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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008


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		95-0862768
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

300 Concord Plaza Drive, San Antonio, Texas 78216-6999
(Address of principal executive offices) (Zip Code)

210-828-8484
(Registrant’s telephone number, including area code)

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 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 in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 137,728,066 shares of the registrant’s Common Stock outstanding at May 5, 2008.

EXPLANATORY NOTE

Amendment No. 1 to our Quarterly Report on Form 10-Q for the period ended March 31, 2008 (the “Amendment”) is filed to restate financial information required by SEC Regulations S-X Rule 3-10 that was previously omitted. This financial information is included in Note L to our condensed consolidated financial statements included herein in Item 1, Financial Statements. The restatement has no effect on the accompanying condensed consolidated balance sheets, condensed statements of consolidated operations or condensed statements of consolidated cash flows and does not amend, update or change any other information within Item 1 from our original Quarterly Report on Form 10-Q filed on May 7, 2008. This Amendment also does not reflect events that occurred after our initial filing date. The 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 Quarterly Report on Form 10-Q, including any amendments to prior filings.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TESORO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions except per share amounts)


	March 31,			December 31,
	2008			2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	41		$	23
Receivables, less allowance for doubtful accounts		1,600			1,243
Inventories		1,360			1,200
Prepayments and other		182			134

Total Current Assets		3,183			2,600

PROPERTY, PLANT AND EQUIPMENT
Refining		5,182			5,021
Retail		619			642
Corporate and other		200			193

		6,001			5,856
Less accumulated depreciation and amortization		(1,123	)		(1,076	)

Net Property, Plant and Equipment		4,878			4,780

OTHER NONCURRENT ASSETS
Goodwill		92			92
Acquired intangibles, net		284			290
Other, net		371			366

Total Other Noncurrent Assets		747			748

Total Assets	$	8,808		$	8,128

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	2,412		$	2,004
Accrued liabilities		410			488
Current maturities of debt		2			2

Total Current Liabilities		2,824			2,494

DEFERRED INCOME TAXES		374			388
OTHER LIABILITIES		561			537
DEBT		2,082			1,657
COMMITMENTS AND CONTINGENCIES (Note G)
STOCKHOLDERS’ EQUITY
Common stock, par value $0.16²/₃; authorized 200,000,000 shares; 145,091,262 shares issued (144,505,356 in 2007)		24			24
Additional paid-in capital		886			876
Retained earnings		2,297			2,393
Treasury stock, 7,426,370 common shares (7,460,518 in 2007), at cost		(150	)		(151	)
Accumulated other comprehensive loss		(90	)		(90	)

Total Stockholders’ Equity		2,967			3,052

Total Liabilities and Stockholders’ Equity	$	8,808		$	8,128

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

TESORO CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(In millions except per share amounts)


	Three Months Ended
	March 31,
	2008			2007

REVENUES (1)	$	6,531		$	3,876
COSTS AND EXPENSES:
Costs of sales and operating expenses (1)		6,533			3,548
Selling, general and administrative expenses		52			69
Depreciation and amortization		90			69
Loss on asset disposals and impairments		14			2

OPERATING INCOME (LOSS)		(158	)		188
Interest and financing costs		(27	)		(17	)
Interest income		2			14
Other income		45			—

EARNINGS (LOSS) BEFORE INCOME TAXES		(138	)		185
Income tax provision (benefit)		(56	)		69

NET EARNINGS (LOSS)	$	(82	)	$	116

NET EARNINGS (LOSS) PER SHARE:
Basic	$	(0.60	)	$	0.86
Diluted	$	(0.60	)	$	0.84
WEIGHTED AVERAGE COMMON SHARES:
Basic		136.2			135.2
Diluted		136.2			138.9
DIVIDENDS DECLARED PER SHARE	$	0.10		$	0.05

(1) Includes excise taxes collected by our retail segment	$	75		$	24

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

TESORO CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions)


