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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2006

OR



| ̈ | 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 1-6841

SUNOCO, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|PENNSYLVANIA                                                   |  | 23-1743282                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

1735 MARKET STREET, SUITE LL, PHILADELPHIA, PA 19103-7583

(Address of principal executive offices)

(Zip Code)

(215) 977-3000

(Registrants telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

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  x    NO ̈ | 
|------------- | 

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check One):

Large accelerated filer  x                Accelerated
filer ̈Non-accelerated filer ̈

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

YES ̈NO  x

At September 30, 2006, there were
123,117,290 shares of Common Stock, $1 par value outstanding.



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##### Table of Contents

SUNOCO, INC.

INDEX



|                              |  |                                                                                                       |  |         
|----------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                       |  | Page No.
|PART I. FINANCIAL INFORMATION |  |                                                                                                      
|                              |  |                                                                                                      
|Item 1.                       |  | Financial Statements (Unaudited)                                                                      |  |         
|                              |  |                                                                                                      
|                              |  | Condensed Consolidated Statements of Income for the Nine Months Ended September 30, 2006 and 2005     |  | 1       
|                              |  |                                                                                                      
|                              |  | Condensed Consolidated Statements of Income for the Three Months Ended September 30, 2006 and 2005    |  | 2       
|                              |  |                                                                                                      
|                              |  | Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005                     |  | 3       
|                              |  |                                                                                                      
|                              |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 |  | 4       
|                              |  |                                                                                                      
|                              |  | Notes to Condensed Consolidated Financial Statements                                                  |  | 5       
|                              |  |                                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 23      
|                              |  |                                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  | 40      
|                              |  |                                                                                                      
|Item 4.                       |  | Controls and Procedures                                                                               |  | 41      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                      
|                              |  |                                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                                     |  | 41      
|                              |  |                                                                                                      
|Item 1A.                      |  | Risk Factors                                                                                          |  | 42      
|                              |  |                                                                                                      
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                           |  | 42      
|                              |  |                                                                                                      
|Item 6.                       |  | Exhibits                                                                                              |  | 42      
|                              | 
|SIGNATURE                     |  | 44                                                                                                   



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##### Table of Contents

PART I

FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Sunoco, Inc. and Subsidiaries

(Millions of Dollars and Shares, Except Per Share Amounts)



|                                                                    |  |                                       |        |   |      |   |        |  
|------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                    |  | For the Nine MonthsEnded September 30 |       
|                                                                    |  | 2006                                  |        |   | 2005 |  
|                                                                    |  | (UNAUDITED)                           |       
|REVENUES                                                            |  |                                       |        |   |      |   |        |  
|Sales and other operating revenue (including consumer excise taxes) |  | $                                     | 29,624 |   |      | $ | 24,506 |  
|Interest income                                                     |  |                                       | 29     |   |      |   | 12     |  
|Other income (loss), net (Notes 2, 3 and 4)                         |  |                                       | 26     |   |      |   | (24    | )
|                                                                    |  |                                       |        |   |      |   |        |  
|                                                                    |  |                                       | 29,679 |   |      |   | 24,494 |  
|                                                                    |  |                                       |        |   |      |   |        |  
|COSTS AND EXPENSES                                                  |  |                                       |        |   |      |   |        |  
|Cost of products sold and operating expenses                        |  |                                       | 25,179 |   |      |   | 20,342 |  
|Consumer excise taxes                                               |  |                                       | 1,970  |   |      |   | 1,900  |  
|Selling, general and administrative expenses (Note 2)               |  |                                       | 635    |   |      |   | 676    |  
|Depreciation, depletion and amortization                            |  |                                       | 341    |   |      |   | 316    |  
|Payroll, property and other taxes                                   |  |                                       | 98     |   |      |   | 97     |  
|Interest cost and debt expense                                      |  |                                       | 78     |   |      |   | 71     |  
|Interest capitalized                                                |  |                                       | (10    | ) |      |   | (20    | )
|                                                                    |  |                                       |        |   |      |   |        |  
|                                                                    |  |                                       | 28,291 |   |      |   | 23,382 |  
|                                                                    |  |                                       |        |   |      |   |        |  
|Income before income tax expense                                    |  |                                       | 1,388  |   |      |   | 1,112  |  
|Income tax expense (Note 4)                                         |  |                                       | 532    |   |      |   | 425    |  
|                                                                    |  |                                       |        |   |      |   |        |  
|NET INCOME                                                          |  | $                                     | 856    |   |      | $ | 687    |  
|                                                                    |  |                                       |        |   |      |   |        |  
|Net income per share of common stock:                               |  |                                       |        |   |      |   |        |  
|Basic                                                               |  | $                                     | 6.56   |   |      | $ | 5.01   |  
|Diluted                                                             |  | $                                     | 6.53   |   |      | $ | 4.97   |  
|Weighted-average number of shares outstanding (Notes 6 and 10):     |  |                                       |        |   |      |   |        |  
|Basic                                                               |  |                                       | 130.4  |   |      |   | 137.2  |  
|Diluted                                                             |  |                                       | 131.1  |   |      |   | 138.2  |  
|Cash dividends paid per share of common stock (Note 10)             |  | $                                     | .70    |   |      | $ | .55    |  

(See Accompanying Notes)



1



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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Sunoco, Inc. and Subsidiaries

(Millions of Dollars and Shares, Except Per Share Amounts)



|                                                                    |  |                                        |        |   |      |   |       |  
|------------------------------------------------------------------- |  | -------------------------------------- | ------ | - | ---- | - | ----- | -
|                                                                    |  | For the Three MonthsEnded September 30 |       
|                                                                    |  | 2006                                   |        |   | 2005 |  
|                                                                    |  | (UNAUDITED)                            |       
|REVENUES                                                            |  |                                        |        |   |      |   |       |  
|Sales and other operating revenue (including consumer excise taxes) |  | $                                      | 10,480 |   |      | $ | 9,345 |  
|Interest income                                                     |  |                                        | 11     |   |      |   | 6     |  
|Other income (loss), net (Notes 2, 3 and 4)                         |  |                                        | 5      |   |      |   | (56   | )
|                                                                    |  |                                        |        |   |      |   |       |  
|                                                                    |  |                                        | 10,496 |   |      |   | 9,295 |  
|                                                                    |  |                                        |        |   |      |   |       |  
|COSTS AND EXPENSES                                                  |  |                                        |        |   |      |   |       |  
|Cost of products sold and operating expenses                        |  |                                        | 8,867  |   |      |   | 7,702 |  
|Consumer excise taxes                                               |  |                                        | 679    |   |      |   | 675   |  
|Selling, general and administrative expenses (Note 2)               |  |                                        | 215    |   |      |   | 242   |  
|Depreciation, depletion and amortization                            |  |                                        | 115    |   |      |   | 109   |  
|Payroll, property and other taxes                                   |  |                                        | 33     |   |      |   | 33    |  
|Interest cost and debt expense                                      |  |                                        | 25     |   |      |   | 25    |  
|Interest capitalized                                                |  |                                        | (5     | ) |      |   | (8    | )
|                                                                    |  |                                        |        |   |      |   |       |  
|                                                                    |  |                                        | 9,929  |   |      |   | 8,778 |  
|                                                                    |  |                                        |        |   |      |   |       |  
|Income before income tax expense                                    |  |                                        | 567    |   |      |   | 517   |  
|Income tax expense (Note 4)                                         |  |                                        | 216    |   |      |   | 188   |  
|                                                                    |  |                                        |        |   |      |   |       |  
|NET INCOME                                                          |  | $                                      | 351    |   |      | $ | 329   |  
|                                                                    |  |                                        |        |   |      |   |       |  
|Net income per share of common stock:                               |  |                                        |        |   |      |   |       |  
|Basic                                                               |  | $                                      | 2.77   |   |      | $ | 2.41  |  
|Diluted                                                             |  | $                                      | 2.76   |   |      | $ | 2.39  |  
|Weighted-average number of shares outstanding (Notes 6 and 10):     |  |                                        |        |   |      |   |       |  
|Basic                                                               |  |                                        | 126.8  |   |      |   | 136.4 |  
|Diluted                                                             |  |                                        | 127.4  |   |      |   | 137.4 |  
|Cash dividends paid per share of common stock (Note 10)             |  | $                                      | .25    |   |      | $ | .20   |  

(See Accompanying Notes)



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CONDENSED CONSOLIDATED BALANCE SHEETS

Sunoco, Inc. and Subsidiaries



|                                                          |  |                      |        |                     |   |      
|--------------------------------------------------------- |  | -------------------- | ------ | ------------------- | - | -----
|(Millions of Dollars)                                     |  | At September 30 2006 |        | At December 31 2005
|                                                          |  | (UNAUDITED)          |        |                    
|ASSETS                                                    |  |                      |        |                     |   |      
|Current Assets                                            |  |                      |        |                     |   |      
|Cash and cash equivalents                                 |  | $                    | 218    |                     | $ | 919  
|Accounts and notes receivable, net                        |  |                      | 2,348  |                     |   | 1,754
|Inventories:                                              |  |                      |        |                     |   |      
|Crude oil                                                 |  |                      | 430    |                     |   | 317  
|Petroleum and chemical products                           |  |                      | 685    |                     |   | 322  
|Materials, supplies and other                             |  |                      | 166    |                     |   | 160  
|Deferred income taxes (Note 4)                            |  |                      | 217    |                     |   | 215  
|                                                          |  |                      |        |                     |   |      
|Total Current Assets                                      |  |                      | 4,064  |                     |   | 3,687
|Investments and long-term receivables                     |  |                      | 126    |                     |   | 143  
|Properties, plants and equipment                          |  |                      | 10,216 |                     |   | 9,576
|Less accumulated depreciation, depletion and amortization |  |                      | 4,122  |                     |   | 3,918
|                                                          |  |                      |        |                     |   |      
|Properties, plants and equipment, net                     |  |                      | 6,094  |                     |   | 5,658
|Prepaid retirement costs                                  |  |                      | 13     |                     |   | 12   
|Deferred charges and other assets (Note 3)                |  |                      | 460    |                     |   | 431  
|                                                          |  |                      |        |                     |   |      
|Total Assets                                              |  | $                    | 10,757 |                     | $ | 9,931
|                                                          |  |                      |        |                     |   |      
|LIABILITIES AND SHAREHOLDERS EQUITY                      |  |                      |        |                     |   |      
|Current Liabilities                                       |  |                      |        |                     |   |      
|Accounts payable                                          |  | $                    | 3,716  |                     | $ | 3,014
|Accrued liabilities (Note 7)                              |  |                      | 469    |                     |   | 681  
|Short-term borrowings (Note 8)                            |  |                      | 150    |                     |   |     
|Current portion of long-term debt                         |  |                      | 62     |                     |   | 177  
|Taxes payable                                             |  |                      | 372    |                     |   | 338  
|                                                          |  |                      |        |                     |   |      
|Total Current Liabilities                                 |  |                      | 4,769  |                     |   | 4,210
|Long-term debt (Note 8)                                   |  |                      | 1,285  |                     |   | 1,234
|Retirement benefit liabilities (Note 9)                   |  |                      | 513    |                     |   | 563  
|Deferred income taxes (Note 4)                            |  |                      | 923    |                     |   | 817  
|Other deferred credits and liabilities (Notes 3 and 7)    |  |                      | 392    |                     |   | 409  
|Commitments and contingent liabilities (Note 7)           |  |                      |        |                     |   |      
|Minority interests (Note 2)                               |  |                      | 749    |                     |   | 647  
|Shareholders equity (Note 10)                            |  |                      | 2,126  |                     |   | 2,051
|                                                          |  |                      |        |                     |   |      
|Total Liabilities and Shareholders Equity                |  | $                    | 10,757 |                     | $ | 9,931
|                                                          |  |                      |        |                     |   |      

(See Accompanying Notes)



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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Sunoco, Inc. and Subsidiaries

(Millions of Dollars)



|                                                                                                |  |                                        |      |   |      |   |       |  
|----------------------------------------------------------------------------------------------- |  | -------------------------------------- | ---- | - | ---- | - | ----- | -
|                                                                                                |  | For the Nine Months Ended September 30 |     
|                                                                                                |  | 2006                                   |      |   | 2005 |  
|                                                                                                |  | (UNAUDITED)                            |     
|INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS                                              |  |                                        |      |   |      |   |       |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                           |  |                                        |      |   |      |   |       |  
|Net income                                                                                      |  | $                                      | 856  |   |      | $ | 687   |  
|Adjustments to reconcile net income to net cash provided by operating activities:               |  |                                        |      |   |      |   |       |  
|Phenol supply contract dispute loss (payment) (Note 3)                                          |  |                                        | (95  | ) |      |   | 78    |  
|Proceeds from power contract restructuring (Note 3)                                             |  |                                        |     |   |      |   | 48    |  
|Depreciation, depletion and amortization                                                        |  |                                        | 341  |   |      |   | 316   |  
|Deferred income tax expense                                                                     |  |                                        | 74   |   |      |   | 18    |  
|Payments in excess of expense for retirement plans                                              |  |                                        | (50  | ) |      |   | (53   | )
|Changes in working capital pertaining to operating activities, net of effect of acquisitions:   |  |                                        |      |   |      |   |       |  
|Accounts and notes receivable                                                                   |  |                                        | (462 | ) |      |   | (664  | )
|Inventories                                                                                     |  |                                        | (480 | ) |      |   | (347  | )
|Accounts payable and accrued liabilities                                                        |  |                                        | 513  |   |      |   | 1,055 |  
|Taxes payable                                                                                   |  |                                        | 33   |   |      |   | 88    |  
|Other                                                                                           |  |                                        | 2    |   |      |   | 47    |  
|                                                                                                |  |                                        |      |   |      |   |       |  
|Net cash provided by operating activities                                                       |  |                                        | 732  |   |      |   | 1,273 |  
|                                                                                                |  |                                        |      |   |      |   |       |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                           |  |                                        |      |   |      |   |       |  
|Capital expenditures                                                                            |  |                                        | (675 | ) |      |   | (682  | )
|Acquisitions (Notes 3 and 7)                                                                    |  |                                        | (123 | ) |      |   | (100  | )
|Proceeds from divestments (Note 3)                                                              |  |                                        | 39   |   |      |   | 32    |  
|Other                                                                                           |  |                                        | 4    |   |      |   | 1     |  
|                                                                                                |  |                                        |      |   |      |   |       |  
|Net cash used in investing activities                                                           |  |                                        | (755 | ) |      |   | (749  | )
|                                                                                                |  |                                        |      |   |      |   |       |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |  |                                        |      |   |      |   |       |  
|Net proceeds from short-term borrowings                                                         |  |                                        | 150  |   |      |   |      |  
|Net proceeds from issuance of long-term debt                                                    |  |                                        | 361  |   |      |   | 75    |  
|Repayments of long-term debt                                                                    |  |                                        | (426 | ) |      |   | (70   | )
|Net proceeds from issuance of Sunoco Logistics Partners L.P. limited partnership units (Note 2) |  |                                        | 110  |   |      |   | 160   |  
|Cash distributions to investors in cokemaking operations                                        |  |                                        | (13  | ) |      |   | (19   | )
|Cash distributions to investors in Sunoco Logistics Partners L.P.                               |  |                                        | (35  | ) |      |   | (19   | )
|Cash dividend payments                                                                          |  |                                        | (92  | ) |      |   | (76   | )
|Purchases of common stock for treasury                                                          |  |                                        | (734 | ) |      |   | (167  | )
|Proceeds from issuance of common stock under management incentive plans                         |  |                                        | 1    |   |      |   | 7     |  
|Other                                                                                           |  |                                        |     |   |      |   | (4    | )
|                                                                                                |  |                                        |      |   |      |   |       |  
|Net cash used in financing activities                                                           |  |                                        | (678 | ) |      |   | (113  | )
|                                                                                                |  |                                        |      |   |      |   |       |  
|Net increase (decrease) in cash and cash equivalents                                            |  |                                        | (701 | ) |      |   | 411   |  
|Cash and cash equivalents at beginning of period                                                |  |                                        | 919  |   |      |   | 405   |  
|                                                                                                |  |                                        |      |   |      |   |       |  
|Cash and cash equivalents at end of period                                                      |  | $                                      | 218  |   |      | $ | 816   |  
|                                                                                                |  |                                        |      |   |      |   |       |  

(See Accompanying Notes)



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|1. | General.
|-- | --------

The accompanying condensed consolidated
financial statements are presented in accordance with the requirements of Form 10-Q and U.S. generally accepted accounting principles for interim financial reporting. They do not include all disclosures normally made in financial statements
contained in Form 10-K. In managements opinion, all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for the periods shown have been made. All such adjustments are of a normal
recurring nature except for the charge related to the correction of an error in the computation of the preferential return of third-party investors in Sunocos cokemaking operations, gains related to income tax matters and the loss associated
with a phenol supply contract dispute (Notes 2, 3 and 4). Results for the three and nine months ended September 30, 2006 are not necessarily indicative of results for the full-year 2006.

