years	$	232
Vested or expected to vest at December 31, 2007		7,840		$	18.62		5.8 years	$	228
Exercisable at December 31, 2007		5,413		$	10.82		4.6 years	$	200

The estimated weighted-average grant-date fair value per share of options granted during 2007, 2006 and 2005 was $20.62, $16.01 and $9.26, respectively. The total intrinsic value for options exercised during 2007, 2006 and 2005 was $37 million, $44 million and $70 million, respectively. Total unrecognized compensation cost related to non-vested stock options totaled $26 million as of December 31, 2007, which is expected to be recognized over a weighted-average period of 1.9 years. The income tax benefit realized from tax deductions associated with stock options exercised during 2007 totaled $14 million.

We estimate the fair value of each option on the date of grant using the Black-Scholes option-pricing model. We amortize the estimated fair value of stock options granted over the vesting period using the straight-line method. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination within the valuation model. The expected life of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding. The risk-free

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rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Tesoro’s weighted average assumptions are presented below:

	2007	2006	2005
Expected life (years)	6	6	7
Expected volatility	45% - 46%	46% - 48%	45% - 49%
Expected dividend yield	0.53% - 1.00%	0.63% - 0.79%	0.16% - 0.24%
Weighted average volatility	46%	48%	48%
Risk-free interest rate	4.8%	4.6%	4.0%

Restricted Stock

The fair value of each restricted share on the date of grant is equal to its fair market price. We amortize the estimated fair value of our restricted stock granted over the vesting period using the straight-line method. Our restricted shares vest in three or five year increments assuming continued employment at the vesting dates. A summary of our restricted stock activity is set forth below (shares in thousands):

				Weighted-Average
	Number of			Grant-Date
	Restricted Shares			Fair Value
Nonvested at January 1, 2007		1,126		$	12.57
Granted		111			41.78
Vested		(276	)		15.10
Forfeited		—			—
Nonvested at December 31, 2007		961		$	15.23

The weighted average grant date fair value per share of restricted stock granted during 2007, 2006 and 2005 was $41.78, $33.31 and $16.62, respectively. Total unrecognized compensation cost related to non-vested restricted stock totaled $7 million as of December 31, 2007, which is expected to be recognized over a weighted-average period of 1.6 years. The total fair value of restricted shares vested in 2007, 2006 and 2005 was $13 million, $8 million, and $4 million, respectively.

Stock Appreciation Rights

In February 2006, our Board of Directors approved the 2006 Long-Term Stock Appreciation Rights Plan (the “SAR Plan”). The SAR Plan permits the grant of stock appreciation rights (“SARs”) to key managers and other employees of Tesoro. A SAR granted under the SAR Plan entitles an employee to receive cash in an amount equal to the excess of the fair market value of one share of common stock on the date of exercise over the grant price of the SAR. Unless otherwise specified, all SARs under the SAR Plan vest ratably during a three-year period following the date of grant. The term of a SAR granted under the SAR Plan shall be determined by the Compensation Committee on the grant date provided that no SAR shall be exercisable on or after the seventh anniversary date of its grant. During 2007, we paid cash of $1 million to settle stock appreciation rights upon exercise. Prior to 2007, we did not have any SARs that were exercised. During 2007 and 2006, the estimated weighted-average grant-date fair value for each SAR granted was $18.12 and $16.09, respectively, using the Black-Scholes option-pricing model. The option-pricing model weighted-average assumptions used to calculate the fair value of SARS are similar to those used to calculate the fair value of options as described above. At December 31, 2007 and 2006, the liability associated with our SARs recorded in accrued liabilities in the consolidated balance sheet totaled $17 million and $3 million, respectively.

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A summary of stock appreciation right activity for the SAR plan is set forth below (shares in thousands):

						Weighted-Average
	Number of			Weighted-Average		Remaining
	Options			Exercise Price		Contractual Term
Outstanding at January 1, 2007		632		$	33.30		6.1 years
Granted		1,213		$	42.61
Exercised		(62	)	$	33.31
Forfeited or expired		(82	)	$	38.73
Outstanding at December 31, 2007		1,701		$	39.68		5.8 years
Vested or expected to vest at December 31, 2007		1,668		$	39.60		5.8 years
Exercisable at December 31, 2007		148		$	33.30		5.1 years

Director Compensation Plan

The 2005 Director Compensation Plan provides for the grant of up to 100,000 shares of common stock to our eligible non-employee directors as payment for a portion of director retainer fees. We granted 8,418 shares of common stock during 2007 at a weighted-average grant-date price per share of $51.69. At December 31, 2007, we had 80,952 shares available for future grants under the plan.

Non-Employee Director Phantom Stock Plan

Under the Non-Employee Director Phantom Stock Plan, a yearly credit, limited to 15 full annual credits, of $7,250 is made in units to an account of each non-employee director, based upon the closing market price of Tesoro’s common stock on the date of credit, which vests with three years of service. A director also may elect to have the value of his cash retainer fee deposited quarterly into the account as units that are immediately vested. Retiring directors who are committee chairpersons receive an additional $5,000 credit to their accounts. The value of each vested account balance, which is a function of changes in market value of Tesoro’s common stock, is payable in cash commencing at termination or at retirement, death or disability. Payments may be made as a total distribution or in annual installments, not to exceed ten years. At December 31, 2007 and 2006, the liability associated with our non-employee director phantom stock plan recorded in accrued liabilities in the consolidated balance sheets totaled $5 million and $4 million, respectively.