	Three Months Ended
	March 31,
	2008			2007
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings (loss)	$	(82	)	$	116
Adjustments to reconcile net earnings (loss) to net cash from (used in) operating activities:
Depreciation and amortization		90			69
Amortization of debt issuance costs and discounts		3			4
Loss on asset disposals and impairments		14			2
Stock-based compensation		(1	)		20
Deferred income taxes		(14	)		7
Excess tax benefits from stock-based compensation arrangements		—			(10	)
Other changes in non-current assets and liabilities		(4	)		(12	)
Changes in current assets and current liabilities:
Receivables		(357	)		(52	)
Inventories		(160	)		(72	)
Prepayments and other		(47	)		(65	)
Accounts payable and accrued liabilities		374			(26	)

Net cash used in operating activities		(184	)		(19	)


CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures		(212	)		(144	)
Proceeds from asset sales		6			1

Net cash used in investing activities		(206	)		(143	)


CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Borrowings under revolving credit agreement		2,300			—
Repayments under revolving credit agreement		(1,875	)		—
Repurchase of common stock		(3	)		(3	)
Dividend payments		(14	)		(7	)
Proceeds from stock options exercised		—			5
Excess tax benefits from stock-based compensation arrangements		—			10

Net cash from financing activities		408			5


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		18			(157	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		23			986


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	41		$	829


SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid, net of capitalized interest	$	(11	)	$	(5	)
Income taxes paid	$	8		$	15

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
Capital expenditures included in accounts payable and accrued liabilities	$	64		$	55

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

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE A — BASIS OF PRESENTATION

The interim condensed consolidated financial statements and notes thereto of Tesoro Corporation (“Tesoro”) and its subsidiaries have been prepared by management without audit according to the rules and regulations of the SEC. The accompanying financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results for the periods presented. Such adjustments are of a normal recurring nature. The consolidated balance sheet at December 31, 2007 has been condensed from the audited consolidated financial statements at that date. Certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. However, management believes that the disclosures presented herein are adequate to make the information not misleading. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2007. For all periods presented, share and per share data (except par value) reflect the effect of a two-for-one stock split effected in the form of a stock dividend which was distributed in May 2007. Our results of operations for the 2008 period include the acquisitions described in Note C.

We prepare our condensed consolidated financial statements in conformity with 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 periods. 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. The results of operations for any interim period are not necessarily indicative of results for the full year.

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. The assumed conversion of common stock equivalents produced anti-dilutive results for the three months ended March 31, 2008, and was not included in the dilutive calculation. For the three months ended March 31, 2007, 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 calculations are presented below (in millions except per share amounts):


	Three Months Ended
	March 31,
	2008			2007
Basic:
Net earnings (loss)	$	(82	)	$	116

Weighted average common shares outstanding		136.2			135.2

Basic Earnings (Loss) Per Share	$	(0.60	)	$	0.86


Diluted:
Net earnings (loss)	$	(82	)	$	116

Weighted average common shares outstanding		136.2			135.2
Dilutive effect of stock options and unvested restricted stock		—			3.7

Total diluted shares		136.2			138.9

Diluted Earnings (Loss) Per Share	$	(0.60	)	$	0.84

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE C — ACQUISITIONS

Los Angeles Assets

On May 10, 2007, we acquired a 100,000 barrels per day (“bpd”) refinery and a 42,000 bpd 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). 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. 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 three months ended March 31, 2007 gives effect to the acquisition of the Los Angeles Assets and the related financings, including (i) the issuance of $500 million 6 ¹/2% senior notes due 2017, and (ii) $500 million in borrowings under our credit agreement, as if each had occurred at the beginning of the period presented. Included in the pro forma results below are allocations of corporate overhead reflected in the historical financial statements of the Los Angeles Assets totaling $16 million for the three months ended March 31, 2007. 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.


	Three Months Ended
	March 31, 2007

Revenues	$	4,455
Net earnings	$	113
Net earnings per share:
Basic	$	0.84
Diluted	$	0.81

USA Gasoline™ 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 ™ 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. The purchase price was allocated based upon fair market values at the date of acquisition.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The purchase price allocation, including direct costs incurred in the acquisition of the USA Gasoline ™ 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 information has not been presented for the USA Petroleum Assets acquisition as it is insignificant to our consolidated financial statements.

NOTE D — INVENTORIES

Components of inventories were as follows (in millions):


	March 31,		December 31,
	2008		2007

Crude oil and refined products, at LIFO cost	$	1,258	$	1,107
Oxygenates and by-products, at FIFO cost		23		17
Merchandise, at average cost		14		15
Materials and supplies, at average cost		65		61

Total Inventories	$	1,360	$	1,200

Inventories valued at LIFO cost were less than replacement cost by approximately $1.8 billion and $1.4 billion at March 31, 2008 and December 31, 2007, respectively.