Share and per-share data (except par value) presented for all periods reflect the effect of a two-for-one stock split, which was effected in the form of a
common stock dividend distributed on August 1, 2005 (Note 10).



|2. | Minority Interests.
|-- | -------------------

Cokemaking Operations

Since 1995, Sunoco has received, in four separate transactions, a total of $724 million in exchange for interests in its Jewell and Indiana Harbor
cokemaking operations. Sunoco did not recognize any gain at the dates of these transactions because the third-party investors were entitled to a preferential return on their investments. The preferential returns are currently equal to 98 percent of
the cash flows and tax benefits from the respective cokemaking operations during the preferential return periods, which continue until the investors recover their investments and achieve a cumulative annual after-tax return that averages
approximately 10 percent. Income is recognized as coke production and sales generate cash flows and tax benefits which are allocated to Sunoco and the third-party investors, while expense is recognized to reflect the investors preferential
returns.

The preferential return period for the Jewell operation is projected to end during 2011, while the preferential return period for
the Indiana Harbor operation is projected to end during 2007. Due to the difficulty of forecasting operations and tax benefits into the future, the accuracy of these estimates is subject to considerable uncertainty. The estimated lengths of these
preferential return periods are based upon the Companys current expectations of future cash flows and tax benefits, which are impacted by sales volumes and prices, raw material and operating costs, capital expenditure levels and potential
limitations on the ability to recognize tax benefits based upon the level of crude oil prices (see below). The estimates also assume that the realization of nonconventional fuel tax credits is 53 percent in 2006 and 100 percent thereafter.
Higher-than-expected cash flows and tax benefits will shorten the investors preferential return periods, while lower-than-expected cash flows and tax benefits will lengthen the periods.

Following the expiration of these preferential return periods, the investor in the Jewell operation will be entitled to a minority interest in the related
cash flows and tax benefits amounting to 18 percent, while the investors in the Indiana Harbor operation will be entitled to a minority interest in the related cash flows and tax benefits initially amounting to 34 percent and thereafter declining
periodically to 10 percent by 2038.



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Under existing tax law, most of the coke production at Jewell and all of the production at Indiana Harbor
is not eligible to generate nonconventional fuel tax credits after 2007. The energy policy legislation enacted in August 2005 includes additional tax credits pertaining to a portion of the coke production at Jewell, all of the coke production at
Haverhill, where operations commenced in March 2005, and all future domestic coke plants placed into service by January 1, 2010. The new credits cover a four-year period, effective January 1, 2006 or the date any new facility is placed
into service, if later. However, prior to their expiration dates, all of the tax credits would be phased out, on a ratable basis, if the average annual price of domestic crude oil at the wellhead is within a certain inflation-adjusted price range.
(This range was $53.20 to $66.79 per barrel for 2005, the latest year for which the range is available.) The domestic wellhead price averaged $61.92 per barrel for the eight months ended August 31, 2006, $67.32 per barrel for the
month of August 2006 and $50.26 per barrel for the year ended December 31, 2005. The corresponding prices for West Texas Intermediate (WTI) crude oil, a widely published reference price for domestic crude oil, were $68.76 per barrel
for the eight months ended August 31, 2006, $73.08 per barrel for the month of August 2006 and $56.56 per barrel for the year ended December 31, 2005. Based upon the Companys estimate of domestic wellhead prices for the first nine
months of 2006, the Company recorded only 53 percent of the benefit of the tax credits that otherwise would have been available without regard to these phase-out provisions. The estimated impact of this phase-out reduced earnings for the first nine
months of 2006 by $10 million after tax. The ultimate amount of the credits to be earned during 2006 will be based upon the average annual price of domestic crude oil at the wellhead. In addition, if the tax credits were phased out, the Company
could be required under tax indemnity agreements to make cash payments to the third-party investors. Payments would be required only if the expected end of the applicable preferential return period was extended by two years or more and if the
respective third-party investor was expected to achieve a cumulative after-tax return of less than approximately 6.5 percent. The Company currently does not believe that any payments would be required, even if the average annual wellhead crude oil
price were to exceed the threshold at which the credits are completely phased out.

The Company also indemnifies the third-party investors
for certain tax benefits available to them during the preferential return period in the event the Internal Revenue Service disallows the tax deductions and benefits allocated to the third parties or if there is a change in the tax laws that reduces
the amount of nonconventional fuel tax credits. These tax indemnifications are in effect until the applicable tax returns are no longer subject to Internal Revenue Service review. In certain of these cases, if performance under the indemnification
is required, the Company also has the option to purchase the third-party investors interests. Although the Company believes it is remote that it will be required to make any payments under these indemnifications, at September 30, 2006,
the maximum potential payment under these tax indemnifications and the options to purchase the third-party investors interests, if exercised, would have been approximately $530 million. If this were to occur, the minority interest balance
would be reduced by approximately $195 million.



6



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The following table sets forth the minority interest balances and the changes in these balances
attributable to the third-party investors interests in cokemaking operations (in millions of dollars):



|                                                    |  |                                |     |   |      |   |     |  
|--------------------------------------------------- |  | ------------------------------ | --- | - | ---- | - | --- | -
|                                                    |  | Nine Months Ended September 30 |    
|                                                    |  | 2006                           |     |   | 2005 |  
|Balance at beginning of year                        |  | $                              | 234 |   |      | $ | 287 |  
|Nonconventional fuel credit and other tax benefits* |  |                                | (28 | ) |      |   | (42 | )
|Preferential return*                                |  |                                | 40  |   |      |   | 32  |  
|Cash distributions to third-party investors         |  |                                | (13 | ) |      |   | (19 | )
|                                                    |  |                                |     |   |      |   |     |  
|Balance at end of period                            |  | $                              | 233 |   |      | $ | 258 |  
|                                                    |  |                                |     |   |      |   |     |  

---

|* | The nonconventional fuel credit and other tax benefits and the preferential return, which comprise the noncash change in the minority interest in cokemaking operations, are included
in other income (loss), net, in the condensed consolidated statements of income. The preferential return for the nine months ended September 30, 2006 includes an $11 million increase ($7 million after tax) attributable to a correction of an
error in the computation of the preferential return relating to prior years. Prior-period amounts have not been restated as this adjustment was not deemed to be material.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Logistics Operations

In the second quarter
of 2005, Sunoco Logistics Partners L.P. (the Partnership), a master limited partnership in which Sunoco has an ownership interest, issued 2.8 million limited partnership units at a price of $37.50 per unit. Proceeds from the
offering, net of underwriting discounts and offering expenses, totaled approximately $99 million. These proceeds were used to redeem an equal number of limited partnership units owned by Sunoco. In the third quarter of 2005, the Partnership issued
an additional 1.6 million limited partnership units at a price of $39.00 per unit. Proceeds from the offering, which totaled approximately $61 million, net of underwriting discounts and offering expenses, were used by the Partnership
principally to repay a portion of the borrowings under its revolving credit facility. In the second quarter of 2006, the Partnership issued $175 million of senior notes due 2016 and 2.7 million limited partnership units at a price of $43.00 per
unit. Proceeds from the 2006 offerings, net of underwriting discounts and offering expenses, totaled approximately $173 and $110 million, respectively. These proceeds were used by the Partnership in part to repay the outstanding borrowings under its
revolving credit facility with the balance used to fund a portion of the Partnerships 2006 growth capital program. Upon completion of the equity offerings, Sunocos interest in the Partnership, including its 2 percent general partnership
interest, decreased to 43 percent. The accounts of the Partnership continue to be included in Sunocos condensed consolidated financial statements.

As of September 30, 2006, Sunoco owned 12.06 million limited partnership units consisting of 6.37 million common units and 5.69 million subordinated units. Distributions on Sunocos
subordinated units are payable only after the minimum quarterly distributions of $.45 per unit for the common units held by the public and Sunoco, including any arrearages, have been made. The subordinated units convert to common units if certain
financial tests related to earning and paying the minimum quarterly distribution for the preceding three consecutive one-year periods have been met. In February 2006 and 2005, when the quarterly cash distributions pertaining to the fourth



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quarters of 2005 and 2004 were paid, the first two three-year requirements were satisfied. As a result, a total of 5.70 million of Sunocos
subordinated units have been converted to common units, 2.85 million each in February 2006 and February 2005. If the Partnership continues to meet the financial tests through the fourth quarter of 2006, all of Sunocos remaining
5.69 million subordinated units would be converted to common units in February 2007.

The Partnerships issuance of common units
to the public has resulted in an increase in the value of Sunocos proportionate share of the Partnerships equity as the issuance price per unit exceeded Sunocos carrying amount per unit at the time of issuance. The resultant gain
to Sunoco on these transactions, which totaled approximately $150 million pretax at September 30, 2006, has been deferred as a component of minority interest in the Companys condensed consolidated balance sheets as the common units issued
do not represent residual interests in the Partnership due to Sunocos ownership of the subordinated units. The deferred gain would be recognized in income when Sunocos remaining subordinated units convert to common units at which time
the common units become the residual interests.

The following table sets forth the minority interest balance and the changes to this
balance attributable to the third-party investors interests in Sunoco Logistics Partners L.P. (in millions of dollars):



|                                                               |  |                               |     |   |      |   |     |  
|-------------------------------------------------------------- |  | ----------------------------- | --- | - | ---- | - | --- | -
|                                                               |  | Nine Months EndedSeptember 30 |    
|                                                               |  | 2006                          |     |   | 2005 |  
|Balance at beginning of year                                   |  | $                             | 397 |   |      | $ | 232 |  
|Net proceeds from public equity offerings                      |  |                               | 110 |   |      |   | 160 |  
|Minority interest share of income*                             |  |                               | 29  |   |      |   | 20  |  
|Increase attributable to Partnership management incentive plan |  |                               | 1   |   |      |   | 5   |  
|Cash distributions to third-party investors**                  |  |                               | (35 | ) |      |   | (19 | )
|                                                               |  |                               |     |   |      |   |     |  
|Balance at end of period                                       |  | $                             | 502 |   |      | $ | 398 |  
|                                                               |  |                               |     |   |      |   |     |  

---

|* | Included in selling, general and administrative expenses in the condensed consolidated statements of income.
|- | ------------------------------------------------------------------------------------------------------------



|** | During 2005 and the first nine months of 2006, the Partnership increased its quarterly cash distribution per unit from $.625 to $.7875.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------

Epsilon Joint Venture Operations

Epsilon
Products Company, LLC (Epsilon) is a joint venture that consists of polymer-grade propylene operations at Sunocos Marcus Hook, PA refinery and an adjacent polypropylene plant. The joint venture is a variable interest entity for
which the Company is the primary beneficiary. As such, the accounts of Epsilon are included in Sunocos condensed consolidated financial statements. Epsilon was unable to repay its $120 million term loan and $31 million borrowing under its $40
million revolving credit facility that matured in September 2006. Upon such default, the lenders made a demand on Sunoco, Inc., as guarantor, and Sunoco, Inc. satisfied its guarantee obligations in the third quarter of 2006 (Note 8).



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The following table sets forth the minority interest balance and the changes to this balance attributable
to the other joint venture partners interest in Epsilon (in millions of dollars):



|                                          |  |                               |    |   |      |   |   
|----------------------------------------- |  | ----------------------------- | -- | - | ---- | - | --
|                                          |  | Nine Months EndedSeptember 30
|                                          |  | 2006                          |    |   | 2005
|Balance at beginning of year              |  | $                             | 16 |   |      | $ | 11
|Minority interest share of income (loss)* |  |                               | (2 | ) |      |   | 4 
|                                          |  |                               |    |   |      |   |   
|Balance at end of period                  |  | $                             | 14 |   |      | $ | 15
|                                          |  |                               |    |   |      |   |   

---

|* | Included in selling, general and administrative expenses in the condensed consolidated statements of income.
|- | ------------------------------------------------------------------------------------------------------------



|3. | Changes in Business and Other Matters.
|-- | --------------------------------------

Acquisitions

Logistics Assets  In August 2006, Sunoco Logistics Partners L.P. purchased from Sunoco for $65 million a company that has a 55
percent interest in Mid-Valley Pipeline Company (Mid-Valley), a joint venture which owns a crude oil pipeline system in the Midwest. The Partnership utilized cash and a $46 million draw against its revolving credit facility to fund this
acquisition. Sunoco did not recognize any gain or loss on this transaction.

In March 2006, the Partnership purchased two separate crude oil
pipeline systems and related storage facilities located in Texas, one from affiliates of Black Hills Energy, Inc. (Black Hills) for $41 million and the other from affiliates of Alon USA Energy, Inc. (Alon) for $68 million.
The Black Hills acquisition also includes a lease acquisition marketing business and related inventory. In August 2005, the Partnership completed the acquisition of a crude oil pipeline system and related storage facilities located in Texas from
ExxonMobil for $100 million. In December 2005, the Partnership also completed the acquisition of an ownership interest in the Mesa Pipeline from Chevron for $5 million which, coupled with the 7.2 percent interest it acquired from Sunoco, gave it a
37.0 percent ownership interest. The Texas crude oil pipeline system acquisitions were initially funded with proceeds from borrowings under the Partnerships revolving credit facility (Note 2).

The purchase price of the Black Hills acquisition has been allocated to the assets acquired based on their estimated fair market values at the acquisition
date. The following is a summary of the effects of this transaction on Sunocos consolidated financial position (in millions of dollars):



|                                      |  |   |   
|------------------------------------- |  | - | --
|Increase in:                          |  |   |   
|Inventories                           |  | $ | 2 
|Properties, plants and equipment, net |  |   | 39
|                                      |  |   |   
|                                      |  | $ | 41
|                                      |  |   |   

The purchase price of the Alon and Mesa Pipeline acquisitions has been included in properties,
plants and equipment in the condensed consolidated balance sheets. No pro forma information has been presented since the



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acquisitions were not material in relation to Sunocos consolidated results of operations.

Divestments

Retail Portfolio Management
Program  A Retail Portfolio Management (RPM) program is ongoing, which is selectively reducing the Companys invested capital in Company-owned or leased retail sites. During the 2003-2006 period, selected sites are being
divested. Most of the sites are being converted to contract dealers and distributors thereby retaining most of the gasoline sales volume attributable to the divested sites within the Sunoco branded business. The Company expects to generate
divestment proceeds of approximately $230 million, of which $204 million has been received through September 30, 2006 related to the sale of 366 sites. During the first nine months of 2006 and 2005, net gains of $13 and $6 million, respectively
($8 and $4 million after tax, respectively), were recognized in other income (loss), net, in the condensed consolidated statements of income in connection with the RPM program.

Other Matters

Phenol Supply Contract Dispute
 During the third quarter of 2005, an arbitrator ruled that Sunoco was liable in an arbitration proceeding for breaching a supply agreement concerning the prices charged to Honeywell International Inc. (Honeywell) for phenol
produced at Sunocos Philadelphia chemical plant from June 2003 through April 2005. In January 2006, the arbitrator ruled that Sunoco should bill Honeywell based on the pricing formula established in the arbitration until a second arbitration
finalized pricing for 2005 and beyond under provisions of the supply agreement which provide for a price reopener on and after January 1, 2005. Damages of approximately $95 million ($56 million after tax), including prejudgment interest, were
assessed, of which $27, $48 and $20 million pertained to 2005, 2004 and 2003, respectively. Such damages, which were paid to Honeywell in April 2006, were recorded as a charge against earnings in other income (loss), net, in the 2005 interim
condensed consolidated statements of income ($78 million in the third quarter and $17 million in the fourth quarter). In March 2006, a U.S. District Court judge upheld the first arbitrators ruling. In July 2006, the second arbitrator ruled
that the pricing through July 2009 should be based essentially on the pricing formula established in the first arbitration. The prices charged to Honeywell during the first nine months of 2006 have been based on this formula.