Phantom Stock Options

Tesoro granted 350,000 phantom stock options in 1997 to our chief executive officer with a term of ten years at 100% of the fair value of Tesoro’s common stock on the grant date, or $8.4922 per share. During 2007, all of the granted phantom stock options were exercised prior to termination in October 2007. Upon exercise, our chief executive officer received in cash, the difference between the fair market value of the common stock on the date of the phantom stock option grant and the fair market value of common stock on the date of exercise. During 2007, we paid $17 million to settle the exercised phantom stock options. The fair value of each phantom stock option was estimated at the end of each reporting period using the Black-Scholes option-pricing model with assumptions similar to those used to calculate the fair value of options as described above. At December 31, 2006, the liability associated with our phantom stock awards recorded in accrued liabilities in the consolidated balance sheets totaled $9 million.

NOTE P — OPERATING SEGMENTS

The Company’s revenues are derived from our two operating segments, refining and retail. Our refining segment owns and operates seven petroleum refineries located in California, Washington, Alaska, Hawaii, North

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Dakota and Utah. These refineries manufacture gasoline and gasoline blendstocks, jet fuel, diesel fuel, residual fuel oils and other refined products. We sell these refined products, together with refined products purchased from third parties, at wholesale through terminal facilities and other locations, primarily in Alaska, California, Nevada, Hawaii, Idaho, Minnesota, North Dakota, Utah, Oregon and Washington. Our refining segment also sells refined products to unbranded marketers and occasionally exports refined products to other markets in the Asia/Pacific area. Our retail segment sells gasoline, diesel fuel and convenience store items through company-operated retail stations and branded jobber/dealers in 17 western states from Minnesota to Alaska and Hawaii. Retail operates under the Tesoro^®, Mirastar^®, Shell^®, USA Gasoline^tm and 2-Go Tesoro^® brands. We developed our Mirastar^® brand exclusively for use at Wal-Mart stores in an agreement covering 13 western states. We operate under the Shell^® brand at certain stations in California through a long-term agreement entered into in connection with our acquisition of the Los Angeles Assets. The Tesoro^® and USA Gasoline^tm brands are both owned by Tesoro.

The operating segments adhere to the accounting policies used for Tesoro’s consolidated financial statements, as described in the summary of significant accounting policies in Note A. We evaluate the performance of our segments based primarily on segment operating income. Segment operating income includes those revenues and expenses that are directly attributable to management of the respective segment. Intersegment sales from refining to retail are made at prevailing market rates. Income taxes, interest and financing costs, interest income and other, corporate depreciation and corporate general and administrative expenses are excluded from segment operating income. Identifiable assets are those utilized by the segment. Corporate assets are principally cash and other assets that are not associated with a specific operating segment. Segment information as of and for each of the three years ended December 31, 2007 is as follows (in millions):

	2007			2006			2005
Revenues
Refining:
Refined products	$	20,906		$	17,323		$	15,587
Crude oil resales and other(a)		627			564			782
Retail:
Fuel(b)		2,946			1,060			944
Merchandise and other		221			144			141
Intersegment sales from Refining to Retail		(2,785	)		(987	)		(873	)
Total Revenues	$	21,915		$	18,104		$	16,581
Segment Operating Income (Loss)
Refining(c)	$	1,188		$	1,476		$	1,194
Retail		(8	)		(21	)		(31	)
Total Segment Operating Income		1,180			1,455			1,163
Corporate and Unallocated Costs		(213	)		(138	)		(136	)
Operating Income		967			1,317			1,027
Interest and Financing Costs		(95	)		(77	)		(211	)
Interest Income and Other		33			46			15
Earnings Before Income Taxes	$	905		$	1,286		$	831
Depreciation and Amortization
Refining	$	314		$	221		$	160
Retail		28			16			17
Corporate		15			10			9
Total Depreciation and Amortization	$	357		$	247		$	186

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2007		2006		2005
Capital Expenditures
Refining	$	720	$	401	$	214
Retail		10		5		6
Corporate		59		47		42
Total Capital Expenditures	$	789	$	453	$	262
Identifiable Assets
Refining	$	7,068	$	4,486	$	4,204
Retail		771		207		222
Corporate		289		1,211		671
Total Assets	$	8,128	$	5,904	$	5,097

(a)	To balance or optimize our refinery supply requirements, we sell certain crude oil that we purchase under our supply contracts.
(b)	Federal excise and state motor fuel taxes on sales by our retail segment are included in revenues and costs of sales. These taxes totaled $240 million, $102 million and $108 million for the years ended December 31, 2007, 2006 and 2005, respectively.
(c)	Refining operating income for 2006 includes a pretax charge of $28 million related to the termination of a delayed coker project at our Washington refinery in July 2006. The charge is included in loss on asset disposals and impairments in the statements of consolidated operations.

NOTE Q — CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In the filing of our Annual Report on Form 10-K for the year ended December 31, 2007, which was originally filed with the SEC on February 29, 2008, we did not include the required disclosure under SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. We have restated our financial statement footnotes to include the information presented below.