NOTE E — DEBT

Credit Agreement

At March 31, 2008, our credit agreement provided for borrowings (including letters of credit) up to the lesser of the agreement’s total capacity, $1.75 billion, or the amount of a periodically adjusted borrowing base ($2.5 billion as of March 31, 2008), consisting of Tesoro’s eligible cash and cash equivalents, receivables and petroleum inventories, net of the standard reserve ,as defined. As of March 31, 2008, we had $545 million in borrowings and $571 million in letters of credit outstanding under the amended credit agreement, resulting in total unused credit availability of $634 million or 36% of the eligible borrowing base. Borrowings under the revolving credit facility bear interest at either a base rate (5.25% at March 31, 2008) or a Eurodollar rate (2.70% at March 31, 2008) plus an applicable margin. The applicable margin at March 31, 2008 was 0.875% 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 (0.875% at March 31, 2008). We also incur commitment fees for the unused portion of the revolving credit facility at an annual rate of 0.25% as of March 31, 2008.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 specified levels of tangible net worth. For the three months ended March 31, 2008 and 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

At March 31, 2008, we had two separate letter of credit agreements for the purchase of foreign crude oil that provide $320 million and $80 million in letters of credit. The $320 million letter of credit agreement was increased from a capacity of $250 million in March 2008. The 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 March 31, 2008, we had $151 million in letters of credit outstanding under this agreement, resulting in total unused credit availability of $169 million, or 53% 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 March 31, 2008, 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.

During April 2008, we entered into a third letter of credit agreement for the purchase of foreign crude oil providing up to $100 million in letters of credit. The terms and conditions of this agreement are similar to the separate letter of credit agreements described above. Letters of credit outstanding under this agreement incur fees at a rate of 0.10% per quarter.

Capitalized Interest

We capitalize interest as part of the cost of major projects during extended construction periods. Capitalized interest, which is a reduction to interest and financing costs in the condensed statements of consolidated operations, totaled $12 million and $5 million for the three months ended March 31, 2008 and 2007, respectively.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE F — 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. Although our funded employee retirement plan fully meets all funding requirements under applicable laws and regulations, during the three months ended March 31, 2008, we voluntarily contributed $5 million to improve the funded status of the employee retirement plan. The components of pension and other postretirement benefit expense included in the condensed statements of consolidated operations for the three months ended March 31, 2008 and 2007 were (in millions):


							Other Postretirement
	Pension Benefits						Benefits
	2008			2007			2008		2007
Service Cost	$	8		$	6		$	3	$	3
Interest Cost		6			5			5		3
Expected return on plan assets		(6	)		(6	)		—		—
Amortization of prior service cost		1			1			—		—
Recognized net actuarial loss		1			1			1		—

Net Periodic Benefit Expense	$	10		$	7		$	9	$	6

NOTE G — COMMITMENTS AND CONTINGENCIES

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,” and FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes” 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. During the three months ended March 31, 2008 and 2007, our combined federal and state effective income tax rate was a 41% tax benefit and a 37% tax provision, respectively. The 41% tax benefit during the 2008 Quarter included a $3.5 million benefit from the favorable settlement of federal tax audits for the years 1997 through 2005. All tax liabilities resulting from these audits were previously recorded as unrecognized tax benefits in our condensed consolidated balance sheet in accordance with FIN 48.

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.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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. At March 31, 2008, our accruals for environmental expenses totaled $99 million. 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, 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.

In March 2007, we settled our dispute with a prior owner of our Golden Eagle refinery concerning soil and groundwater conditions at the refinery. We received $58.5 million in settlement proceeds in exchange for assuming responsibility for certain environmental liabilities arising from operations at the refinery prior to August of 2000. At March 31, 2008, our accrual for these environmental liabilities totaled $72 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. Amounts recorded for these environmental liabilities have not been reduced by possible insurance recoveries.

In March 2008, we settled 77 Notices of Violation (“NOV”) received from the Bay Area Air Quality Management District alleging violations of air quality at our Golden Eagle refinery for the years 2003 through 2006. We agreed to settle this matter for $1.4 million, which was paid in March 2008.