Power Contract Restructuring - In December 2004, Sunoco and a subsidiary of FPL Energy (FPL) agreed to a restructuring of an agreement under
which Sunoco may purchase steam from a natural gas fired cogeneration power plant owned and operated by FPL at Sunocos Marcus Hook refinery. Under the restructured terms, FPL surrendered its easement interest in land adjacent to the power
plant on which four auxiliary boilers were constructed, thereby transferring ownership of the auxiliary boilers with an estimated fair market value of $33 million to Sunoco. FPL operates the auxiliary boilers on Sunocos behalf. When the
cogeneration plant is in operation, Sunoco has the option to purchase steam from the facility at a rate equivalent to that set forth in the original agreement. As part of the restructuring, Sunoco has agreed to a long-term lease to FPL of the land
on which the cogeneration facility was constructed and to modify certain terms in the existing agreement for an aggregate cash payment of $48 million, most of which is attributable to prepaid rent. Sunoco received this $48 million payment in January
2005. No gain or loss was recognized in connection with the restructuring. Upon completion of the restructured agreement in January 2005, deferred revenue of $81 million was recorded in other deferred credits



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and liabilities in the condensed consolidated balance sheet, which is being amortized into income over the 30-year term of the contract.



|4. | Income Tax Matters.
|-- | -------------------

During the third quarter of 2006,
Sunoco recorded a $5 million net after-tax gain consisting of a $12 million deferred tax benefit as a result of state law changes and a $7 million net provision, primarily attributable to an increase in state income taxes reflecting the impact of an
unfavorable court decision against an unrelated taxpayer. In the second quarter of 2006, Sunoco recorded a $5 million deferred tax benefit as a result of another state law change.

During the third quarter of 2005, Sunoco settled certain federal income tax issues and established a provision for certain state and local tax matters. In
connection with these tax matters, an $18 million net after-tax gain was recognized in the condensed consolidated statement of income for the third quarter of 2005. There was no cash received in connection with the federal income tax settlement.



|5. | Stock-Based Compensation.
|-- | -------------------------

Effective January 1, 2006,
the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), utilizing the modified-prospective method. SFAS No. 123R revised the accounting for
stock-based compensation required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Among other things, SFAS No. 123R requires a fair-value-based
method of accounting for share-based payment transactions, which is similar to the method followed by the Company under the provisions of SFAS No. 123. SFAS No. 123R also requires the use of a non-substantive vesting period approach for
new share-based payment awards that vest when an employee becomes retirement eligible as is the case under Sunocos share-based awards (i.e., the vesting period cannot exceed the date an employee becomes retirement eligible). The effect will be
to accelerate expense recognition compared to the vesting period approach that Sunoco previously followed under SFAS No. 123. Adoption of SFAS No. 123R did not have a material effect on the Companys results of operations for the
nine-month period ended September 30, 2006. However, assuming the fair value of awards to be granted in the fourth quarter of 2006 are similar to the value of those granted in December 2005, the Company currently estimates that its after-tax
compensation expense under SFAS No. 123R will be approximately $5-$10 million higher in 2006 than it would have been under SFAS No. 123 as a result of the accelerated expense recognition. The future impact of the non-substantive vesting
period will be dependent upon the value of future stock-based awards granted to employees who are eligible to retire prior to the normal vesting periods of the awards.

The stock options granted under the Companys management incentive plans have a 10-year term, are not exercisable until two years after the date of grant and permit optionees to purchase Company stock at its fair
market value on the date of grant. Under SFAS No. 123, the fair value of the stock options was estimated using the Black-Scholes option pricing model. Use of this model requires the Company to make certain assumptions regarding the term that
the options are expected to be outstanding (expected life), as well as regarding the risk-free interest rate, the Companys expected dividend yield and the expected volatility of the Companys stock price during the period the
options are expected to be outstanding. The expected life and dividend yield are estimated based on historical experience. The risk-free interest rate is based on the U.S. Treasury yield curve at the date of grant for periods that are approximately
equal to the expected life.



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The Company uses historical share prices, for a period equivalent to the options expected life, to estimate the expected volatility of the
Companys share price. The Company continues to use the Black-Scholes option pricing model to estimate the fair value of stock options under SFAS No. 123R.

During the nine months ended September 30, 2006 and 2005, 67,190 and 696,612 stock options, respectively, were exercised with an intrinsic value of $4 and $23 million, respectively. Cash received from the
exercise of options during the nine months ended September 30, 2006 totaled $1 million and the related tax benefit realized was $2 million. At September 30, 2006, there were 1,460,166 stock options outstanding, of which 266,216 were
exercisable. As of that date, the aggregate intrinsic value of all of the outstanding stock options was $29 million, while the aggregate intrinsic value and the weighted-average remaining contractual term of the exercisable options was $12 million
and five years, respectively.

Common stock unit awards under the Companys management incentive plans mature upon completion of a
three-year service period or upon attainment of predetermined performance targets during the three-year period. For the performance-based awards, adjustments for attainment of performance targets can range from 0200 percent of the award grant.
Awards are payable in cash or common stock. Awards to be paid in cash are classified as liabilities in the Companys condensed consolidated balance sheets and are re-measured for expense purposes at fair value each period (based on the fair
value of an equivalent number of Sunoco common shares at the end of the period) with any change in fair value recognized as an increase or decrease in income. For awards to be settled in common stock, the fair value for expense purposes is based on
the closing price of the Companys shares on the date of grant.

During the nine months ended September 30, 2006 and 2005, 527,000
and 276,000 common stock units, respectively, were settled in cash and 85,200 and 53,200 common stock units, respectively, were settled in common stock. The intrinsic value of the common stock units that were settled in cash during the nine months
ended September 30, 2006 and 2005 totaled $43 and $12 million, respectively, while the intrinsic value of the common stock unit awards that were settled in common stock totaled $7 and $2 million, respectively. At September 30, 2006,
without consideration of any potential adjustment for performance, there were 531,140 common stock units outstanding payable in cash and 141,635 payable in stock with an aggregate intrinsic value of $33 and $9 million, respectively.

For the nine months ended September 30, 2006 and 2005, the Company recognized stock-based compensation expense of $17 and $54 million, respectively,
and related tax benefits of $7 and $22 million, respectively. As of September 30, 2006, total compensation cost related to nonvested awards not yet recognized was $27 million, and the weighted-average period over which this cost is expected to
be recognized in income is 1.4 years. The stock-based compensation expense and the total compensation cost related to nonvested awards not yet recognized reflect the Companys estimates of performance factors pertaining to performance-based
common stock unit awards.



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|6. | Earnings Per Share Data.
|-- | ------------------------

The following table sets forth
the reconciliation of the weighted-average number of common shares used to compute basic earnings per share (EPS) to those used to compute diluted EPS (in millions):



|                                                             |  |                               |  |                                |  |       |  |      
|------------------------------------------------------------ |  | ----------------------------- |  | ------------------------------ |  | ----- |  | -----
|                                                             |  | Nine Months EndedSeptember 30 |  | Three Months EndedSeptember 30
|                                                             |  | 2006                          |  | 2005                           |  | 2006  |  | 2005 
|Weighted-average number of common shares outstanding  basic |  | 130.4                         |  | 137.2                          |  | 126.8 |  | 136.4
|Add effect of dilutive stock incentive awards                |  | .7                            |  | 1.0                            |  | .6    |  | 1.0  
|                                                             |  |                               |  |                                |  |       |  |      
|Weighted-average number of shares - diluted                  |  | 131.1                         |  | 138.2                          |  | 127.4 |  | 137.4
|                                                             |  |                               |  |                                |  |       |  |      



|7. | Commitments and Contingent Liabilities.
|-- | ---------------------------------------

Commitments

Sunoco is contingently liable under various arrangements which guarantee debt of third parties aggregating to approximately $6 million at
September 30, 2006. At this time, management does not believe that it is likely that the Company will have to perform under any of these guarantees.

Over the years, Sunoco has sold thousands of retail gasoline outlets as well as refineries, terminals, coal mines, oil and gas properties and various other assets. In connection with these sales, the Company has
indemnified certain purchasers for potential environmental and other contingent liabilities related to the period prior to the transaction dates. In most cases, the effect of these arrangements was to afford protection for the purchasers with
respect to obligations for which the Company was already primarily liable. While some of these indemnities have spending thresholds which must be exceeded before they become operative, or limits on Sunocos maximum exposure, they generally are
not limited. The Company recognizes the fair value of the obligations undertaken for all guarantees entered into or modified after January 1, 2003. In addition, the Company accrues for any obligations under these agreements when a loss is
probable and reasonably estimable. The Company cannot reasonably estimate the maximum potential amount of future payments under these agreements.

Effective January 1, 2001, Sunoco completed the acquisition of Aristech Chemical Corporation (Aristech), a wholly owned subsidiary of Mitsubishi Corporation (Mitsubishi), for $506 million in cash and the
assumption of $163 million of debt. Contingent payments (the earn out) may also be made if realized margins for polypropylene and phenol exceed certain agreed-upon thresholds through 2006. For 2005, a $14 million payment was earned,
which was paid in April 2006. Based on the Companys current income projection for 2006, no payment would be earned for 2006; however, if any additional contingent payment were earned, it would be limited to $90 million. All earn-out payments
are being treated as adjustments to the purchase price. In addition, Mitsubishi is responsible for up to $100 million of any potential environmental liabilities of the business identified through January 1, 2026 arising out of or related to the
period prior to the acquisition date.

Environmental Remediation Activities

Sunoco is subject to extensive and frequently changing federal, state and local laws and regulations, including, but not limited to, those relating to the
discharge of materials into the environment or that otherwise deal with the protection of the environment, waste management and the characteristics



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and composition of fuels. As with the industry generally, compliance with existing and anticipated laws and regulations increases the overall cost of
operating Sunocos businesses, including remediation, operating costs and capital costs to construct, maintain and upgrade equipment and facilities.

Existing laws and regulations result in liabilities and loss contingencies for remediation at Sunocos facilities and at formerly owned or third-party sites. The accrued liability for environmental remediation is
classified in the condensed consolidated balance sheets as follows (in millions of dollars):



|                                       |  |                      |     |                     |   |    
|-------------------------------------- |  | -------------------- | --- | ------------------- | - | ---
|                                       |  | At September 30 2006 |     | At December 31 2005
|Accrued liabilities                    |  | $                    | 40  |                     | $ | 37 
|Other deferred credits and liabilities |  |                      | 86  |                     |   | 100
|                                       |  |                      |     |                     |   |    
|                                       |  | $                    | 126 |                     | $ | 137
|                                       |  |                      |     |                     |   |    

The following table summarizes the changes in the accrued liability for environmental remediation
activities by category (in millions of dollars):



|                              |  |            |    |   |                 |   |     |                      |  |   |                         |   |  |                       |    |   |       |   |    |       |  |   |    |   |  |   |     |  
|----------------------------- |  | ---------- | -- | - | --------------- | - | --- | -------------------- |  | - | ----------------------- | - |  | --------------------- | -- | - | ----- | - | -- | ----- |  | - | -- | - |  | - | --- | -
|                              |  | Refineries |    |   | Marketing Sites |   |     | Chemicals Facilities |  |   | Pipelines and Terminals |   |  | Hazardous Waste Sites |    |   | Other |   |    | Total | 
|Balance at January 1, 2005    |  | $          | 48 |   |                 | $ | 74  |                      |  | $ | 5                       |   |  | $                     | 15 |   |       | $ | 4  |       |  | $ | 2  |   |  | $ | 148 |  
|Accruals                      |  |            | 2  |   |                 |   | 15  |                      |  |   | 1                       |   |  |                       | 2  |   |       |   | 1  |       |  |   |   |   |  |   | 21  |  
|Payments                      |  |            | (9 | ) |                 |   | (15 | )                    |  |   | (1                      | ) |  |                       | (3 | ) |       |   | (2 | )     |  |   |   |   |  |   | (30 | )
|Other                         |  |            |   |   |                 |   | (1  | )                    |  |   |                        |   |  |                       | 1  |   |       |   |   |       |  |   |   |   |  |   |    |  
|                              |  |            |    |   |                 |   |     |                      |  |   |                         |   |  |                       |    |   |       |   |    |       |  |   |    |   |  |   |     |  
|Balance at September 30, 2005 |  | $          | 41 |   |                 | $ | 73  |                      |  | $ | 5                       |   |  | $                     | 15 |   |       | $ | 3  |       |  | $ | 2  |   |  | $ | 139 |  
|                              |  |            |    |   |                 |   |     |                      |  |   |                         |   |  |                       |    |   |       |   |    |       |  |   |    |   |  |   |     |  
|Balance at January 1, 2006    |  | $          | 36 |   |                 | $ | 78  |                      |  | $ | 3                       |   |  | $                     | 15 |   |       | $ | 3  |       |  | $ | 2  |   |  | $ | 137 |  
|Accruals                      |  |            | 5  |   |                 |   | 15  |                      |  |   | 1                       |   |  |                       |   |   |       |   | 1  |       |  |   |   |   |  |   | 22  |  
|Payments                      |  |            | (7 | ) |                 |   | (18 | )                    |  |   | (1                      | ) |  |                       | (3 | ) |       |   | (1 | )     |  |   | (1 | ) |  |   | (31 | )
|Other                         |  |            |   |   |                 |   | (2  | )                    |  |   |                        |   |  |                       |   |   |       |   |   |       |  |   |   |   |  |   | (2  | )
|                              |  |            |    |   |                 |   |     |                      |  |   |                         |   |  |                       |    |   |       |   |    |       |  |   |    |   |  |   |     |  
|Balance at September 30, 2006 |  | $          | 34 |   |                 | $ | 73  |                      |  | $ | 3                       |   |  | $                     | 12 |   |       | $ | 3  |       |  | $ | 1  |   |  | $ | 126 |  
|                              |  |            |    |   |                 |   |     |                      |  |   |                         |   |  |                       |    |   |       |   |    |       |  |   |    |   |  |   |     |  

Sunocos accruals for environmental remediation activities reflect managements estimates
of the most likely costs that will be incurred over an extended period to remediate identified conditions for which the costs are both probable and reasonably estimable. Engineering studies, historical experience and other factors are used to
identify and evaluate remediation alternatives and their related costs in determining the estimated accruals for environmental remediation activities. Losses attributable to unasserted claims are also reflected in the accruals to the extent they are
probable of occurrence and reasonably estimable.

Total future costs for the environmental remediation activities identified above will
depend upon, among other things, the identification of any additional sites, the determination of the extent of the contamination at each site, the timing and nature of required remedial actions, the technology available and needed to meet the
various existing legal requirements, the nature and terms of cost-sharing arrangements with other potentially responsible parties, the availability of insurance coverage, the nature and extent of future environmental laws, inflation rates and the
determination of Sunocos liability at the sites, if any, in light of the number, participation level and financial viability of the other parties. Management believes it is reasonably possible (i.e., less than probable but greater than remote)
that additional environmental remediation losses will



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be incurred. At September 30, 2006, the aggregate of the estimated maximum additional reasonably possible losses, which relate to numerous individual
sites, totaled approximately $90 million. However, the Company believes it is very unlikely that it will realize the maximum reasonably possible loss at every site. Furthermore, the recognition of additional losses, if and when they were to occur,
would likely extend over many years and, therefore, likely would not have a material impact on the Companys financial position.

Under
various environmental laws, including the Resource Conservation and Recovery Act (RCRA) (which relates to solid and hazardous waste treatment, storage and disposal), Sunoco has initiated corrective remedial action at its facilities,
formerly owned facilities and third-party sites. At the Companys major manufacturing facilities, Sunoco has consistently assumed continued industrial use and a containment/remediation strategy focused on eliminating unacceptable risks to human
health or the environment. The remediation accruals for these sites reflect that strategy. Accruals include amounts to prevent off-site migration and to contain the impact on the facility property, as well as to address known, discrete areas
requiring remediation within the plants. Activities include closure of RCRA solid waste management units, recovery of hydrocarbons, handling of impacted soil, mitigation of surface water impacts and prevention of off-site migration.