Separate condensed consolidating financial information of Tesoro Corporation, subsidiary guarantors and non-guarantors are presented below. Tesoro and certain subsidiary guarantors have fully and unconditionally guaranteed our 61/4% senior notes due 2012, 65/8% senior notes due 2015 and 61/2% senior notes due 2017. All guarantees are joint and several. As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information. The following condensed consolidating financial information should be read in conjunction with the accompanying condensed consolidated financial statements and notes. The following condensed consolidating financial information is provided as an alternative to providing separate financial statements for guarantor subsidiaries. Separate financial statements of Tesoro’s subsidiary guarantors are not included because the guarantees are full and unconditional and these subsidiary guarantors are 100% owned and jointly and severally liable for Tesoro’s outstanding senior notes. The accounts for all companies reflected herein are presented using the equity method of accounting for investments in subsidiaries.

40

TESORO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Balance Sheet as of December 31, 2007
(In millions)

						Non-
	Tesoro		Guarantor			Guarantor
	Corporation		Subsidiaries			Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—	$	23		$	—	$	—		$	23
Receivables, less allowance for doubtful accounts		1		1,157			85		—			1,243
Inventories		—		1,102			98		—			1,200
Prepayments and other		46		88			—		—			134
Total Current Assets		47		2,370			183		—			2,600
Net Property, Plant and Equipment		—		4,652			128		—			4,780
Investment in Subsidiaries		3,854		(1	)		—		(3,853	)		—
Long-Term Receivables from Affiliates		1,527		—			62		(1,589	)		—
Other Noncurrent Assets		44		703			1		—			748
Total Assets	$	5,472	$	7,724		$	374	$	(5,442	)	$	8,128
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	54	$	2,178		$	260	$	—		$	2,492
Current maturities of debt		—		2			—		—			2
Total Current Liabilities		54		2,180			260		—			2,494
Long-Term Payables to Affiliates		—		1,589			—		(1,589	)		—
Debt		1,632		25			—		—			1,657
Other Noncurrent Liabilities		734		189			2		—			925
Stockholders’ Equity		3,052		3,741			112		(3,853	)		3,052
Total Liabilities and Stockholders’ Equity	$	5,472	$	7,724		$	374	$	(5,442	)	$	8,128

41

TESORO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Balance Sheet as of December 31, 2006
(In millions)

					Non-
	Tesoro		Guarantor		Guarantor
	Corporation		Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—	$	985	$	1	$	—		$	986
Receivables, less allowance for doubtful accounts		3		771		87		—			861
Inventories		—		807		65		—			872
Prepayments and other		31		54		7		—			92
Total Current Assets		34		2,617		160		—			2,811
Net Property, Plant and Equipment		—		2,569		118		—			2,687
Investment in Subsidiaries		3,283		21		—		(3,304	)		—
Long-Term Receivables from Affiliates		878		—		14		(892	)		—
Other Noncurrent Assets		26		379		1		—			406
Total Assets	$	4,221	$	5,586	$	293	$	(4,196	)	$	5,904
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	99	$	1,386	$	170	$	—		$	1,655
Current maturities of debt		14		3		—		—			17
Total Current Liabilities		113		1,389		170		—			1,672
Long-Term Payables to Affiliates		—		892		—		(892	)		—
Debt		1,003		26		—		—			1,029
Other Noncurrent Liabilities		603		96		2		—			701
Stockholders’ Equity		2,502		3,183		121		(3,304	)		2,502
Total Liabilities and Stockholders’ Equity	$	4,221	$	5,586	$	293	$	(4,196	)	$	5,904

42

TESORO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Operations for the Year Ended December 31, 2007
(In millions)

							Non-
	Tesoro			Guarantor			Guarantor
	Corporation			Subsidiaries			Subsidiaries			Eliminations			Consolidated
REVENUES	$	—		$	24,646		$	2,390		$	(5,121	)	$	21,915
Costs and expenses		7			23,664			2,398			(5,121	)		20,948
OPERATING INCOME (LOSS)		(7	)		982			(8	)		—			967
Equity in earnings (loss) of subsidiaries		571			(22	)		—			(549	)		—
Other income (expense)		—			(58	)		(4	)		—			(62	)
EARNINGS (LOSS) BEFORE INCOME TAXES		564			902			(12	)		(549	)		905
Income tax provision (benefit)(1)		(2	)		344			(3	)		—			339
NET EARNINGS (LOSS)	$	566		$	558		$	(9	)	$	(549	)	$	566

(1) The income tax provision (benefit) reflected in each column does not include any tax effect of the equity in earnings from subsidiaries.

43

TESORO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Operations for the Year Ended December 31, 2006
(In millions)

							Non-
	Tesoro			Guarantor			Guarantor
	Corporation			Subsidiaries			Subsidiaries		Eliminations			Consolidated
REVENUES	$	—		$	19,982		$	1,748	$	(3,626	)	$	18,104
Costs and expenses		5			18,664			1,744		(3,626	)		16,787
OPERATING INCOME (LOSS)		(5	)		1,318			4		—			1,317
Equity in earnings of subsidiaries		804			2			—		(806	)		—
Other income (expense)		—			(32	)		1		—			(31	)
EARNINGS (LOSS) BEFORE INCOME TAXES		799			1,288			5		(806	)		1,286
Income tax provision (benefit)(1)		(2	)		485			2		—			485
NET EARNINGS	$	801		$	803		$	3	$	(806	)	$	801

(1) The income tax provision (benefit) reflected in each column does not include any tax effect of the equity in earnings from subsidiaries.