In January 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 operation. A reserve for this matter is included in the environmental accruals referenced above.

In December 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 operation. A reserve for the NOV is included in the environmental accruals referenced above.

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 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.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Other Environmental Matters

We are a defendant, along with other manufacturing, supply and marketing defendants, in ten pending cases alleging MTBE contamination in groundwater. We have agreed to settle a number of the pending cases, subject to the completion of the terms and conditions of the settlement agreement. 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 for the cases included in the settlement is included in 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.

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.

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, and held that we were entitled to receive refunds, including interest. In accordance with the ruling, we received in March 2008 a refund from TAPS of $45 million, net of contingent legal fees of $8 million. The $45 million refund is included as other income in our condensed statement of consolidated operations.

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. In March 2008, the Alaska Superior Court affirmed the RCA’s ruling and affirmed the $1.96 permanent rate. That ruling is currently on appeal to the Alaska Supreme 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 Supreme Court where the decision is being held in abeyance pending the decision in the appeals of the rates for 2001-2003. If the RCA’s decisions, as affirmed by the Alaska Superior Court, 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 March 31, 2008 (averaging approximately $4.07 barrel) and the RCA’s approved rate for this period ($1.96 per barrel) plus interest for the approximately 51 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 March 31, 2008.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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. In May 2007, the presiding judge in this consolidated FERC 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 we believe 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 H — STOCKHOLDERS’ EQUITY

Cash Dividends

On May 6, 2008, our Board of Directors declared a quarterly cash dividend on common stock of $0.10 per share, payable on June 16, 2008 to shareholders of record on June 2, 2008. In March 2008, we paid a quarterly cash dividend on common stock of $0.10 per share.

Shareholder Rights Plan

On March 6, 2008, our Board of Directors approved the termination of the stockholder rights plan, dated as of November 20, 2007. The final expiration date of the rights was changed from November 20, 2010 to March 6, 2008. The rights agreement is of no further force and effect, and the rights were de-registered under the Securities Exchange Act of 1934.

NOTE I — STOCK-BASED COMPENSATION

Stock-based compensation expense included in our condensed statements of consolidated operations for our stock-based compensation plans was as follows (in millions):


	Three Months Ended
	March 31,
	2008			2007
Stock options	$	5		$	5
Restricted stock		3			2
Stock appreciation rights		(8	)		5
Phantom stock		(1	)		8

Total Stock-Based Compensation Expense (Benefit)	$	(1	)	$	20

The income tax benefit realized from tax deductions associated with stock-based compensation totaled $0.5 million and $12 million for the three months ended March 31, 2008 and 2007, respectively. During 2007, all of the phantom stock options issued to our chief executive officer were exercised prior to termination in October 2007.

Stock Options

We amortize the estimated fair value of our stock options granted over the vesting period using the straight-line method. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model. During the three months ended March 31, 2008, we granted 743,800 options with a weighted-average exercise price of $40.40. The estimated weighted-average grant-date fair value per share of options granted was $17.82. These

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

options will become exercisable after one year in 33% annual increments and expire ten years from the date of grant. Total unrecognized compensation cost related to non-vested stock options totaled $33 million as of March 31, 2008, which is expected to be recognized over a weighted-average period of 2.0 years. A summary of our stock options as of March 31, 2008 is presented below:


					Weighted-Average
			Weighted-Average		Remaining	Intrinsic Value
	Shares		Exercise Price		Contractual Term	(In Millions)
Options Outstanding		8,824,910	$	20.83	6.0 years	$	81
Options Vested or Expected to Vest		8,598,652	$	20.36	5.9 years	$	83
Options Exercisable		6,646,316	$	14.52	5.0 years	$	103

Restricted Stock

We amortize the estimated fair value of our restricted stock granted over the vesting period using the straight-line method. The fair value of each restricted share on the date of grant is equal to its fair market price. During the three months ended March 31, 2008, we issued 575,110 shares of restricted stock with a weighted-average grant-date fair value of $40.37. These restricted shares vest in annual increments ratably over three years. Total unrecognized compensation cost related to our non-vested restricted stock totaled $27 million as of March 31, 2008, which is expected to be recognized over a weighted-average period of 2.5 years. As of March 31, 2008 we had 1,291,706 shares of restricted stock outstanding at a weighted-average grant-date fair value of $25.69.