Many of Sunocos current terminals are being addressed with the above containment/remediation strategy. At some smaller or less impacted facilities
and some previously divested terminals, the focus is on remediating discrete interior areas to attain regulatory closure.

Sunoco owns or
operates certain retail gasoline outlets where releases of petroleum products have occurred. Federal and state laws and regulations require that contamination caused by such releases at these sites and at formerly owned sites be assessed and
remediated to meet the applicable standards. The obligation for Sunoco to remediate this type of contamination varies, depending on the extent of the release and the applicable laws and regulations. A portion of the remediation costs may be
recoverable from the reimbursement fund of the applicable state, after any deductible has been met.

Future costs for environmental
remediation activities at the Companys marketing sites also will be influenced by the extent of MTBE contamination of groundwater, the cleanup of which will be driven by thresholds based on drinking water protection. Though not all groundwater
is used for drinking, several states have initiated or proposed more stringent MTBE cleanup requirements. Cost increases result directly from extended remedial operations and maintenance on sites that, under prior standards, could otherwise have
been completed. Cost increases will also result from installation of additional remedial or monitoring wells and purchase of more expensive equipment because of the presence of MTBE. While actual cleanup costs for specific sites are variable and
depend on many of the factors discussed above, expansion of similar MTBE remediation thresholds to additional states or adoption of even more stringent requirements for MTBE remediation would result in further cost increases. Sunoco is not
currently, nor does it intend to, manufacture or sell gasoline containing MTBE (see Environmental Regulatory Matters below).

The accrued liability for hazardous waste sites is attributable to potential obligations to remove or mitigate the environmental effects of the disposal or release of certain pollutants at third-party sites pursuant to the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) (which relates to releases and remediation of hazardous substances) and similar state laws. Under CERCLA, Sunoco is potentially subject to joint and several liability for the
costs of remediation at sites



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at which it has been identified as a potentially responsible party (PRP). As of September 30, 2006, Sunoco had been named as a
PRP at 36 sites identified or potentially identifiable as Superfund sites under federal and state law. The Company is usually one of a number of companies identified as a PRP at a site. Sunoco has reviewed the nature and extent of its
involvement at each site and other relevant circumstances and, based upon the other parties involved or Sunocos negligible participation therein, believes that its potential liability associated with such sites will not be significant.

Management believes that none of the current remediation locations, which are in various stages of ongoing remediation, is individually
material to Sunoco as its largest accrual for any one Superfund site, operable unit or remediation area was less than $5 million at September 30, 2006. As a result, Sunocos exposure to adverse developments with respect to any individual
site is not expected to be material. However, if changes in environmental regulations occur, such changes could impact multiple Sunoco facilities and formerly owned and third-party sites at the same time. As a result, from time to time, significant
charges against income for environmental remediation may occur.

The Company maintains insurance programs that cover certain of its existing
or potential environmental liabilities, which programs vary by year, type and extent of coverage. For underground storage tank remediations, the Company can also seek reimbursement through various state funds of certain remediation costs above a
deductible amount. For certain acquired properties, the Company has entered into arrangements with the sellers or others that allocate environmental liabilities and provide indemnities to the Company for remediating contamination that occurred prior
to the acquisition dates. Some of these environmental indemnifications are subject to caps and limits. No accruals have been recorded for any potential contingent liabilities that will be funded by the prior owners as management does not believe,
based on current information, that it is likely that any of the former owners will not perform under any of these agreements. Other than the preceding arrangements, the Company has not entered into any arrangements with third parties to mitigate its
exposure to loss from environmental contamination. Claims for recovery of environmental liabilities that are probable of realization totaled $19 million at September 30, 2006 and are included principally in deferred charges and other assets in
the condensed consolidated balance sheets.

Environmental Regulatory Matters

The U.S. Environmental Protection Agency (EPA) adopted rules under the Clean Air Act (which relates to emissions of materials into the air)
that phased in limitations on the sulfur content of gasoline beginning in 2004 and the sulfur content of on-road diesel fuel beginning in mid-2006 (Tier II). The rules include banking and trading credit systems, which could provide
refiners flexibility through 2006 for the low-sulfur gasoline and through May 2010 for the on-road low-sulfur diesel. Tier II capital spending, which totaled $754 million through September 30, 2006, is essentially completed. In addition, higher
operating costs are being incurred as the low-sulfur fuels are produced. In May 2004, the EPA adopted another rule which will phase in limitations on the allowable sulfur content in off-road diesel fuel beginning in mid-2007. This rule also provides
for banking and trading credit systems. The ultimate impact of this rule may be impacted by the effectiveness of the related banking and trading credit systems, Sunocos flexibility to modify its production slate and the impact on any capital
expenditures of technology selection, permitting requirements and construction schedules, as well as any effect on prices created by the changes in the level of off-road diesel fuel production.



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In connection with the phase in of these new off-road diesel fuel specifications, Sunoco is evaluating
its alternatives for its Tulsa refinery, including consideration of significant capital expenditures which could result in increased crude flexibility and an upgraded product slate. The majority of any such capital expenditures would likely not
occur until the 2009-2010 timeframe.

National Ambient Air Quality Standards (NAAQS) for ozone and fine particles promulgated by
the EPA have resulted in identification of non-attainment areas throughout the country, including Texas, Pennsylvania, Ohio, New Jersey and West Virginia, where Sunoco operates facilities. In 2004, the EPA issued final non-attainment area
designations for ozone and fine particles. These standards will result in further controls of nitrogen oxide, sulfur dioxide and volatile organic compound emissions. The EPA has designated certain areas, including Philadelphia and Houston, as
moderate non-attainment areas for ozone, which would require them to meet the ozone requirements by 2010, before currently mandated federal control programs would take effect. If a region is not able to demonstrate attainment by 2010,
there would be more stringent offset requirements, and, if a region cannot submit an approvable State Implementation Plan, there could be other negative consequences. However, EPAs designation of ozone non-attainment areas and the EPAs
rule on state implementation are currently being challenged by the State of Ohio, trade associations and health and environmental groups. In 2005, EPA issued a final rule revoking a previously proposed 1-hour ozone standard and related provisions in
favor of a more stringent 8-hour standard. The EPA issued a subsequent rule codifying the revocation of the 1-hour ozone standard for the areas with effective 8-hour ozone non-attainment designations. Both industry and environmental groups have
filed lawsuits challenging various provisions of the final rule. In September 2006, the EPA issued a final rule approving the Houston ozone State Implementation Plan. Sunocos Bayport and LaPorte, TX chemical facilities are located within this
non-attainment area. In 2005, the EPA also identified 21 counties which, based on 2003-2004 data, now are in attainment of the fine particles standard. Sunocos Toledo refinery is within one of these attainment areas. In September 2006, the EPA
issued a final rule which tightens the standard for certain fine particle matter. Regulatory programs, when established to implement the EPAs standards, could have an impact on Sunoco and its operations. However, the potential financial impact
cannot be reasonably estimated until the EPA promulgates regulatory programs to attain the standards, and the states, as necessary, develop and implement revised State Implementation Plans to respond to the new regulations.

Under a law that was enacted in August 2005, a new renewable fuels mandate for ethanol use in gasoline was established (immediately in California and on
May 5, 2006 for the rest of the nation). Although the act did not ban MTBE, during the second quarter of 2006, Sunoco discontinued the use of MTBE and increased its use of ethanol in gasoline. While management expects ethanol will continue to
be adequately supplied, this change by Sunoco and other refiners in the industry has price and supply implications in the marketplace. Any additional Federal and state legislation could also have a significant impact on market conditions and the
profitability of Sunoco and the industry in general.

MTBE Litigation

Sunoco, along with other refiners, manufacturers and sellers of gasoline, owners and operators of retail gasoline sites, and manufacturers of MTBE, are
defendants in 67 cases in 18 states involving the manufacture and use of MTBE in gasoline and MTBE contamination in groundwater. Plaintiffs, which



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include private well owners, water providers and certain governmental authorities, allege that refiners and suppliers of gasoline containing MTBE are
responsible for manufacturing and distributing a defective product that contaminates groundwater. Plaintiffs are asserting primarily product liability claims but additional claims are also being asserted including, nuisance, trespass, negligence,
violation of environmental laws and deceptive business practices. Plaintiffs are seeking compensatory damages, and in some cases injunctive relief, exemplary and punitive damages and attorneys fees. All of the public water provider cases have
been removed to federal court and consolidated for pretrial purposes in the U.S. District Court for the Southern District of New York (MDL 1358). Motions to remand these cases to state courts have been denied. Motions to dismiss were denied.
Discovery is proceeding in four focus cases. Sunoco is a defendant in three of these cases. In addition, several of the private well owner cases are moving forward. Sunoco is a focus defendant in two of those cases. Up to this point, for the group
of MTBE cases currently pending, there has been insufficient information developed about the plaintiffs legal theories or the facts that would be relevant to an analysis of potential exposure. Based on the current law and facts available at
this time, Sunoco believes that these cases will not have a material adverse effect on its consolidated financial position. A court decision, which is under appeal, provided that an insurance company must reimburse Sunoco for certain defense and
investigative costs attributable to the MTBE lawsuits. Claims for recovery of these expenses that are probable of realization totaled $14 million at September 30, 2006 and are included in accounts and notes receivable, net, in the condensed
consolidated balance sheet.

Conclusion

Many other legal and administrative proceedings are pending or possible against Sunoco from its current and past operations, including proceedings related to commercial and tax disputes, product liability, antitrust, employment claims,
leaks from pipelines and underground storage tanks, natural resource damage claims, premises-liability claims, allegations of exposures of third parties to toxic substances (such as benzene or asbestos) and general environmental claims. The ultimate
outcome of pending proceedings and other matters identified above cannot be ascertained at this time; however, it is reasonably possible that some of them could be resolved unfavorably to Sunoco. Management believes that these matters could have a
significant impact on results of operations for any future quarter or year. However, management does not believe that any additional liabilities which may arise pertaining to such matters would be material in relation to the consolidated financial
position of Sunoco at September 30, 2006. Furthermore, management does not believe that the overall costs for environmental activities will have a material impact over an extended period of time on Sunocos cash flows or liquidity.



|8. | Debt.
|-- | -----

Epsilon, the Companys consolidated joint
venture, was unable to repay its $120 million term loan that was due in September 2006 and the $31 million of borrowings under its $40 million revolving credit facility that matured in September 2006. Upon such default, the lenders made a demand on
Sunoco, Inc., as guarantor, and Sunoco, Inc. satisfied its guarantee obligations in the third quarter of 2006 principally utilizing cash proceeds generated through the issuance of $150 million of commercial paper under its revolving credit facility.
Sunoco, Inc. is now subrogated to the rights and privileges of the former debtholders and is working with Epsilon to formulate a plan for payment of the debt to Sunoco, Inc.



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In the second quarter of 2006, the Company redeemed its 9-3/8 percent debentures with a book value of $56
million. The Company recognized a loss of less than $1 million due to the early extinguishment of the debt.



|9. | Retirement Benefit Plans.
|-- | -------------------------

The following tables set forth
the components of defined benefit plans and postretirement benefit plans expense (in millions of dollars):



|                                                       |  |                                |     |   |                                |   |     |      |  |   |      |   |  |   |    |  
|------------------------------------------------------ |  | ------------------------------ | --- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | -- | -
|                                                       |  | Defined BenefitPlans           |     |   | PostretirementBenefit Plans    |  
|                                                       |  | Nine Months Ended September 30 |     |   | Nine Months Ended September 30 |  
|                                                       |  | 2006                           |     |   | 2005                           |   |     | 2006 |  |   | 2005 |  
|Service cost (cost of benefits earned during the year) |  | $                              | 39  |   |                                | $ | 36  |      |  | $ | 7    |   |  | $ | 6  |  
|Interest cost on benefit obligations                   |  |                                | 64  |   |                                |   | 63  |      |  |   | 17   |   |  |   | 18 |  
|Expected return on plan assets                         |  |                                | (71 | ) |                                |   | (68 | )    |  |   |     |   |  |   |   |  
|Amortization of:                                       |  |                                |     |   |                                |   |     |      |  |   |      |   |  |   |    |  
|Prior service cost (benefit)                           |  |                                | 2   |   |                                |   | 2   |      |  |   | (2   | ) |  |   | (3 | )
|Unrecognized losses                                    |  |                                | 24  |   |                                |   | 22  |      |  |   | 2    |   |  |   | 1  |  
|                                                       |  |                                |     |   |                                |   |     |      |  |   |      |   |  |   |    |  
|Total expense                                          |  | $                              | 58  |   |                                | $ | 55  |      |  | $ | 24   |   |  | $ | 22 |  
|                                                       |  |                                |     |   |                                |   |     |      |  |   |      |   |  |   |    |  



|                                                       |  |                                 |     |   |                                 |   |     |      |  |      |   |  |   |    |  
|------------------------------------------------------ |  | ------------------------------- | --- | - | ------------------------------- | - | --- | ---- |  | ---- | - |  | - | -- | -
|                                                       |  | Defined BenefitPlans            |     |   | Postretirement Benefit Plans    |  
|                                                       |  | Three Months Ended September 30 |     |   | Three Months Ended September 30 |  
|                                                       |  | 2006                            |     |   | 2005                            |   |     | 2006 |  | 2005 |  
|Service cost (cost of benefits earned during the year) |  | $                               | 13  |   |                                 | $ | 12  |      |  | $    | 2 |  | $ | 2  |  
|Interest cost on benefit obligations                   |  |                                 | 21  |   |                                 |   | 21  |      |  |      | 6 |  |   | 6  |  
|Expected return on plan assets                         |  |                                 | (24 | ) |                                 |   | (23 | )    |  |      |  |  |   |   |  
|Amortization of:                                       |  |                                 |     |   |                                 |   |     |      |  |      |   |  |   |    |  
|Prior service cost (benefit)                           |  |                                 | 1   |   |                                 |   | 1   |      |  |      |  |  |   | (1 | )
|Unrecognized losses                                    |  |                                 | 8   |   |                                 |   | 7   |      |  |      |  |  |   |   |  
|                                                       |  |                                 |     |   |                                 |   |     |      |  |      |   |  |   |    |  
|Total expense                                          |  | $                               | 19  |   |                                 | $ | 18  |      |  | $    | 8 |  | $ | 7  |  
|                                                       |  |                                 |     |   |                                 |   |     |      |  |      |   |  |   |    |  



|10. | Shareholders Equity.
|--- | ---------------------



|                                       |  |                       |        |   |                     |   |        |  
|-------------------------------------- |  | --------------------- | ------ | - | ------------------- | - | ------ | -
|                                       |  | At September 30 2006  |        |   | At December 31 2005 |  
|                                       |  | (Millions of Dollars) |       
|Common stock, par value $1 per share   |  | $                     | 280    |   |                     | $ | 280    |  
|Capital in excess of par value         |  |                       | 1,598  |   |                     |   | 1,587  |  
|Earnings employed in the business      |  |                       | 4,530  |   |                     |   | 3,766  |  
|Accumulated other comprehensive loss   |  |                       | (156   | ) |                     |   | (192   | )
|Common stock held in treasury, at cost |  |                       | (4,126 | ) |                     |   | (3,390 | )
|                                       |  |                       |        |   |                     |   |        |  
|Total                                  |  | $                     | 2,126  |   |                     | $ | 2,051  |  
|                                       |  |                       |        |   |                     |   |        |  



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On July 7, 2005, the Companys Board of Directors (Board) approved a two-for-one
split of Sunocos common stock to be effected in the form of a stock dividend. The shares were distributed on August 1, 2005 to shareholders of record as of July 18, 2005. In connection with the common stock split, the number of
authorized shares of common stock was increased from 200 million to 400 million, and the shares of common stock reserved for issuance pertaining to Sunocos 6-3/4 percent convertible debentures and various employee benefit plans were
proportionally increased in accordance with the terms of those respective agreements and plans.

During the first nine months of 2006, the
Company repurchased 10,160,981 shares of its common stock for $734 million. In September 2006 and July 2006, the Company announced that its Board had approved additional share repurchase authorizations totaling $1 billion and $500 million,
respectively. At September 30, 2006, the Company had a remaining authorization from its Board to purchase up to $1.07 billion of Company common stock in the open market from time to time depending on prevailing market conditions and available
cash.