44

TESORO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Operations for the Year Ended December 31, 2005
(In millions)

							Non-
	Tesoro			Guarantor			Guarantor
	Corporation			Subsidiaries			Subsidiaries		Eliminations			Consolidated
REVENUES	$	—		$	18,250		$	1,077	$	(2,746	)	$	16,581
Costs and expenses		6			17,227			1,067		(2,746	)		15,554
OPERATING INCOME (LOSS)		(6	)		1,023			10		—			1,027
Equity in earnings of subsidiaries		511			1			—		(512	)		—
Other income (expense)		—			(196	)		—		—			(196	)
EARNINGS (LOSS) BEFORE INCOME TAXES		505			828			10		(512	)		831
Income tax provision (benefit)(1)		(2	)		322			4		—			324
NET EARNINGS	$	507		$	506		$	6	$	(512	)	$	507

(1) The income tax provision (benefit) reflected in each column does not include any tax effect of the equity in earnings from subsidiaries.

45

TESORO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2007
(In millions)

							Non-
	Tesoro			Guarantor			Guarantor
	Corporation			Subsidiaries			Subsidiaries			Eliminations			Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash from (used in) operating activities	$	(3	)	$	1,281		$	44		$	—		$	1,322
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures		—			(734	)		(13	)		—			(747	)
Acquisitions		(1,820	)		(285	)		—			—			(2,105	)
Intercompany notes, net		1,278			—			—			(1,278	)		—
Proceeds from asset sales		—			10			4			—			14
Net cash used in investing activities		(542	)		(1,009	)		(9	)		(1,278	)		(2,838	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from debt offerings, net of issuance costs of $6		494			—			—			—			494
Borrowings under revolver		1,060			—			—			—			1,060
Repayments under revolver		(940	)		—			—			—			(940	)
Borrowings under term loan		700			—			—			—			700
Debt Refinanced		(500	)		—			—			—			(500	)
Repurchase of common stock		(4	)		—			—			—			(4	)
Dividend payments		(48	)		—			—			—			(48	)
Repayments of debt		(214	)		(2	)		—			—			(216	)
Proceeds from stock options exercised		9			—			—			—			9
Excess tax benefits from stock-based compensation arrangements		—			10			—			—			10
Net intercompany borrowings (repayments)		—			(1,242	)		(36	)		1,278			—
Financing costs and other		(12	)		—			—			—			(12	)
Net cash from (used in) financing activities		545			(1,234	)		(36	)		1,278			553
DECREASE IN CASH AND CASH EQUIVALENTS		—			(962	)		(1	)		—			(963	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		—			985			1			—			986
CASH AND CASH EQUIVALENTS, END OF YEAR	$	—		$	23		$	—		$	—		$	23

46

TESORO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2006
(In millions)

							Non-
	Tesoro			Guarantor			Guarantor
	Corporation			Subsidiaries			Subsidiaries			Eliminations			Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash from (used in) operating activities	$	(5	)	$	1,137		$	7		$	—		$	1,139
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures		—			(402	)		(34	)		—			(436	)
Intercompany notes, net		182			—			—			(182	)		—
Proceeds from asset sales		—			6			—			—			6
Net cash from (used in) investing activities		182			(396	)		(34	)		(182	)		(430	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Repurchase of common stock		(151	)		—			—			—			(151	)
Dividend payments		(27	)		—			—			—			(27	)
Repayments of debt		(9	)		(3	)		—			—			(12	)
Proceeds from stock options exercised		12			—			—			—			12
Excess tax benefits from stock-based compensation arrangements		—			17			—			—			17
Net intercompany borrowings (repayments)		—			(210	)		28			182			—
Financing costs and other		(2	)		—			—			—			(2	)
Net cash from (used in) financing activities		(177	)		(196	)		28			182			(163	)
INCREASE IN CASH AND CASH EQUIVALENTS		—			545			1			—			546
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		—			440			—			—			440
CASH AND CASH EQUIVALENTS, END OF YEAR	$	—		$	985		$	1		$	—		$	986

47

TESORO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2005
(In millions)

							Non-
	Tesoro			Guarantor			Guarantor
	Corporation			Subsidiaries			Subsidiaries			Eliminations			Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash from (used in) operating activities	$	(2	)	$	729		$	31		$	—		$	758
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures		—			(251	)		(7	)		—			(258	)
Intercompany notes, net		275			—			—			(275	)		—
Proceeds from asset sales		—			4			—			—			4
Net cash from (used in) investing activities		275			(247	)		(7	)		(275	)		(254	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from debt offerings, net of issuance costs of $10		890			—			—			—			890
Borrowings under revolver		463			—			—			—			463
Repayments under revolver		(463	)		—			—			—			(463	)
Debt Refinanced		(900	)		—			—			—			(900	)
Repayments of debt		(188	)		(3	)		—			—			(191	)
Repurchase of common stock		(15	)		—			—			—			(15	)
Dividend payments		(14	)		—			—			—			(14	)
Proceeds from stock options exercised		30			—			—			—			30
Excess tax benefits from stock-based compensation arrangements		—			27			—			—			27
Net intercompany borrowings (repayments)		—			(251	)		(24	)		275			—
Financing costs and other		(76	)		—			—			—			(76	)
Net cash from (used in) financing activities		(273	)		(227	)		(24	)		275			(249	)
INCREASE IN CASH AND CASH EQUIVALENTS		—			255			—			—			255
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		—			185			—			—			185
CASH AND CASH EQUIVALENTS, END OF YEAR	$	—		$	440		$	—		$	—		$	440