Stock Appreciation Rights

A stock appreciation right (“SAR”) 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. The fair value of each SAR is estimated at the end of each reporting period using the Black-Scholes option-pricing model. During the three months ended March 31, 2008, we granted 956,110 SARs at 100% of the fair value of Tesoro’s common stock with a weighted-average grant price of $40.40 per SAR. The SARs granted in 2008 vest ratably over three years following the date of grant and expire seven years from the grant date. At March 31, 2008 and December 31, 2007, the liability associated with our SARs recorded in accrued liabilities totaled $8 million and $17 million, respectively.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE J — OPERATING SEGMENTS

We are an independent refiner and marketer of petroleum products and derive revenues from two operating segments, refining and retail. 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, other income, corporate depreciation and corporate general and administrative expenses are excluded from segment operating income. Identifiable assets are those assets utilized by the segment. Corporate assets are principally cash and other assets that are not associated with a specific operating segment. Segment information is as follows (in millions):


	Three Months Ended
	March 31,
	2008			2007
Revenues
Refining:
Refined products	$	6,201		$	3,679
Crude oil resales and other (a)		231			153
Retail:
Fuel (b)		1,019			228
Merchandise and other		58			32
Intersegment Sales from Refining to Retail		(978	)		(216	)

Total Revenues	$	6,531		$	3,876


Segment Operating Income (Loss)
Refining	$	(87	)	$	256
Retail (c)		(28	)		(11	)

Total Segment Operating Income (Loss)		(115	)		245
Corporate and Unallocated Costs		(43	)		(57	)

Operating Income		(158	)		188
Interest and Financing Costs		(27	)		(17	)
Interest Income		2			14
Other Income (d)		45			—

Earnings (Loss) Before Income Taxes	$	(138	)	$	185


Depreciation and Amortization
Refining	$	73		$	62
Retail		12			4
Corporate		5			3

Total Depreciation and Amortization	$	90		$	69


Capital Expenditures
Refining	$	165		$	131
Retail		1			1
Corporate		9			8

Total Capital Expenditures	$	175		$	140

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


	March 31,		December 31,
	2008		2007
Identifiable Assets
Refining	$	7,668	$	7,068
Retail		767		771
Corporate		373		289

Total Assets	$	8,808	$	8,128


(a)		To balance or optimize our refinery supply requirements, we sometimes sell 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 $75 million and $24 million for the three months ended March 31, 2008 and 2007, respectively.

(c)		Retail operating loss for the three months ended March 31, 2008 includes impairment charges of $11 million related to the pending sale or closure of 23 retail stations.

(d)		During the three months ended March 31, 2008 we received a $45 million refund of prior years refinery transportation and distribution costs from TAPS associated with our protest of intrastate pipeline rates between 1997 and 2000 (see Note G).

NOTE K— NEW ACCOUNTING STANDARDS

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 standard establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels: level 1 — quoted prices in active markets for identical assets and liabilities; level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities; and level 3 — unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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. We have not adopted the standard’s provisions applicable to nonfinancial assets and nonfinancial liabilities and we are currently evaluating the impact, if any, these provisions will have on our financial position and results of operations.

The standard’s provisions for financial assets and financial liabilities which became effective as of January 1, 2008 had no material impact on our financial position or results of operations. At March 31, 2008, our only financial assets and financial liabilities that are measured at fair value on a recurring basis are our derivative instruments. Our derivative instruments measured at fair value by the three levels described above are as follows (in millions):


				Quoted Prices
				in Active			Significant
				Markets for			Other			Significant
				Identical			Observable			Unobservable
	March 31,			Assets			Inputs			Inputs
	2008			(Level 1)			(Level 2)			(Level 3)
Assets:
Derivatives	$	14		$	—		$	14		$	—

Liabilities:
Derivatives	$	(40	)	$	(37	)	$	(3	)	$	—

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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. We did not elect the fair value option under this standard upon adoption.

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 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) will be applied prospectively to business combinations occurring on or after January 1, 2009.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities.” This standard changes the annual and interim disclosure requirements for derivative instruments and hedging activities. An entity with derivative instruments is required to disclose how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedge items affect an entity’s financial position, financial performance and cash flows. The standard is effective beginning January 1, 2009. The adoption of the standard will not have an impact on our financial position or results of operations.