The Company increased the quarterly cash dividend paid on common stock from $.15 per share ($.60 per year) to $.20 per share ($.80
per year) beginning with the second quarter of 2005 and then to $.25 per share ($1.00 per year) beginning with the second quarter of 2006.



|11. | Comprehensive Income.
|--- | ---------------------

The following table sets forth
Sunocos comprehensive income (in millions of dollars):



|                                                         |  |                               |     |   |                                |   |     |      |  |   |      |   |  |   |     |  
|-------------------------------------------------------- |  | ----------------------------- | --- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                                         |  | Nine Months EndedSeptember 30 |     |   | Three Months EndedSeptember 30 |  
|                                                         |  | 2006                          |     |   | 2005                           |   |     | 2006 |  |   | 2005 |  
|Net income                                               |  | $                             | 856 |   |                                | $ | 687 |      |  | $ | 351  |   |  | $ | 329 |  
|Other comprehensive income, net of related income taxes: |  |                               |     |   |                                |   |     |      |  |   |      |   |  |   |     |  
|Net hedging gains (losses)                               |  |                               | 37  |   |                                |   |    |      |  |   | 50   |   |  |   | (6  | )
|Reclassifications of net hedging gains to earnings       |  |                               | (1  | ) |                                |   | (7  | )    |  |   | (5   | ) |  |   | (4  | )
|                                                         |  |                               |     |   |                                |   |     |      |  |   |      |   |  |   |     |  
|Comprehensive income                                     |  | $                             | 892 |   |                                | $ | 680 |      |  | $ | 396  |   |  | $ | 319 |  
|                                                         |  |                               |     |   |                                |   |     |      |  |   |      |   |  |   |     |  

Sunoco uses derivative instruments to hedge a variety of commodity price risks. During the second
quarter of 2006, Sunoco increased its use of ethanol as an oxygenate component in gasoline in response to the new renewable fuels mandate for ethanol and the discontinuance of the use of MTBE as a gasoline blending component. Currently, most of the
ethanol purchased by Sunoco is through normal purchase fixed-price contracts. To reduce the margin risk created by these fixed-price contracts, the Company entered into derivative contracts to sell gasoline at a fixed price to hedge a similar volume
of forecasted floating-price gasoline sales over the term of the ethanol contracts. In effect, these derivative contracts have locked in an acceptable differential between the gasoline price and the cost of the ethanol purchases for gasoline
blending during this period.

As a result of the significant decrease in the price of gasoline, the fair value of the fixed-price gasoline
contracts increased $89 million ($53 million after tax) in the third quarter of 2006. As these derivative contracts have been designated as cash flow hedges, this increase in fair value has not been included in net income but rather has
been reflected in the net hedging gains component of comprehensive income in the table above.



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The fair value of these contracts at the time the positions are closed will be recognized in income when the hedged items are recognized in income, with
Sunocos margin reflecting the differential between the gasoline sales prices hedged to a fixed price and the cost of fixed-price ethanol purchases.



|12. | Business Segment Information.
|--- | -----------------------------

The following table sets
forth certain income statement information concerning Sunocos business segments (in millions of dollars):



|                                     |  |                                  |        |                                   |   |       |  |   |      |    
|------------------------------------ |  | -------------------------------- | ------ | --------------------------------- | - | ----- |  | - | ---- | ---
|                                     |  | Sales and OtherOperating Revenue |        | Segment Income (Loss) (after
tax) |  
|Nine Months Ended September 30, 2006 |  | Unaffiliated Customers           |        | Inter- segment                    |  
|Refining and Supply                  |  | $                                | 14,019 |                                   | $ | 8,621 |  | $ | 755  |    
|Retail Marketing                     |  |                                  | 10,464 |                                   |   |      |  |   | 87   |    
|Chemicals                            |  |                                  | 1,909  |                                   |   |      |  |   | 27   |    
|Logistics                            |  |                                  | 2,875  |                                   |   | 1,477 |  |   | 25   |    
|Coke                                 |  |                                  | 357    |                                   |   | 8     |  |   | 33   |    
|Corporate and Other                  |  |                                  |       |                                   |   |      |  |   | (71  | )* 
|                                     |  |                                  |        |                                   |   |       |  |   |      |    
|Consolidated                         |  | $                                | 29,624 |                                   |   |       |  | $ | 856  |    
|                                     |  |                                  |        |                                   |   |       |  |   |      |    
|                                     |  |                                  |       
|Nine Months Ended September 30, 2005 |  |                                  |        |                                   |   |       | 
|Refining and Supply                  |  | $                                | 11,773 |                                   | $ | 7,013 |  | $ | 661  |    
|Retail Marketing                     |  |                                  | 8,748  |                                   |   |      |  |   | 5    |    
|Chemicals                            |  |                                  | 1,838  |                                   |   |      |  |   | 86   |    
|Logistics                            |  |                                  | 1,841  |                                   |   | 1,495 |  |   | 19   |    
|Coke                                 |  |                                  | 306    |                                   |   | 4     |  |   | 38   |    
|Corporate and Other                  |  |                                  |       |                                   |   |      |  |   | (122 | )**
|                                     |  |                                  |        |                                   |   |       |  |   |      |    
|Consolidated                         |  | $                                | 24,506 |                                   |   |       |  | $ | 687  |    
|                                     |  |                                  |        |                                   |   |       |  |   |      |    

---

|* | Consists of $38 million of after-tax corporate expenses and $33 million of after-tax net financing expenses and other.
|- | ----------------------------------------------------------------------------------------------------------------------



|** | Consists of $57 million of after-tax corporate expenses, $37 million of after-tax net financing expenses and other, an $18 million net after-tax gain related to income tax matters
and a $46 million after-tax loss associated with the Chemicals segments phenol supply contract dispute (Notes 3 and 4).
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                      |  |                                  |        |                                   |   |       |  |   |     |    
|------------------------------------- |  | -------------------------------- | ------ | --------------------------------- | - | ----- |  | - | --- | ---
|                                      |  | Sales and OtherOperating Revenue |        | Segment Income (Loss) (after
tax) |  
|Three Months Ended September 30, 2006 |  | Unaffiliated Customers           |        | Inter- segment                    |  
|Refining and Supply                   |  | $                                | 4,825  |                                   | $ | 3,073 |  | $ | 273 |    
|Retail Marketing                      |  |                                  | 3,757  |                                   |   |      |  |   | 77  |    
|Chemicals                             |  |                                  | 659    |                                   |   |      |  |   | 5   |    
|Logistics                             |  |                                  | 1,119  |                                   |   | 484   |  |   | 7   |    
|Coke                                  |  |                                  | 120    |                                   |   | 3     |  |   | 9   |    
|Corporate and Other                   |  |                                  |       |                                   |   |      |  |   | (20 | )* 
|                                      |  |                                  |        |                                   |   |       |  |   |     |    
|Consolidated                          |  | $                                | 10,480 |                                   |   |       |  | $ | 351 |    
|                                      |  |                                  |        |                                   |   |       |  |   |     |    
|                                      |  |                                  |       
|Three Months Ended September 30, 2005 |  |                                  |        |                                   |   |       | 
|Refining and Supply                   |  | $                                | 4,500  |                                   | $ | 2,798 |  | $ | 341 |    
|Retail Marketing                      |  |                                  | 3,424  |                                   |   |      |  |   | 6   |    
|Chemicals                             |  |                                  | 590    |                                   |   |      |  |   | 23  |    
|Logistics                             |  |                                  | 720    |                                   |   | 524   |  |   | 7   |    
|Coke                                  |  |                                  | 111    |                                   |   | 4     |  |   | 15  |    
|Corporate and Other                   |  |                                  |       |                                   |   |      |  |   | (63 | )**
|                                      |  |                                  |        |                                   |   |       |  |   |     |    
|Consolidated                          |  | $                                | 9,345  |                                   |   |       |  | $ | 329 |    
|                                      |  |                                  |        |                                   |   |       |  |   |     |    

---

|* | Consists of $11 million of after-tax corporate expenses and $9 million of after-tax net financing expenses and other.
|- | ---------------------------------------------------------------------------------------------------------------------



|** | Consists of $25 million of after-tax corporate expenses, $10 million of after-tax net financing expenses and other, an $18 million net after-tax gain related to income tax matters
and a $46 million after-tax loss associated with the Chemicals segments phenol supply contract dispute (Notes 3 and 4).
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13. | New Accounting Pronouncements.
|--- | ------------------------------

In September 2006,
Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158), was issued, which amended Statement of Financial Accounting
Standards No. 87, Employers Accounting for Pensions, and Statement of Financial Accounting Standards No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. Sunoco will
prospectively adopt SFAS No. 158 effective December 31, 2006 when adoption is mandatory. This standard, among other things, requires that the funded status of defined benefit and postretirement benefit plans be fully recognized on the
balance sheet. The funded status is determined by the difference between the fair value of plan assets and the benefit obligation, with the benefit obligation represented by the projected benefit obligation for defined benefit plans and the
accumulated postretirement benefit obligation for postretirement benefits plans. Under the new accounting, previously unrecognized actuarial gains (losses) and prior service costs (benefits) will be recognized in the consolidated balance sheet as a
component of the retirement benefit liability with a corresponding charge or credit initially to the accumulated other comprehensive loss component of shareholders equity. This charge or credit to shareholders equity, which is reflected
net of related tax effects, will be subsequently recognized in net income when amortized as a component of defined benefit and postretirement benefit plans expense. Sunoco is currently evaluating the impact that SFAS No. 158 will have on the
Companys financial position. If the new standard had been in effect at December 31, 2005, the Company would have recorded an after-tax charge of approximately $140 million to shareholders equity at that time. The impact upon
adoption at December 31, 2006 may differ substantially from this amount because net plan liabilities are dependent upon future changes



22



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##### Table of Contents

in interest rates, the fair value of plan assets and actuarial assumptions. The new standard will have no
impact on the

Companys results of operations.

In July 2006, FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FASB Interpretation No. 48), was issued.
It clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, by prescribing the
minimum recognition threshold and measurement attribute a tax position taken or expected to be taken on a tax return is required to meet before being recognized in the financial statements. FASB Interpretation No. 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Sunoco is currently evaluating the impact of FASB Interpretation No. 48, which must be implemented effective
January 1, 2007.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

RESULTS OF OPERATIONS  NINE MONTHS

Earnings Profile of
Sunoco Businesses (after tax)



|                                 |  |                               |     |   |          |   |     |   |  |   |     |  
|-------------------------------- |  | ----------------------------- | --- | - | -------- | - | --- | - |  | - | --- | -
|                                 |  | Nine Months EndedSeptember 30 |     |   | Variance |  
|                                 |  | 2006                          |     |   | 2005     |   |    
|                                 |  | (Millions of Dollars)         |    
|Refining and Supply              |  | $                             | 755 |   |          | $ | 661 |   |  | $ | 94  |  
|Retail Marketing                 |  |                               | 87  |   |          |   | 5   |   |  |   | 82  |  
|Chemicals                        |  |                               | 27  |   |          |   | 86  |   |  |   | (59 | )
|Logistics                        |  |                               | 25  |   |          |   | 19  |   |  |   | 6   |  
|Coke                             |  |                               | 33  |   |          |   | 38  |   |  |   | (5  | )
|Corporate and Other:             |  |                               |     |   |          |   |     |   |  |   |     |  
|Corporate expenses               |  |                               | (38 | ) |          |   | (57 | ) |  |   | 19  |  
|Net financing expenses and other |  |                               | (33 | ) |          |   | (37 | ) |  |   | 4   |  
|Income tax matters               |  |                               |    |   |          |   | 18  |   |  |   | (18 | )
|Phenol supply contract dispute   |  |                               |    |   |          |   | (46 | ) |  |   | 46  |  
|                                 |  |                               |     |   |          |   |     |   |  |   |     |  
|Consolidated net income          |  | $                             | 856 |   |          | $ | 687 |   |  | $ | 169 |  
|                                 |  |                               |     |   |          |   |     |   |  |   |     |  

Analysis of Earnings Profile of Sunoco Businesses

In the nine-month period ended September 30, 2006, Sunoco earned $856 million, or $6.53 per share of common stock on a diluted basis, compared to $687 million, or
$4.97 per share, for the first nine months of 2005.



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##### Table of Contents

The $169 million increase in net income in the first nine months of 2006 was primarily due to higher margins for
wholesale fuels ($213 million) and retail gasoline ($80 million). Also contributing to the improvement in earnings was the absence of a loss associated with a phenol supply contract dispute ($46 million). Partially offsetting these positive factors
were higher expenses ($86 million); lower chemical margins ($60 million); and lower production of refined products ($19 million).

Refining and Supply



|                                                     |  |                                       |       |      |   |      
|---------------------------------------------------- |  | ------------------------------------- | ----- | ---- | - | -----
|                                                     |  | For the Nine MonthsEnded September 30
|                                                     |  | 2006                                  |       | 2005
|Income (millions of dollars)                         |  | $                                     | 755   |      | $ | 661  
|Wholesale margin* (per barrel):                      |  |                                       |       |      |   |      
|Total Refining and Supply                            |  | $                                     | 9.61  |      | $ | 8.20 
|Northeast Refining                                   |  | $                                     | 8.48  |      | $ | 8.07 
|MidContinent Refining                                |  | $                                     | 12.82 |      | $ | 8.61 
|Crude inputs as percent of crude unit rated capacity |  |                                       | 94    |      |   | 97   
|Throughputs (thousands of barrels daily):            |  |                                       |       |      |   |      
|Crude oil                                            |  |                                       | 849.7 |      |   | 877.1
|Other feedstocks                                     |  |                                       | 70.9  |      |   | 57.6 
|                                                     |  |                                       |       |      |   |      
|Total throughputs                                    |  |                                       | 920.6 |      |   | 934.7
|                                                     |  |                                       |       |      |   |      
|Products manufactured (thousands of barrels daily):  |  |                                       |       |      |   |      
|Gasoline                                             |  |                                       | 441.5 |      |   | 437.9
|Middle distillates                                   |  |                                       | 305.2 |      |   | 315.8
|Residual fuel                                        |  |                                       | 73.1  |      |   | 76.6 
|Petrochemicals                                       |  |                                       | 35.3  |      |   | 37.1 
|Lubricants                                           |  |                                       | 14.0  |      |   | 13.0 
|Other                                                |  |                                       | 85.1  |      |   | 89.3 
|                                                     |  |                                       |       |      |   |      
|Total production                                     |  |                                       | 954.2 |      |   | 969.7
|Less: Production used as fuel in refinery operations |  |                                       | 44.6  |      |   | 48.1 
|                                                     |  |                                       |       |      |   |      
|Total production available for sale                  |  |                                       | 909.6 |      |   | 921.6
|                                                     |  |                                       |       |      |   |      

---

|* | Wholesale sales revenue less related cost of crude oil, other feedstocks, product purchases and terminalling and transportation divided by production available for sale.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Refining and Supply earned $755 million in the first nine months of 2006 versus $661 million in the nine months of 2005. The $94 million
increase in earnings was due to higher realized margins ($213 million), partially offset by lower production volumes ($19 million) and higher expenses ($103 million). Strong premiums for ethanol-blended gasoline and low-sulfur diesel fuel supported
the wholesale marketplace during the current period. In addition, supply disruptions on the Gulf Coast due to Hurricanes Katrina and Rita resulted in higher margins during the first nine months of 2005. The lower volumes were in part due to
scheduled maintenance turnarounds at the Philadelphia and Toledo refineries, while the higher expenses were mainly the result of higher purchased fuel costs, expenses associated with the maintenance activities and operating costs to produce
low-sulfur fuels.