48

TESORO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE R — QUARTERLY FINANCIAL DATA (UNAUDITED)

	Quarters									Total
	First		Second		Third		Fourth			Year
	(In millions except per share amounts)
2007
Revenues	$	3,876	$	5,604	$	5,902	$	6,533		$	21,915
Costs of sales and operating expenses	$	3,548	$	4,710	$	5,651	$	6,399		$	20,308
Operating Income (loss)	$	188	$	729	$	99	$	(49	)	$	967
Net Earnings (loss)	$	116	$	443	$	47	$	(40	)	$	566
Net Earnings (loss) Per share:
Basic	$	0.86	$	3.26	$	0.35	$	(0.29	)	$	4.17
Diluted	$	0.84	$	3.17	$	0.34	$	(0.29	)	$	4.06
2006
Revenues	$	3,877	$	4,929	$	5,278	$	4,020		$	18,104
Costs of sales and operating expenses	$	3,689	$	4,276	$	4,697	$	3,652		$	16,314
Operating Income	$	81	$	543	$	446	$	247		$	1,317
Net Earnings	$	43	$	326	$	274	$	158		$	801
Net Earnings Per Share:
Basic	$	0.31	$	2.40	$	2.01	$	1.17		$	5.89
Diluted	$	0.30	$	2.33	$	1.96	$	1.14		$	5.73

49

Item 9A.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the year. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. During the fourth quarter of 2007, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management Report on Internal Control over Financial Reporting

We, as management of Tesoro Corporation and its subsidiaries (the “Company”), are responsible for establishing and maintaining adequate internal control over financial reporting as defined in the Securities Exchange Act of 1934, Rule 13a-15(f). The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on such assessment, we believe that as of December 31, 2007, the Company’s internal control over financial reporting is effective.

Management’s assessment of and conclusion on the effectiveness of our internal control over financial reporting excludes the internal control over financial reporting of the Los Angeles Assets and USA Petroleum Assets, both of which we acquired in May 2007 (as defined and described in Note C of our notes to consolidated financial statements in Item 8). The acquisitions contributed approximately 14 percent of our total revenues for the year ended December 31, 2007 and accounted for approximately 32 percent of our total assets as of December 31, 2007. Registrants are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year if, among other circumstances and factors, there is not adequate time between the consummation date of the acquisition and the assessment date for assessing internal controls.

The independent registered public accounting firm of Deloitte & Touche LLP, as auditors of the Company’s consolidated financial statements, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, included herein.

50

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Tesoro Corporation

We have audited the internal control over financial reporting of Tesoro Corporation and subsidiaries (the “Company”) as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting of the acquired Los Angeles Assets and USA Petroleum Assets, which were acquired in May 2007 and whose financial statements constitute 32% of total assets and 14% of total revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2007. Accordingly, our audit did not include the internal control over financial reporting of the Los Angeles Assets and USA Petroleum Assets. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2007 of the Company and our report dated February 28, 2008 (October 21, 2008, as to Note Q), expressed an unqualified opinion on those financial statements and included explanatory paragraphs relating to a change in the Company’s method of accounting for refined product sales and purchases transactions with the same counterparty that have been entered into in contemplation of one another, and for its pension and other postretirement plans and the restatement discussed in Note Q.

/s/  Deloitte & Touche LLP

San Antonio, Texas

February 28, 2008

51

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)1. Financial Statements

The following consolidated financial statements of Tesoro Corporation and its subsidiaries are included in Part II, Item 8 of this Form 10-K:

	Page
Report of Independent Registered Public Accounting Firm		3
Statements of Consolidated Operations — Years Ended December 31, 2007, 2006 and 2005		4
Consolidated Balance Sheets — December 31, 2007 and 2006		5
Statements of Consolidated Comprehensive Income and Stockholders’ Equity — Years Ended December 31, 2007, 2006 and 2005		6
Statements of Consolidated Cash Flows — Years Ended December 31, 2007, 2006 and 2005		7
Notes to Consolidated Financial Statements		8

2. Financial Statement Schedules

No financial statement schedules are submitted because of the absence of the conditions under which they are required, the required information is insignificant or because the required information is included in the consolidated financial statements.

3. Exhibits

Exhibit
Number				Description of Exhibit
	2	.1	—	Stock Sale Agreement, dated March 18, 1998, among the Company, BHP Hawaii Inc. and BHP Petroleum Pacific Islands Inc. (incorporated by reference herein to Exhibit 2.1 to Registration Statement No. 333-51789).
	2	.2	—	Stock Sale Agreement, dated May 1, 1998, among Shell Refining Holding Company, Shell Anacortes Refining Company and the Company (incorporated by reference herein to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 1998, File No. 1-3473).
	2	.3	—	Asset Purchase Agreement, dated July 16, 2001, by and among the Company, BP Corporation North America Inc. and Amoco Oil Company (incorporated by reference herein to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on September 21, 2001, File No. 1-3473).
	2	.4	—	Asset Purchase Agreement, dated July 16, 2001, by and among the Company, BP Corporation North America Inc. and Amoco Oil Company (incorporated by reference herein to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on September 21, 2001, File No. 1-3473).
	2	.5	—	Asset Purchase Agreement, dated July 16, 2001, by and among the Company, BP Corporation North America Inc. and BP Pipelines (North America) Inc. (incorporated by reference herein to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001, File No. 1-3473).
	2	.6	—	Sale and Purchase Agreement for Golden Eagle Refining and Marketing Assets, dated February 4, 2002, by and among Ultramar Inc. and Tesoro Refining and Marketing Company, including First Amendment dated February 20, 2002 and related Purchaser Parent Guaranty dated February 4, 2002, and Second Amendment dated May 3, 2002 (incorporated by reference herein to Exhibit 2.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 1-3473, and Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 9, 2002, File No. 1-3473).
	2	.7	—	Asset Purchase Agreement by and between the Company and Shell Oil Products U.S. dated as of January 29, 2007 (incorporated by reference herein to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 1, 2007, File No. 1-3473).