NOTE L– CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In the filing of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, which was originally filed with the SEC on May 7, 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 6 ¹/₄ % senior notes due 2012, 6 ⁵/₈% senior notes due 2015 and 6 ¹/2% 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.

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Condensed Consolidating Balance Sheet as of March 31, 2008
(In millions)


						Non-
	Tesoro		Guarantor			Guarantor
	Corporation		Subsidiaries			Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—	$	39		$	2	$			$	41
Receivables, less allowance for doubtful accounts		40		1,403			157		—			1,600
Inventories		—		1,251			109		—			1,360
Prepayments and other		66		116			—		—			182


Total Current Assets		106		2,809			268		—			3,183


Net Property, Plant and Equipment		—		4,750			128		—			4,878
Investment in Subsidiaries		3,772		(21	)		—		(3,751	)		—
Long-Term Receivables from Affiliates		1,898		—			104		(2,002	)		—
Other Noncurrent Assets		43		704			—		—			747

Total Assets	$	5,819	$	8,242		$	500	$	(5,753	)	$	8,808


LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	63	$	2,370		$	389	$	—		$	2,822
Current maturities of debt		—		2			—		—			2


Total Current Liabilities		63		2,372			389		—			2,824


Long-Term Payables to Affiliates		—		2,002			—		(2,002	)		—
Debt		2,058		24			—		—			2,082
Other Noncurrent Liabilities		731		203			1		—			935
Stockholders’ Equity		2,967		3,641			110		(3,751	)		2,967

Total Liabilities and Stockholders’ Equity	$	5,819	$	8,242		$	500	$	(5,753	)	$	8,808

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2008
(In millions)


							Non-
	Tesoro			Guarantor			Guarantor
	Corporation			Subsidiaries			Subsidiaries			Eliminations			Consolidated
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net cash from (used in) operating activities	$	(12	)	$	(217	)	$	45		$	—		$	(184	)

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures		—			(210	)		(2	)		—			(212	)
Intercompany notes, net		(396	)		—			—			396			—
Proceeds from asset sales		—			6			—			—			6

Net cash used in investing activities		(396	)		(204	)		(2	)		396			(206	)

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Borrowings under revolver		2,300			—			—			—			2,300
Repayments under revolver		(1,875	)		—			—			—			(1,875	)
Repurchase of common stock		(3	)		—			—			—			(3	)
Dividend payments		(14	)		—			—			—			(14	)
Net intercompany borrowings (repayments)		—			437			(41	)		(396	)		—

Net cash from (used in) financing activities		408			437			(41	)		(396	)		408

INCREASE IN CASH AND CASH EQUIVALENTS		—			16			2			—			18
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		—			23			—			—			23

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	—		$	39		$	2		$	—		$	41

TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2007
(In millions)


							Non-
	Tesoro			Guarantor			Guarantor
	Corporation			Subsidiaries			Subsidiaries			Eliminations			Consolidated

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net cash from (used in) operating activities	$	—		$	(32	)	$	13		$	—		$	(19	)

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures		—			(143	)		(1	)		—			(144	)
Intercompany notes, net		5			—			—			(5	)		—
Proceeds from asset sales		—			1			—			—			1

Net cash from (used in) investing activities		5			(142	)		(1	)		(5	)		(143	)

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Repurchase of common stock		(3	)		—			—			—			(3	)
Dividend payments		(7	)		—			—			—			(7	)
Proceeds from stock options exercised		5			—			—			—			5
Excess tax benefits from stock-based compensation		—
arrangements					10			—			—			10
Net intercompany borrowings (repayments)		—			6			(11	)		5			—

Net cash from (used in) financing activities		(5	)		16			(11	)		5			5

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		—			(158	)		1			—			(157	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		—			985			1			—			986

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	—		$	827		$	2		$	—		$	829

	31.1		Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2		Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1		Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2		Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	TESORO CORPORATION
Date: October 22, 2008	/s/ BRUCE A. SMITH
	Bruce A. Smith
	Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)

Date: October 22, 2008	/s/ OTTO C. SCHWETHELM
	Otto C. Schwethelm
	SVP, Chief Financial Officer and Treasurer (Principal Financial Officer)


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


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