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##### Table of Contents

Retail Marketing



|                                    |  |                                       |       |      |   |      
|----------------------------------- |  | ------------------------------------- | ----- | ---- | - | -----
|                                    |  | For the Nine MonthsEnded September 30
|                                    |  | 2006                                  |       | 2005
|Income (millions of dollars)        |  | $                                     | 87    |      | $ | 5    
|Retail margin* (per barrel):        |  |                                       |       |      |   |      
|Gasoline                            |  | $                                     | 4.61  |      | $ | 2.99 
|Middle distillates                  |  | $                                     | 4.37  |      | $ | 4.07 
|Sales (thousands of barrels daily): |  |                                       |       |      |   |      
|Gasoline                            |  |                                       | 302.6 |      |   | 301.6
|Middle distillates                  |  |                                       | 42.9  |      |   | 44.8 
|                                    |  |                                       |       |      |   |      
|                                    |  |                                       | 345.5 |      |   | 346.4
|                                    |  |                                       |       |      |   |      
|Retail gasoline outlets             |  |                                       | 4,694 |      |   | 4,795
|                                    |  |                                       |       |      |   |      

---

|* | Retail sales price less related wholesale price and terminalling and transportation costs per barrel. The retail sales price is the weighted-average price received through the
various branded marketing distribution channels.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Retail Marketing earned $87 million in the first nine months of 2006 versus $5 million in
the first nine months of 2005. The $82 million increase in results was primarily due to higher average retail gasoline margins ($80 million) and higher gains attributable to the Retail Portfolio Management program ($4 million).

A Retail Portfolio Management (RPM) program is ongoing, which is selectively reducing the Companys invested capital in Company-owned or leased sites.
During the 2003-2006 period, selected sites are being divested. Most of the sites are being converted to contract dealers or distributors thereby retaining most of the gasoline sales attributable to the divested sites within the Sunoco branded
business. The Company expects to generate divestment proceeds of approximately $230 million, of which $204 million has been received through September 30, 2006 related to the sale of 366 sites. During the first nine months of 2006 and 2005, net
after-tax gains of $8 and $4 million, respectively, were recognized in connection with the RPM program.



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##### Table of Contents

Chemicals



|                             |  |                                       |       |      |   |      
|---------------------------- |  | ------------------------------------- | ----- | ---- | - | -----
|                             |  | For the Nine MonthsEnded September 30
|                             |  | 2006*                                 |       | 2005
|Income (millions of dollars) |  | $                                     | 27    |      | $ | 86   
|Margin** (cents per pound):  |  |                                       |       |      |   |      
|All products***              |  |                                       | 9.6   |      |   | 12.3 
|Phenol and related products  |  |                                       | 7.7   |      |   | 11.5 
|Polypropylene***             |  |                                       | 12.2  |      |   | 13.7 
|Sales (millions of pounds):  |  |                                       |       |      |   |      
|Phenol and related products  |  |                                       | 1,903 |      |   | 1,960
|Polypropylene                |  |                                       | 1,681 |      |   | 1,706
|Other                        |  |                                       | 63    |      |   | 69   
|                             |  |                                       |       |      |   |      
|                             |  |                                       | 3,647 |      |   | 3,735
|                             |  |                                       |       |      |   |      

---

|* | The income and margin data reflect a new pricing formula for 2006 sales of phenol to Honeywell International Inc. based upon the outcome of arbitration decisions (see below).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|** | Wholesale sales revenue less the cost of feedstocks, product purchases and related terminalling and transportation divided by sales volumes.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------



|*** | The polypropylene and all products margins include the impact of a long-term supply contract with Equistar Chemicals, L.P. which is priced on a cost-based formula that includes a
fixed discount.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Chemicals earned $27 million in the first nine months of 2006 versus $86 million in the prior-year period. The $59 million
decrease in earnings was due primarily to lower margins for both phenol and polypropylene ($60 million). Lower sales volumes were offset by a $4 million deferred tax benefit recognized in the second quarter of 2006 as a result of a state law change.

During the third quarter of 2005, an arbitrator ruled that Sunoco was liable in an arbitration proceeding for breaching a supply agreement concerning the
prices charged to Honeywell International Inc. (Honeywell) for phenol produced at Sunocos Philadelphia chemical plant from June 2003 through April 2005. In January 2006, the arbitrator ruled that Sunoco should bill Honeywell based
on the pricing formula established in the arbitration until a second arbitration finalized pricing for 2005 and beyond under provisions of the supply agreement which provide for a price reopener on and after January 1, 2005. Damages of
approximately $95 million, including prejudgment interest, were assessed, of which $27, $48 and $20 million pertained to 2005, 2004 and 2003, respectively. Such damages, which were paid to Honeywell in April 2006, were recorded as a charge against
earnings in the 2005 interim condensed consolidated statements of income and were shown separately as Phenol Supply Contract Dispute under Corporate and Other in the Earnings Profile of Sunoco Businesses ($46 million after tax in the third quarter
and $10 million after tax in the fourth quarter). In March 2006, a U.S. District Court judge upheld the first arbitrators ruling. In July 2006, the second arbitrator ruled that the pricing through July 2009 should be based essentially on the
pricing formula established in the first arbitration. The prices charged to Honeywell during the first nine months of 2006 have been based on this formula. (See Note 3 to the condensed consolidated financial statements.)

Logistics

Sunocos Logistics business earned $25 million in the
first nine months of 2006 versus $19 million in the first nine months of 2005. The $6 million increase in earnings was due largely to the absence of a $4 million after-tax accrual attributable to a pipeline spill in January 2005 and a $2 million
unfavorable tax adjustment. Also contributing to the increase were higher earnings attributable



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##### Table of Contents

to Eastern pipeline operations and crude oil acquisition and marketing activities as well as operating results from the Partnerships acquisitions
completed in 2006 and 2005. Partially offsetting these positive factors was Sunocos reduced ownership in the Partnership subsequent to the public equity offerings in 2006 and 2005 (see Financial Condition  Other Cash Flow
Information below).

In August 2006, the Partnership purchased from Sunoco for $65 million a company that has a 55 percent interest in Mid-Valley
Pipeline Company, a joint venture which owns a crude oil pipeline in the Midwest. The Partnership utilized cash and a $46 million draw against its revolving credit facility to fund this acquisition. Sunoco did not recognize any gain or loss on
this transaction. In March 2006, the Partnership purchased two separate crude oil pipeline systems and related storage facilities located in Texas, one from affiliates of Black Hills Energy, Inc. (Black Hills) for $41 million and the
other from affiliates of Alon USA Energy, Inc. (Alon) for $68 million. The Black Hills acquisition also includes a lease acquisition marketing business and related inventory. In August 2005, the Partnership completed the acquisition of
another crude oil pipeline system and related storage facilities located in Texas from ExxonMobil for $100 million. In December 2005, the Partnership also completed the acquisition of an ownership interest in the Mesa Pipeline from Chevron for $5
million which, coupled with the 7.2 percent interest it acquired from Sunoco, gave it a 37.0 percent ownership interest. The Texas crude oil pipeline system acquisitions were initially funded with proceeds from borrowings under the
Partnerships revolving credit facility (see Financial Condition  Financial Capacity below).

Coke

Coke earned $33 million in the first nine months of 2006 versus $38 million in the first nine months of 2005. The $5 million decrease in earnings was due primarily to a
$10 million partial phase-out of tax credits which resulted from the high level of crude oil prices during the first nine months of 2006 (see below). Also contributing to the decline in earnings was the absence of a gain from an insurance litigation
settlement. Partially offsetting these negative factors were higher income from the cokemaking facility in Haverhill, OH, which commenced operations in March 2005, and lower selling, general and administrative expenses.

Under existing tax law, most of the coke production at Jewell and all of the coke production at Indiana Harbor is not eligible to generate nonconventional fuel tax
credits after 2007, which is expected to result in a decline in Sun Cokes annual income of approximately $16 million on an after-tax basis beginning in 2008, assuming the tax credits are available to be used in their entirety during 2007. The
energy policy legislation enacted in August 2005 includes additional tax credits pertaining to a portion of the coke production at Jewell, all of the production at Haverhill and all future domestic coke plants placed into service by January 1,
2010. The new credits cover a four-year period, effective January 1, 2006 or the date any new facility is placed into service, if later. Beginning in 2006, the new credits attributable to Sun Cokes existing Jewell and Haverhill facilities
could benefit Sun Cokes annual income by approximately $6 million after tax. However, prior to their expiration dates, all of the tax credits would be phased out, on a ratable basis, if the average annual price of domestic crude oil at the
wellhead is within a certain inflation-adjusted price range. (This range was $53.20 to $66.79 per barrel for 2005, the latest year for which the range is available.) The domestic wellhead price averaged $61.92 per barrel for the eight months
ended August 31, 2006, $67.32 per barrel for the month of August 2006 and $50.26 per barrel for the year ended December 31, 2005. The



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##### Table of Contents

corresponding prices for West Texas Intermediate (WTI) crude oil, a widely published reference price for domestic crude oil, were $68.76 per
barrel for the eight months ended August 31, 2006, $73.08 per barrel for the month of August 2006 and $56.56 per barrel for the year ended December 31, 2005. If the annual crude oil price averages at or above the top of the
inflation-adjusted range during 2006 or 2007, then it is estimated the corresponding reduction in Sun Cokes after-tax income would approximate $28 million for each year. Based upon the Companys estimate of domestic wellhead prices for
the first nine months of 2006, Sun Coke recorded only 53 percent of the benefit of the tax credits that otherwise would have been available without regard to these phase-out provisions. The estimated impact of the phase-out reduced earnings for the
first nine months of 2006 by $10 million after tax. The ultimate amount of the credits to be earned during 2006 will be based upon the average annual price of domestic crude oil at the wellhead. The above estimates incorporate increased coke prices
resulting from the expiration or any phase-out of the tax credits with respect to coke sold under long-term contracts from the Indiana Harbor and Haverhill plants. The Company also could be required to make cash payments to the third-party investors
if the tax credit is reduced as a result of increased domestic crude oil prices. However, the Company currently does not believe that any such payments would be required. (See Note 2 to the condensed consolidated financial statements.)

In August 2004, Sun Coke entered into a series of agreements with two major steel companies (the Off-takers) with respect to the development of a
1.7 million tons-per-year cokemaking facility and associated cogeneration power plant in Vitória, Brazil. Those agreements generally include: technology license agreements whereby Sun Coke has licensed its proprietary technology to a
project company (the Project Company); an engineering and technical services agreement whereby Sun Coke is providing engineering and constructionrelated technical services to the Project Company; an operating agreement whereby a
local subsidiary of Sun Coke will operate the cokemaking and water treatment plant facilities for a term of not less than 15 years; and an investment agreement by and among Sun Coke and the Off-takers whereby Sun Coke has acquired an initial one
percent equity interest in the Project Company and an option to purchase an additional 19 percent equity interest. Sun Coke expects to exercise this option in 2007 for approximately $35 million. The Off-takers will purchase from the Project Company
all coke production under long-term agreements, and one of the Off-takers will purchase all of the electricity produced at the cogeneration power plant. Those off-take agreements are still being negotiated. Construction of the facilities commenced
in November 2004 and the facilities are projected by the Project Company to be operational in the first quarter of 2007.

Sun Coke is currently discussing
other opportunities for developing new heat recovery cokemaking facilities with several domestic and international steel companies. Such cokemaking facilities could be either wholly owned or owned through a joint venture with one or more parties.
The steel company customers would be expected to purchase the coke production on a take-or-pay or equivalent basis.

Corporate and Other

Corporate Expenses  Corporate administrative expenses were $38 million after tax in the current nine-month period versus $57 million in the first nine months of
2005. The $19 million decrease was primarily due to lower accruals for stock-related incentive compensation.

Net Financing Expenses and Other  Net
financing expenses and other were $33 million after tax in the first nine months of 2006 versus $37 million in the prior-year period. The $4 million decline was primarily due to higher interest income ($11 million), partially offset by a decrease in
capitalized interest ($6 million). Net financing expenses and other for the first nine months of 2006 also includes a $5 million net after-tax gain attributable to income tax matters (see



28



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##### Table of Contents

Note 4 to the condensed consolidated financial statements) and a $7 million after-tax charge attributable to the correction of an error in the computation of
the preferential return of third-party investors in Sunocos cokemaking operations (see Note 2 to the condensed consolidated financial statements).

Income Tax Matters  During the third quarter of 2005, Sunoco settled certain federal income tax issues and established a provision for certain state and local tax matters, the net effect of which was to increase net income by $18
million. (See Note 4 to the condensed consolidated financial statements.)

Phenol Supply Contract Dispute  During the third quarter of 2005, Sunoco
recognized a $46 million after-tax loss associated with Chemicals phenol supply contract dispute (See Note 3 to the condensed consolidated financial statements.)

Analysis of Condensed Consolidated Statements of Income

Revenues  Total revenues were $29.68 billion in the first nine months of 2006 compared to $24.49 billion in the first nine months of 2005. The 21 percent increase was primarily due to higher refined product
prices. Also contributing to the increase were higher crude oil sales in connection with the crude oil gathering and marketing activities of the Companys Logistics operations. Partially offsetting these positive factors were lower refined
product sales volumes.

Costs and Expenses  Total pretax costs and expenses were $28.29 billion in the current nine-month period compared to $23.38
billion in the first nine months of 2005. The 21 percent increase was primarily due to higher crude oil and refined product acquisition costs resulting from price increases. Also contributing to the increase in total pretax costs and expenses were
higher crude oil costs in connection with the crude oil gathering and marketing activities of the Companys Logistics operations.



29



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##### Table of Contents

RESULTS OF OPERATIONS  THREE MONTHS

Earnings Profile of Sunoco Businesses (after tax)



|                                 |  |                                |     |   |          |   |     |   |  |   |     |  
|-------------------------------- |  | ------------------------------ | --- | - | -------- | - | --- | - |  | - | --- | -
|                                 |  | Three Months EndedSeptember 30 |     |   | Variance |  
|                                 |  | 2006                           |     |   | 2005     |   |    
|                                 |  | (Millions of Dollars)          |    
|Refining and Supply              |  | $                              | 273 |   |          | $ | 341 |   |  | $ | (68 | )
|Retail Marketing                 |  |                                | 77  |   |          |   | 6   |   |  |   | 71  |  
|Chemicals                        |  |                                | 5   |   |          |   | 23  |   |  |   | (18 | )
|Logistics                        |  |                                | 7   |   |          |   | 7   |   |  |   |    |  
|Coke                             |  |                                | 9   |   |          |   | 15  |   |  |   | (6  | )
|Corporate and Other:             |  |                                |     |   |          |   |     |   |  |   |     |  
|Corporate expenses               |  |                                | (11 | ) |          |   | (25 | ) |  |   | 14  |  
|Net financing expenses and other |  |                                | (9  | ) |          |   | (10 | ) |  |   | 1   |  
|Income tax matters               |  |                                |    |   |          |   | 18  |   |  |   | (18 | )
|Phenol supply contract dispute   |  |                                |    |   |          |   | (46 | ) |  |   | 46  |  
|                                 |  |                                |     |   |          |   |     |   |  |   |     |  
|Consolidated net income          |  | $                              | 351 |   |          | $ | 329 |   |  | $ | 22  |  
|                                 |  |                                |     |   |          |   |     |   |  |   |     |  

Analysis of Earnings Profile of Sunoco Businesses

In the three-month period ended September 30, 2006, Sunoco earned $351 million, or $2.76 per share of common stock on a diluted basis, compared to $329 million, or
$2.39 per share, for the third quarter of 2005.



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##### Table of Contents

The $22 million increase in net income in the third quarter of 2006 was primarily due to higher retail gasoline margins
($68 million) and the absence of a loss associated with a phenol supply contract dispute ($46 million). Partially offsetting these positive factors were lower wholesale fuels margins ($33 million); higher expenses ($23 million); lower chemical
margins ($17 million); a higher effective income tax rate ($8 million); and lower earnings from cokemaking operations ($6 million).