52

Exhibit
Number				Description of Exhibit
	2	.8	—	Asset Purchase and Sale Agreement by and between the Company and Shell Oil Products U.S. dated as of January 29, 2007 (incorporated by reference herein to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on February 1, 2007, File No. 1-3473).
	2	.9	—	Purchase and Sale Agreement and Joint Escrow Instructions by and among the Company and USA Petroleum Corporation, USA Gasoline Corporation, Palisades Gas and Wash, Inc. and USA San Diego LLC dated as of January 26, 2007 (incorporated by reference herein to Exhibit 2.3 to the Company’s Current Report on Form 8-K filed on February 1, 2007, File No. 1-3473).
	Δ2	.10	—	Letter Agreement to the Purchase and Sale Agreement and Joint Escrow Instructions dated April 30, 2007 between the Company and USA Petroleum Corporation, Palisades Gas and Wash, Inc. and USA San Diego, LLC (incorporated by reference herein to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007, File No. 1-3473).
	3	.1	—	Restated Certificate of Incorporation of the Company (incorporated by reference herein to Exhibit 3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3473).
	3	.2	—	By-Laws of the Company, as amended through February 2, 2005 (incorporated by reference herein to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 8, 2005, File No. 1-3473).
	3	.3	—	Amendment to the By-Laws of the Company, effective March 6, 2006 (incorporated by reference herein to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, File No. 1-3473).
	3	.4	—	Amendment to Restated Certificate of Incorporation of the Company adding a new Article IX limiting Directors’ Liability (incorporated by reference herein to Exhibit 3(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3473).
	3	.5	—	Certificate of Amendment, dated as of May 4, 2006, to Certificate of Incorporation of the Company, amending Article IV, increasing the number of authorized shares of common stock from 100 million to 200 million (incorporated by reference herein to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2006, File No. 1-3473).
	3	.6	—	Certificate of Designation Establishing a Series A Participating Preferred Stock, dated as of December 16, 1985 (incorporated by reference herein to Exhibit 3(d) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3473).
	3	.7	—	Certificate of Amendment, dated as of February 9, 1994, to Restated Certificate of Incorporation of the Company amending Article IV, Article V, Article VII and Article VIII (incorporated by reference herein to Exhibit 3(e) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-3473).
	3	.8	—	Certificate of Amendment, dated as of August 3, 1998, to Certificate of Incorporation of the Company, amending Article IV, increasing the number of authorized shares of Common Stock from 50 million to 100 million (incorporated by reference herein to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 1998, File No. 1-3473).
	3	.9	—	Certificate of Ownership of Merger merging Tesoro Merger Corp. into Tesoro Petroleum Corporation and changing the name of Tesoro Petroleum Corporation to Tesoro Corporation, dated November 8, 2004 (incorporated by reference herein to Exhibit 3.1 to the Current Report on Form 8-K filed on November 9, 2004).
	4	.1	—	Form of Indenture relating to the 61/4% Senior Notes due 2012, dated as of November 16, 2005, among Tesoro Corporation, certain subsidiary guarantors and U.S. Bank National Association, as Trustee (including form of note) (incorporated by reference herein to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 17, 2005, File No. 1-3473).
	4	.2	—	Form of Indenture relating to the 65/8% Senior Notes due 2015, dated as of November 16, 2005, among Tesoro Corporation, certain subsidiary guarantors and U.S. Bank National Association, as Trustee (including form of note) (incorporated by reference herein to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on November 17, 2005, File No. 1-3473).