Refining and Supply



|                                                     |  |                                        |       |      |   |      
|---------------------------------------------------- |  | -------------------------------------- | ----- | ---- | - | -----
|                                                     |  | For the Three MonthsEnded September 30
|                                                     |  | 2006                                   |       | 2005
|Income (millions of dollars)                         |  | $                                      | 273   |      | $ | 341  
|Wholesale margin* (per barrel):                      |  |                                        |       |      |   |      
|Total Refining and Supply                            |  | $                                      | 10.13 |      | $ | 10.80
|Northeast Refining                                   |  | $                                      | 8.35  |      | $ | 10.52
|MidContinent Refining                                |  | $                                      | 14.90 |      | $ | 11.60
|Crude inputs as percent of crude unit rated capacity |  |                                        | 94    |      |   | 96   
|Throughputs (thousands of barrels daily):            |  |                                        |       |      |   |      
|Crude oil                                            |  |                                        | 849.7 |      |   | 865.7
|Other feedstocks                                     |  |                                        | 67.1  |      |   | 56.7 
|                                                     |  |                                        |       |      |   |      
|Total throughputs                                    |  |                                        | 916.8 |      |   | 922.4
|                                                     |  |                                        |       |      |   |      
|Products manufactured (thousands of barrels daily):  |  |                                        |       |      |   |      
|Gasoline                                             |  |                                        | 442.6 |      |   | 433.1
|Middle distillates                                   |  |                                        | 297.5 |      |   | 315.4
|Residual fuel                                        |  |                                        | 72.2  |      |   | 74.6 
|Petrochemicals                                       |  |                                        | 35.9  |      |   | 34.5 
|Lubricants                                           |  |                                        | 14.2  |      |   | 12.9 
|Other                                                |  |                                        | 86.0  |      |   | 83.5 
|                                                     |  |                                        |       |      |   |      
|Total production                                     |  |                                        | 948.4 |      |   | 954.0
|Less: Production used as fuel in refinery operations |  |                                        | 44.4  |      |   | 48.7 
|                                                     |  |                                        |       |      |   |      
|Total production available for sale                  |  |                                        | 904.0 |      |   | 905.3
|                                                     |  |                                        |       |      |   |      

---

|* | Wholesale sales revenue less related cost of crude oil, other feedstocks, product purchases and terminalling and transportation divided by production available for sale.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Refining and Supply earned $273 million in the current quarter versus $341 million in the third quarter of 2005, a decrease of $68 million.
In comparison with last years hurricane impacted third-quarter, much lower average margins and production in Sunocos Northeast refining system ($90 million) were partially offset by higher realized margins and production in the
MidContinent system ($56 million). Also impacting this years third quarter were higher expenses ($37 million), largely due to higher purchased fuel and maintenance costs and higher operating costs to produce low-sulfur fuels.

In Northeast Refining, margins declined $2.17 per barrel, as much lower wholesale gasoline margins were partially offset by improved petrochemical margins. Also in the
Northeast, unscheduled maintenance reduced production by about three million barrels in the third quarter of 2006. In MidContinent Refining, margins were up $3.30 per barrel due to stronger distillate, petrochemical and lubricant margins.



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##### Table of Contents

Retail Marketing



|                                    |  |                                        |       |      |   |      
|----------------------------------- |  | -------------------------------------- | ----- | ---- | - | -----
|                                    |  | For the Three MonthsEnded September 30
|                                    |  | 2006                                   |       | 2005
|Income (millions of dollars)        |  | $                                      | 77    |      | $ | 6    
|Retail margin* (per barrel):        |  |                                        |       |      |   |      
|Gasoline                            |  | $                                      | 7.25  |      | $ | 3.22 
|Middle distillates                  |  | $                                      | 4.37  |      | $ | 3.70 
|Sales (thousands of barrels daily): |  |                                        |       |      |   |      
|Gasoline                            |  |                                        | 311.0 |      |   | 309.4
|Middle distillates                  |  |                                        | 40.9  |      |   | 42.7 
|                                    |  |                                        |       |      |   |      
|                                    |  |                                        | 351.9 |      |   | 352.1
|                                    |  |                                        |       |      |   |      
|Retail gasoline outlets             |  |                                        | 4,694 |      |   | 4,795
|                                    |  |                                        |       |      |   |      

---

|* | Retail sales price less related wholesale price and terminalling and transportation costs per barrel. The retail sales price is the weighted-average price received through the
various branded marketing distribution channels.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Retail Marketing earned $77 million in the current quarter versus $6 million in the third
quarter of 2005. The $71 million increase in earnings was primarily due to higher average retail gasoline margins ($68 million), which benefited from a decline in wholesale gasoline prices during the current quarter, and higher gains attributable to
the Retail Portfolio Management program ($5 million). Monthly gasoline and diesel throughput per Company-owned or leased outlet was approximately 5 percent higher than the third quarter of 2005.

Chemicals



|                             |  |                                        |       |      |   |      
|---------------------------- |  | -------------------------------------- | ----- | ---- | - | -----
|                             |  | For the Three MonthsEnded September 30
|                             |  | 2006*                                  |       | 2005
|Income (millions of dollars) |  | $                                      | 5     |      | $ | 23   
|Margin** (cents per pound):  |  |                                        |       |      |   |      
|All products***              |  |                                        | 9.3   |      |   | 11.5 
|Phenol and related products  |  |                                        | 7.0   |      |   | 10.7 
|Polypropylene***             |  |                                        | 12.2  |      |   | 12.7 
|Sales (millions of pounds):  |  |                                        |       |      |   |      
|Phenol and related products  |  |                                        | 607   |      |   | 662  
|Polypropylene                |  |                                        | 550   |      |   | 590  
|Other                        |  |                                        | 21    |      |   | 20   
|                             |  |                                        |       |      |   |      
|                             |  |                                        | 1,178 |      |   | 1,272
|                             |  |                                        |       |      |   |      

---

|* | The income and margin data reflect a new pricing formula for 2006 sales of phenol to Honeywell International Inc. based upon the outcome of arbitration decisions.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|** | Wholesale sales revenue less the cost of feedstocks, product purchases and related terminalling and transportation divided by sales volumes.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------



|*** | The polypropylene and all products margins include the impact of a long-term supply contract with Equistar Chemicals, L.P. which is priced on a cost-based formula that includes a
fixed discount.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Chemicals earned $5 million in the third quarter of 2006 versus $23 million in the prior-year quarter. The $18 million
decrease in earnings was due primarily to lower margins ($17 million) and sales volumes ($5 million) for both phenol and polypropylene, partially offset by lower expenses ($2 million).



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##### Table of Contents

Logistics

Sunocos Logistics business earned $7 million in both the third quarters of 2006 and 2005. Higher earnings attributable to Eastern pipeline and terminalling operations and operating results from the Partnerships acquisitions
completed in 2006 and 2005 were offset by lower earnings from crude oil acquisition and marketing activities and Sunocos reduced ownership in the Partnership subsequent to the public equity offerings in 2006 and 2005 (see Financial
Condition  Other Cash Flow Information below).

Coke

Coke earned $9 million in the third quarter of 2006 versus $15 million in the third quarter of 2005. The $6 million decrease in earnings was due primarily to a $5 million partial phase-out of tax credits and to the
absence of a gain from an insurance litigation settlement, partially offset by lower selling, general and administrative expenses. Year-to-date, Sun Coke recorded only 53 percent of the benefit of the tax credits that otherwise would have been
available without regard to the phase-out. (See Note 2 to the condensed consolidated financial statements.)

Corporate and Other

Corporate Expenses  Corporate administrative expenses were $11 million after tax in the current three-month period versus $25 million in the third quarter of 2005.
The $14 million decrease was primarily due to lower accruals for stock-related incentive compensation.

Net Financing Expenses and Other  Net
financing expenses and other were $9 million after tax in the third quarter of 2006 versus $10 million in the prior-year quarter. The $1 million decline was primarily due to higher interest income ($3 million). Net financing expenses and other for
the third quarter of 2006 also includes a $5 million net after-tax gain attributable to income tax matters (see Note 4 to the condensed consolidated financial statements) and a $7 million after-tax charge attributable to a correction of an error in
the computation of the preferential return of third-party investors in Sunocos cokemaking operations (see Note 2 to the condensed consolidated financial statements).

Income Tax Matters  For a discussion of the $18 million after-tax net gain related to income tax matters recognized in the third quarter of 2005, see Note 4 to the condensed consolidated financial statements.

Phenol Supply Contract Dispute  For a discussion of the $46 million after-tax loss associated with Chemicals phenol supply contract dispute
recognized in the third quarter of 2005, see Note 3 to the condensed consolidated financial statements.

Analysis of
Condensed Consolidated Statements of Income

Revenues  Total revenues were $10.50 billion in the third quarter of 2006 compared to $9.30 billion
in the third quarter of 2005. The 13 percent increase was primarily due to higher refined product prices. Also contributing to the increase were higher crude oil sales in connection with the crude oil gathering and marketing activities of the
Companys Logistics operations. Partially offsetting these positive factors were lower refined product sales volumes.

Costs and Expenses  Total
pretax costs and expenses were $9.93 billion in the current quarter compared to $8.78 billion in the third quarter of 2005. The 13 percent increase was primarily due to higher crude oil and refined product acquisition costs resulting from price
increases. Also contributing to the increase in total pretax costs and expenses were higher crude oil costs in



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connection with the crude oil gathering and marketing activities of the Companys Logistics operations.

FINANCIAL CONDITION

Cash and Working Capital

At September 30, 2006, Sunoco had cash and cash equivalents of $218 million compared to $919 million at
December 31, 2005, and had a working capital deficit of $705 million compared to a working capital deficit of $523 million at December 31, 2005. The $701 million decrease in cash and cash equivalents was due to a $755 million net use of
cash in investing activities and a $678 million net use of cash in financing activities, partially offset by $732 million of net cash provided by operating activities (cash generation). Sunocos working capital position is
considerably stronger than indicated because of the relatively low historical costs assigned under the LIFO method of accounting for most of the inventories reflected in the condensed consolidated balance sheets. The current replacement cost of all
such inventories exceeded their carrying value at September 30, 2006 by $2,391 million. Inventories valued at LIFO, which consist of crude oil, and petroleum and chemical products, are readily marketable at their current replacement values.
Management believes that the current levels of cash and working capital are adequate to support Sunocos ongoing operations.

Cash Flows from Operating Activities

In the first nine months of 2006, Sunocos cash generation was $732 million compared to $1,273
million in the first nine months of 2005. This $541 million decrease in cash generation was primarily due to an increase in working capital levels pertaining to operating activities. Also contributing to the decrease in cash generation were a $95
million payment of damages to Honeywell in connection with a phenol supply contract dispute and the absence of $48 million of cash proceeds received in the first quarter of 2005 in connection with a power contract restructuring. Partially offsetting
these negative factors was an increase in net income. The increase in working capital levels reflects an increase in crude oil and refined product inventories and higher incentive compensation payments to employees.

Other Cash Flow Information

In the
second quarter of 2005, the Partnership issued 2.8 million limited partnership units at a price of $37.50 per unit. Proceeds from the offering, net of underwriting discounts and offering expenses, totaled approximately $99 million. These
proceeds were used to redeem an equal number of limited partnership units owned by Sunoco. In the third quarter of 2005, the Partnership issued an additional 1.6 million limited partnership units at a price of $39.00 per unit. Proceeds from the
offering, which totaled approximately $61 million, net of underwriting discounts and offering expenses, were used by the Partnership principally to repay a portion of the borrowings under its revolving credit facility. In the second quarter of 2006,
the Partnership issued $175 million of senior notes due 2016 and 2.7 million limited partnership units at a price of $43.00 per unit. Proceeds from the 2006 offerings, net of underwriting discounts and offering expenses, totaled approximately
$173 and $110 million, respectively. These proceeds were used by the Partnership in part to repay the outstanding borrowings under its revolving credit facility with the balance used to fund a portion of the Partnerships 2006 growth capital
program. Upon completion of the equity offerings, Sunocos interest in the Partnership, including its 2 percent general partnership interest, decreased to 43 percent.

As of September 30, 2006, Sunoco owned 12.06 million limited partnership units consisting of 6.37 million common units and 5.69 million subordinated units.



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Distributions on Sunocos subordinated units are payable only after the minimum quarterly distributions of $.45 per unit for the common units held by
the public and Sunoco, including any arrearages, have been made. The subordinated units convert to common units if certain financial tests related to earning and paying the minimum quarterly distribution for the preceding three consecutive one-year
periods have been met. In February 2006 and 2005, when the quarterly cash distributions pertaining to the fourth quarters of 2005 and 2004 were paid, the first two three-year requirements were satisfied. As a result, a total of 5.70 million of
Sunocos subordinated units have been converted to common units, 2.85 million each in February 2006 and February 2005. If the Partnership continues to meet the financial tests through the fourth quarter of 2006, all of Sunocos
remaining 5.69 million subordinated units would be converted to common units in February 2007.

The Partnerships issuance of common units to the
public has resulted in an increase in the value of Sunocos proportionate share of the Partnerships equity as the issuance price per unit exceeded Sunocos carrying amount per unit at the time of issuance. The resultant gain to
Sunoco on these transactions, which totaled approximately $150 million pretax at September 30, 2006, has been deferred as a component of minority interest in the Companys condensed consolidated balance sheets as the common units issued do
not represent residual interests in the Partnership due to Sunocos ownership of the subordinated units. The deferred gain would be recognized in income when Sunocos remaining subordinated units convert to common units at which time the
common units become the residual interests.

Financial Capacity

Management currently believes that future cash generation will be sufficient to satisfy Sunocos ongoing capital requirements, to fund its pension obligations (see
Pension Plan Funded Status below) and to pay the current level of cash dividends on Sunocos common stock. However, from time to time, the Companys short-term cash requirements may exceed its cash generation due to various
factors including reductions in margins for products sold and increases in the levels of capital spending (including acquisitions) and working capital. During those periods, the Company may supplement its cash generation with proceeds from financing
activities.

The Company has a revolving credit facility (the Facility) totaling $900 million, which matures in August 2011. The Facility
provides the Company with access to short-term financing and is intended to support the issuance of commercial paper, letters of credit and other debt. The Company also can borrow directly from the participating banks under the Facility. The
Facility is subject to commitment fees, which are not material. Under the terms of the Facility, Sunoco is required to maintain tangible net worth (as defined in the Facility) in an amount greater than or equal to targeted tangible net worth
(targeted tangible net worth being determined by adding $1.125 billion and 50 percent of the excess of net income over share repurchases (as defined in the Facility) for each quarter ended after March 31, 2004). At September 30, 2006, the
Companys tangible net worth was $2.5 billion and its targeted tangible net worth was $1.5 billion. The Facility also requires that Sunocos ratio of consolidated net indebtedness, including borrowings of Sunoco Logistics Partners L.P., to
consolidated capitalization (as those terms are defined in the Facility) not exceed .60 to 1. At September 30, 2006, this ratio was .33 to 1. At September 30, 2006, the Facility was being used to support $150 million of commercial paper
(see below) and $103 million of floating-rate notes due 2034.

Sunoco Logistics Partners L.P. has a $300 million revolving credit facility, which matures
in November 2010. This facility is available to fund the Partnerships working capital requirements, to finance acquisitions, and for general partnership purposes. It includes a $20 million distribution sublimit that is available for
distributions to third-party unitholders and Sunoco. During the first quarter of 2006, the Partnership borrowed $109 million against the facility to fund its March 2006 acquisition of two separate crude oil pipeline systems and related storage



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facilities located in Texas. During the second quarter of 2006, the Partnership used a portion of the proceeds of its May 2006 debt and equity offerings
under its shelf registration statement (see Other Cash Flow Information above) to repay the $216 million of then outstanding borrowings under the credit facility. In the third quarter of 2006, the Partnership utilized cash and a $46
million draw against the facility to finance the $65 million acquisition from Sunoco of its 55 percent interest in the Mid-Valley Pipeline. The credit facility contains convenants requiring the Partnership to maintain a ratio of up to 4.75 to 1 of
its consolidated total debt to its consolidated EBITDA (each as defined in the credit facility) and an interest coverage ratio (as defined in the credit facility) of at least 3 to 1. At September 30, 2006, the Partnerships ratio of its
consolidated debt to its consolidated EBITDA was 3.0 to 1 and the interest coverage ratio was 4.6 to 1.

Epsilon, the Companys consolidated joint
venture, was unable to repay its $120 million term loan that was due in September 2006 and the $31 million of borrowings under its $40 million revolving credit facility that matured in September 2006. Upon such default, the lenders made a demand on
Sunoco, Inc., as guarantor, and Sunoco, Inc. satisfied its guarantee obligations in the third quarter of 2006 principally utilizing cash proceeds generated through the issuance of $150 million of commercial paper under its revolving credit facility.
Sunoco, Inc. is now subrogated to the rights and privileges of the former debtholders and is working with Epsilon to formulate a plan for payment of the debt to Sunoco, Inc.