53

Exhibit
Number				Description of Exhibit
	4	.3	—	Form of Registration Rights Agreement relating to the 61/4% Senior Notes due 2012, dated as of November 16, 2005, among Tesoro Corporation, certain subsidiary guarantors and Lehman Brothers Inc., Goldman, Sachs & Co. and J.P. Morgan Securities, Inc. (incorporated by reference herein to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on November 17, 2005, File No. 1-3473).
	4	.4	—	Form of Registration Rights Agreement relating to the 65/8% Senior Notes due 2015, dated as of November 16, 2005, among Tesoro Corporation, certain subsidiary guarantors and Lehman Brothers, Inc., Goldman, Sachs & Co. and J.P. Morgan Securities, Inc. (incorporated by reference herein to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on November 17, 2005, File No. 1-3473).
	4	.5	—	Form of Indenture relating to the 61/2% Senior Notes due 2017, dated as of May 29, 2007, among Tesoro Corporation, certain subsidiary guarantors and U.S. Bank National Association, as Trustee (including form of note) (incorporated by reference herein to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 4, 2007, File No. 1-3473).
	4	.6	—	Form of Registration Rights Agreement relating to the 61/2% Senior Notes due 2017, dated as of May 29, 2007, among Tesoro Corporation, certain subsidiary guarantors, Lehman Brothers, Inc., Goldman, Sachs & Co. and Greenwich Capital Markets, Inc. (incorporated by reference herein to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on June 4, 2007, File No. 1-3473).
	4	.7	—	Rights Agreement dated as of November 20, 2007 between Tesoro Corporation and American Stock Transfer & Trust Company as Rights Agent, including the form of Certificate of Designations of Series B Junior Participating Preferred Stock, the forms of Right Certificate, Assignment and Election to Purchase, and the Summary of Rights attached thereto as Exhibits A, B and C, respectively (incorporated by reference herein to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 20, 2007, File No. 1-3473).
	10	.1	—	Fourth Amended and Restated Credit Agreement, dated as of May 11, 2007, among the Company, JPMorgan Chase Bank, N.A. as administrative agent and a syndicate of banks, financial institutions and other entities (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 15, 2007, File No. 1-3473).
	*10	.2	—	First Amendment to the Fourth Amended and Restated Credit Agreement, dated as of February 22, 2008, among the Company, JP Morgan Chase Bank, N.A. as administrative agent and a syndicate of banks, financial institutions and other entities.
	10	.3	—	$100 million Promissory Note, dated as of May 17, 2002, payable by the Company to Ultramar Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 24, 2002, File No. 1-3473).
	10	.4	—	$50 million Promissory Note, dated as of May 17, 2002, payable by the Company to Ultramar Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 24, 2002, File No. 1-3473).
	†10	.5	—	Amended and Restated Executive Security Plan effective as January 1, 2005 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 8, 2006, File No. 1-3473).
	†10	.6	—	Amended and Restated Executive Long-Term Incentive Plan effective as of February 2, 2006 (incorporated by reference herein to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 8, 2006, File No. 1-3473).
	†10	.7	—	2006 Executive Long-Term Incentive Plan dated as of May 3, 2006 (incorporated by reference herein to Exhibit A to the Company’s Proxy Statement for the Annual Meeting of Stockholders held on May 3, 2006).
	†10	.8	—	First Amendment to the 2006 Executive Long-Term Incentive Plan dated as of August 1, 2006 (incorporated by reference herein to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2006, File No. 1-3473).
	†10	.9	—	Amended and Restated Employment Agreement between the Company and Bruce A. Smith dated December 3, 2003 (incorporated by reference herein to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, File No. 1-3473).

54

Exhibit
Number				Description of Exhibit
	†10	.10	—	Form of First Amendment to Amended and Restated Employment Agreement between the Company and Bruce A. Smith dated as of February 2, 2006 (incorporated by reference herein to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 8, 2006, File No. 1-3473).
	†10	.11	—	Second Amendment to the Amended and Restated Employment Agreement between the Company and Bruce A. Smith dated as of November 1, 2006 (incorporated by reference herein to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2006, File No. 1-3473).
	†10	.12	—	Agreement between the Company and Bruce A. Smith as of November 1, 2006 (incorporated by reference herein to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2006, File No. 1-3473).
	†10	.13	—	Employment Agreement between the Company and William J. Finnerty dated as of February 2, 2005 (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on February 8, 2005, File No. 1-3473).
	†10	.14	—	Form of First Amendment to Employment Agreement between the Company and William J. Finnerty dated as of February 2, 2006 (incorporated by reference herein to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 8, 2006, File No. 1-3473).
	†10	.15	—	Form of Second Amendment to Employment Agreement between the Company and William J. Finnerty dated as of July 11, 2007 (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 16, 2007, File No. 1-3473).
	†10	.16	—	Employment Agreement between the Company and Everett D. Lewis dated as of February 2, 2005 (incorporated by reference herein to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on February 8, 2005, File No. 1-3473).
	†10	.17	—	Form of First Amendment to Employment Agreement between the Company and Everett D. Lewis dated as of February 2, 2006 (incorporated by reference herein to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on February 8, 2006, File No. 1-3473).
	†10	.18	—	Form of Second Amendment to Employment Agreement between the Company and Everett D. Lewis dated as of July 11, 2007 (incorporated by reference herein to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 16, 2007, File No. 1-3473).
	†10	.19	—	Employment Agreement between the Company and Gregory A. Wright dated as of August 26, 2004 (incorporated by reference herein to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on August 31, 2004, File No. 1-3473).
	†10	.20	—	Form of First Amendment to Employment Agreement between the Company and Gregory A. Wright dated as of February 2, 2006 (incorporated by reference herein to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on February 8, 2006, File No. 1-3473).
	†10	.21	—	Second Amendment to Employment Agreement between the Company and Gregory A. Wright dated as of June 8, 2007 (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 13, 2007, File No. 1-3473).
	†10	.22	—	Management Stability Agreement between the Company and W. Eugene Burden dated November 8, 2002 (incorporated by reference herein to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, File No. 1-3473).
	†10	.23	—	Management Stability Agreement between the Company and Claude A. Flagg dated February 2, 2005 (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 8, 2005, File No. 1-3473).
	†10	.24	—	Amended and Restated Management Stability Agreement between the Company and J. William Haywood dated August 2, 2005 (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 8, 2005, File No. 1-3473).
	†10	.25	—	Management Stability Agreement between the Company and Joseph M. Monroe dated November 6, 2002 (incorporated by reference herein to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, File No. 1-3473).

55

Exhibit
Number				Description of Exhibit
	†10	.26	—	Amended and Restated Management Stability Agreement between the Company and Daniel J. Porter dated August 2, 2005 (incorporated by reference herein to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 8, 2005, File No. 1-3473).
	†10	.27	—	Management Stability Agreement between the Company and Arlen O. Glenewinkel, Jr. dated August 2, 2005 (incorporated by reference herein to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 1-3473).
	†10	.28	—	Amended and Restated Management Stability Agreement between the Company and Susan A. Lerette dated February 2, 2005 (incorporated by reference herein to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 8, 2005, File No. 1-3473).
	†10	.29	—	Amended and Restated Management Stability Agreement between the Company and Charles S. Parrish dated May 3, 2006 (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 25, 2006, File No. 1-3473).
	†10	.30	—	Amended and Restated Management Stability Agreement between the Company and Otto C. Schwethelm dated February 2, 2005 (incorporated by reference herein to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 8, 2005, File No. 1-3473).
	†10	.31	—	Management Stability Agreement between the Company and Sarah S. Simpson dated August 2, 2005 (incorporated by reference herein to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 1-3473).
	†10	.32	—	Management Stability Agreement between the Company and G. Scott Spendlove dated January 24, 2002 (incorporated by reference herein to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002, File No. 1-3473).
	†10	.33	—	Amended and Restated Management Stability Agreement between the Company and Lynn D. Westfall dated as of May 3, 2006 (incorporated by reference herein to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 25, 2006, File No. 1-3473).
	†10	.34	—	Tesoro Corporation Restoration Retirement Plan dated as of August 9, 2006 (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 10, 2006, File No. 1-3473).
	†10	.35	—	Tesoro Corporation 2006 Executive Deferred Compensation Plan dated November 2, 2006 (incorporated by reference herein to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2006, File No. 1-3473).
	†10	.36	—	Copy of the Company’s Key Employee Stock Option Plan dated November 12, 1999 (incorporated by reference herein to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002, File No. 1-3473).
	†10	.37	—	2006 Long-Term Stock Appreciation Rights Plan of Tesoro Corporation (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 8, 2006, File No. 1-3473).
	†10	.38	—	Copy of the Company’s Non-Employee Director Retirement Plan dated December 8, 1994 (incorporated by reference herein to Exhibit 10(t) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-3473).
	†10	.39	—	Amended and Restated 1995 Non-Employee Director Stock Option Plan, as amended through March 15, 2000 (incorporated by reference herein to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002, File No. 1-3473).
	†10	.40	—	Amendment to the Company’s Amended and Restated 1995 Non-Employee Director Stock Option Plan (incorporated by reference herein to Exhibit 10.41 to the Company’s Registration Statement No. 333-92468).
	†10	.41	—	Amendment to the Company’s 1995 Non-Employee Director Stock Option Plan effective as of May 11, 2004 (incorporated by reference herein to Exhibit 4.19 to the Company’s Registration Statement No. 333-120716).
	†10	.42	—	Copy of the Company’s Board of Directors Deferred Compensation Plan dated February 23, 1995 (incorporated by reference herein to Exhibit 10(u) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-3473).

56

Exhibit
Number				Description of Exhibit
	†10	.43	—	Copy of the Company’s Board of Directors Deferred Compensation Trust dated February 23, 1995 (incorporated by reference herein to Exhibit 10(v) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-3473).
	†10	.44	—	Copy of the Company’s Board of Directors Deferred Phantom Stock Plan (incorporated by reference herein to Exhibit 10 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, File No. 1-3473).
	†10	.45	—	2005 Director Compensation Plan (incorporated by reference herein to Exhibit A to the Company’s Proxy Statement for the Annual Meeting of Stockholders held on May 4, 2005, File No. 1-3473).
	†10	.46	—	Phantom Stock Option Agreement between the Company and Bruce A. Smith dated effective October 29, 1997 (incorporated by reference herein to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-3473).
	10	.47	—	Form of Indemnification Agreement between the Company and its officers and directors (incorporated by reference herein to Exhibit B to the Company’s Proxy Statement for the Annual Meeting of Stockholders held on February 25, 1987, File No. 1-3473).
	14	.1	—	Code of Business Conduct and Ethics for Senior Financial Executives (incorporated by reference herein to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, File No. 1-3473).
	*21	.1	—	Subsidiaries of the Company.
	**23	.1	—	Consent of Independent Registered Public Accounting Firm.
	**31	.1	—	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	**31	.2	—	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	**32	.1	—	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	**32	.2	—	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Previously filed on February 29, 2008 as an exhibit to our original Annual Report on Form 10-K.
**	Filed herewith.
Δ	Confidential treatment has been granted for certain portions of this Exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, which portions have been omitted and filed separately with the Securities and Exchange Commission.
†	Identifies management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto pursuant to Item 15(a)(3) of Form 10-K.

Copies of exhibits filed as part of this Form 10-K may be obtained by stockholders of record at a charge of $0.15 per page, minimum $5.00 each request. Direct inquiries to the Corporate Secretary, Tesoro Corporation, 300 Concord Plaza Drive, San Antonio, Texas, 78216-6999.

57

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

TESORO CORPORATION

By  /s/  BRUCE A. SMITH

Bruce A. Smith

Chairman of the Board of Directors,

President and Chief Executive Officer

Dated: October 22, 2008

58