The following table sets forth Sunocos outstanding debt (in millions of dollars):



|                                  |  |                      |       |                     |   |      
|--------------------------------- |  | -------------------- | ----- | ------------------- | - | -----
|                                  |  | At September 30 2006 |       | At December 31 2005
|Short-term borrowings             |  | $                    | 150   |                     | $ |     
|Current portion of long-term debt |  |                      | 62    |                     |   | 177  
|Long-term debt                    |  |                      | 1,285 |                     |   | 1,234
|                                  |  |                      |       |                     |   |      
|Total debt                        |  | $                    | 1,497 |                     | $ | 1,411
|                                  |  |                      |       |                     |   |      

Management believes there is sufficient financial capacity available to pursue strategic opportunities as they
arise. In addition, the Company has the option of issuing additional common or preference stock or selling an additional portion of its Sunoco Logistics Partners L.P. common units, and Sunoco Logistics Partners L.P. has the option of issuing
additional common units.

The Company has a shelf registration statement which provides the Company with financing flexibility to offer senior and
subordinated debt, common and preferred stock, warrants and trust preferred securities. At September 30, 2006, $1,050 million remains available under this shelf registration statement. Sunoco Logistics Partners L.P. also has a shelf
registration statement, under which the Partnership may sell debt or common units in primary offerings to the public, and Sunoco may sell common units, which represent a portion of its limited partnership interests in the Partnership, in secondary
offerings to the public. At September 30, 2006, $210 million remains available to the Partnership under this registration statement for primary offerings and up to five million common units remain available to Sunoco for secondary offerings.
The amount, type and timing of any future financings under these registration statements will depend upon, among other things, the Companys and Partnerships funding requirements, market conditions and compliance with covenants contained
in the Companys and Partnerships respective debt obligations and revolving credit facilities.

Off-Balance
Sheet Arrangement

A wholly owned subsidiary of the Company, Sunoco Receivables Corporation, Inc., is a party to an accounts receivable securitization
facility that terminates in December 2006 under which the subsidiary may sell on a revolving basis up to a $200 million undivided interest in a designated pool of certain of Sunocos accounts receivable. No receivables have been sold to third
parties under this facility. Sunoco currently is in negotiations to extend the term of this facility to December 2009.



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Capital Expenditures

In December 2005, the Company announced that it expected capital expenditures over the 2006-2008 period in Refining and Supply would be approximately $1.9 billion,
including $775 million for income improvement projects. The current status of these capital projects ranges from the preliminary design and engineering phase to the construction phase. During 2006, market conditions for engineering, procurement and
construction of refinery projects have tightened, resulting in increasing costs and project delays. In addition, as more detailed engineering work is completed, increases in the original scope of work have been identified.

The three-year Refining and Supply capital plan included a $300 million project to expand the capacity of one of the fluid catalytic cracking units at the Philadelphia
refinery by 15 thousand barrels per day (the Philadelphia Project) which was expected to be completed in early 2007 and a $365 million project to expand the Toledo refinerys crude unit capacity by 40 thousand barrels per
day and its conversion capacity by 24 thousand barrels per day by 2008 (the Toledo Project). Both projects included significant capital for related base infrastructure and refinery turnarounds, as well as capital required under a
2005 Consent Decree which settled certain alleged violations at its refineries under the Clean Air Act. The Philadelphia Project is still expected to be completed in early 2007, but its cost is now projected to be approximately $400 million. Phase I
of the Toledo Project, which increases the facilitys refining capacity by 20 thousand barrels per day, will also be completed in early 2007 at a cost of approximately $40 million as originally planned. However, the Company is currently
considering its investment strategy for the balance of the Toledo Project to determine the appropriate scope, timing and cost for this project.

While a
significant change in the overall level of total capital spending in Refining and Supply over the 2006-2008 period is not expected, the Company currently believes that the cost of many of these capital projects will be significantly higher than
originally anticipated. The pressures on project scope, costs and timing are also likely to result in the extension of project completion dates and the deferral of some lower-return projects. The Company may also elect to cancel or reduce the scope
of projects which do not meet required investment-return criteria.

PENSION PLAN FUNDED STATUS

The following table sets forth the components of the change in market value of the investments in Sunocos defined benefit pension plans (in millions of dollars):



|                                                                    |  |                                      |       |   |                              |   |       |  
|------------------------------------------------------------------- |  | ------------------------------------ | ----- | - | ---------------------------- | - | ----- | -
|                                                                    |  | Nine Months Ended September 30, 2006 |       |   | Year Ended December 31, 2005 |  
|Market value of investments at beginning of period                  |  | $                                    | 1,196 |   |                              | $ | 1,158 |  
|Increase (reduction) in market value of investments resulting from: |  |                                      |       |   |                              |   |       |  
|Net investment income                                               |  |                                      | 85    |   |                              |   | 92    |  
|Company contributions                                               |  |                                      | 100   |   |                              |   | 100   |  
|Plan benefit payments                                               |  |                                      | (130  | ) |                              |   | (154  | )
|                                                                    |  |                                      |       |   |                              |   |       |  
|                                                                    |  | $                                    | 1,251 |   |                              | $ | 1,196 |  
|                                                                    |  |                                      |       |   |                              |   |       |  

Management does not expect to make any additional contributions to its funded defined benefit plans during the
remainder of 2006, but currently estimates making $100 million of contributions in 2007. Management believes any additional contributions to the pension plans can be funded without a significant impact on liquidity. Future changes in the financial
markets and/or interest rates could result in additional significant increases or decreases to the accumulated other



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comprehensive loss component of shareholders equity and to future pension expense and funding requirements.

DIVIDENDS AND SHARE REPURCHASES

On July 7, 2005, the
Companys Board of Directors (Board) approved a two-for-one split of Sunocos common stock to be effected in the form of a stock dividend. The shares were distributed on August 1, 2005 to shareholders of record as of
July 18, 2005. In connection with the common stock split, the number of authorized shares of common stock was increased from 200 million to 400 million, and the shares of common stock reserved for issuance pertaining to Sunocos
6-3/4 percent convertible debentures and various employee benefit plans were proportionally increased in accordance with the terms of those respective agreements and plans. Share and per-share data (except par value) presented for all periods
reflect the effect of the stock split.

The Company increased the quarterly cash dividend paid on common stock from $.15 per share ($.60 per year) to $.20
per share ($.80 per year) beginning with the second quarter of 2005 and then to $.25 per share ($1.00 per year) beginning with the second quarter of 2006.

During the first nine months of 2006, the Company repurchased 10,160,981 shares of common stock for $734 million. In September 2006 and July 2006, the Company announced that its Board had approved additional share repurchase authorizations
totaling $1 billion and $500 million, respectively. At September 30, 2006, the Company had a remaining authorization from its Board to purchase up to $1.07 billion of Company common stock in the open market from time to time depending on
prevailing market conditions and available cash (see Item 2. Unregistered Sales of Equity Securities and Use of Proceeds below).

NEW ACCOUNTING PRONOUNCEMENTS

For a discussion of Statement of Financial Accounting Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, which must be implemented effective December 31, 2006 and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement
No. 109, which must be implemented effective January 1, 2007, see Note 13 to the condensed consolidated financial statements.

FORWARD-LOOKING STATEMENTS

Some of the information included in this quarterly report on Form 10-Q contains forward-looking statements
(as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). These forward-looking statements discuss estimates, goals, intentions and expectations as to future trends, plans, events,
results of operations or financial condition, or state other information relating to the Company, based on current beliefs of management as well as assumptions made by, and information currently available to, Sunoco. Forward-looking statements
generally will be accompanied by words such as anticipate, believe, budget, could, estimate, expect, forecast, intend, may, plan,
possible, potential, predict, project, scheduled, should, or other similar words, phrases or expressions that convey the uncertainty of future events or outcomes. Although
management believes these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of
risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:



| |  |  | Changes in refined product and chemical margins;
| | - |  | ------------------------------------------------



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##### Table of Contents

| |  |  | Variation in petroleum-based commodity prices and availability of crude oil and feedstock supply or transportation;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Effects of transportation disruptions;
| | - |  | --------------------------------------



| |  |  | Changes in the price differentials between light-sweet and heavy-sour crude oils;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Changes in the marketplace which may affect supply and demand for Sunocos products;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Changes in competition and competitive practices, including the impact of foreign imports;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Effects of weather conditions and natural disasters on the Companys operating facilities and on product supply and demand;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Age of, and changes in the reliability, efficiency and capacity of, the Companys operating facilities or those of third parties;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in the level of operating expenses;
| | - |  | -------------------------------------------



| |  |  | Effects of adverse events relating to the operation of the Companys facilities and to the transportation and storage of hazardous materials (including equipment malfunction,
explosions, fires, spills, and the effects of severe weather conditions);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in the expected level of environmental capital, operating or remediation expenditures;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Delays and/or costs related to construction, improvements and/or repairs of facilities (including shortages of skilled labor, the issuance of applicable permits and inflation);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in product specifications;
| | - |  | ----------------------------------



| |  |  | Availability and pricing of ethanol;
| | - |  | ------------------------------------



| |  |  | Political and economic conditions in the markets in which the Company, its suppliers or customers operate, including the impact of potential terrorist acts and international
hostilities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Military conflicts between, or internal instability in, one or more oil producing countries, governmental actions and other disruptions in the ability to obtain crude oil;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ability to conduct business effectively in the event of an information systems failure;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Ability to identify acquisitions, execute them under favorable terms and integrate them into the Companys existing businesses;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ability to enter into joint ventures and other similar arrangements under favorable terms;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Changes in the availability and cost of debt and equity financing;
| | - |  | ------------------------------------------------------------------



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| |  |  | Changes in the credit ratings assigned to the Companys debt securities or credit facilities;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Changes in insurance markets impacting costs and the level and types of coverage available;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Changes in tax laws or their interpretations, including pension funding requirements;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Changes in financial markets impacting pension expense and funding requirements;
| | - |  | --------------------------------------------------------------------------------



| |  |  | Risks related to labor relations and workplace safety;
| | - |  | ------------------------------------------------------



| |  |  | Nonperformance by or disputes with major customers, suppliers, dealers, distributors or other business partners;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | General economic, financial and business conditions which could affect Sunocos financial condition and results of operations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in applicable statutes and government regulations or their interpretations, including those relating to the environment and global warming;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Claims of the Companys noncompliance with statutory and regulatory requirements; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Changes in the status of, or initiation of new, litigation, arbitration, or other proceedings to which the Company is a party or liability resulting from such litigation,
arbitration, or other proceedings, including natural resource damage claims.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The factors identified above are believed to be important
factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by Sunoco. Other factors not discussed herein could also have material adverse
effects on the Company. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the foregoing cautionary statements. The Company undertakes no obligation to update publicly any forward-looking statement
(or its associated cautionary language) whether as a result of new information or future events.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Sunoco uses derivative instruments to hedge a variety of commodity price risks. During the second quarter of 2006, Sunoco increased its use of ethanol as an oxygenate component in gasoline in response to the new renewable fuels mandate for
ethanol and the discontinuance of the use of MTBE as a gasoline blending component. Currently, most of the ethanol purchased by Sunoco is through normal purchase fixed-price contracts. To reduce the margin risk created by these fixed-price
contracts, the Company entered into derivative contracts to sell gasoline at a fixed price to hedge a similar volume of forecasted floating-price gasoline sales over the term of the ethanol contracts. In effect, these derivative contracts have
locked in an acceptable differential between the gasoline price and the cost of the ethanol purchases for gasoline blending during this period.



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As a result of the significant decrease in the price of gasoline, the fair value of the fixed-price
gasoline contracts increased $89 million ($53 million after tax) in the third quarter of 2006. As these derivative contracts have been designated as cash flow hedges, this increase in fair value has not been included in net income but
rather has been reflected in the net hedging gains component of comprehensive income. The fair value of these contracts at the time the positions are closed will be recognized in income when the hedged items are recognized in income, with
Sunocos margin reflecting the differential between the gasoline sales prices hedged to a fixed price and the cost of fixed-price ethanol purchases.



|Item 4. | Controls and Procedures
|------- | -----------------------

As required by Rule 13a-15
under the Exchange Act, as of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures. This evaluation was carried
out under the supervision and with the participation of the Companys management, including the Companys Chairman, Chief Executive Officer and President and the Companys Senior Vice President and Chief Financial Officer. Based upon
that evaluation, the Companys Chairman, Chief Executive Officer and President and the Companys Senior Vice President and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Companys Chairman, Chief Executive Officer and President and
the Companys Senior Vice President and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in the Companys internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.

PART II

OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

In August 2006, Mid-Valley
Pipeline Company (an entity in which Sunoco, Inc. through Sunoco Logistics Partners L.P. owns a 55-percent interest), Sun Pipe Line Company (a subsidiary of Sunoco, Inc.), and Sunoco Pipeline L.P. (a subsidiary of Sunoco Logistics Partners L.P.)
reached a settlement with the U.S. Environmental Protection Agency, the U.S. Department of Justice and the Kentucky Environmental and Public Protection Cabinet relating to certain alleged violations of the federal Clean Water Act and certain
Kentucky statutes and regulations in a total amount of approximately $3.1 million. Sun Pipe Line Company and Sunoco Pipeline L.P. expect to be fully indemnified for costs associated with this settlement by Mid-Valley Pipeline Company. The Consent
Decree concerning this settlement was lodged with the U.S. District Court in Kentucky on August 15, 2006. The 30-day comment period expired on September 20, 2006 and a motion to enter the Consent Decree was filed on October 13, 2006,
and is pending. The alleged violations



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arise from a release in November 2000 in Louisiana and a release in January 2005 in Kentucky. (See also the Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005 and the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005.)

Many other legal and administrative proceedings are pending or possible against Sunoco from its current and past operations, including proceedings related to commercial and tax disputes, product liability, antitrust, employment claims,
leaks from pipelines and underground storage tanks, natural resource damage claims, premises-liability claims, allegations of exposures of third parties to toxic substances (such as benzene or asbestos) and general environmental claims. Although the
ultimate outcome of these proceedings cannot be ascertained at this time, it is reasonably possible that some of them could be resolved unfavorably to Sunoco. Management of Sunoco believes that any liabilities that may arise from such proceedings
would not be material in relation to Sunocos business or consolidated financial position at September 30, 2006.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes
to the risk factors faced by the Company since December 31, 2005.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

The table below provides a summary of all repurchases by the Company of its common stock during the three-month period ended September 30, 2006:



|               |  |                                                  |  |                              |       |                                                                                                   |       |                                                                                                      |   |      
|-------------- |  | ------------------------------------------------ |  | ---------------------------- | ----- | ------------------------------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------------- | - | -----
|Period         |  | Total Number Of Shares Purchased (In Thousands)* |  | Average Price Paid Per Share |       | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (In Thousands)** |       | Approximate DollarValue of Shares ThatMay Yet Be PurchasedUnder the Plans orPrograms (In Millions)**
|July 2006      |  | 3                                                |  | $                            | 66.92 |                                                                                                   |      |                                                                                                      | $ | 609  
|August 2006    |  | 4,811                                            |  | $                            | 76.84 |                                                                                                   | 4,811 |                                                                                                      | $ | 240  
|September 2006 |  | 2,507                                            |  | $                            | 66.34 |                                                                                                   | 2,507 |                                                                                                      | $ | 1,074
|               |  |                                                  |  |                              |       |                                                                                                   |       |                                                                                                      |   |      
|Total          |  | 7,321                                            |  | $                            | 73.24 |                                                                                                   | 7,318 |                                                                                                      |   |      
|               |  |                                                  |  |                              |       |                                                                                                   |       |                                                                                                      |   |      

---

|* | All of the shares repurchased during the three-month period ended September 30, 2006 were acquired pursuant to the repurchase programs that Sunoco publicly announced on
March 3, 2005 and July 6, 2006 (see below), except for the 3 thousand shares acquired in July 2006, which were purchased from an employee. These shares were acquired in connection with the settlement of a tax withholding obligation
arising from payment of a common stock unit award.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|** | On March 3, 2005, the Companys Board of Directors (Board) approved a $500 million share repurchase program with no stated expiration date. On
September 7, 2006 and July 6, 2006, Sunoco publicly announced that its Board approved additional share repurchase authorizations totaling $1 billion and $500 million, respectively, with no stated expiration dates.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 6. | Exhibits
|------- | --------

Exhibits:



|       |  |                                                                                                                                                            
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10   - |  | Amended Schedule 2.1 to the Directors Deferred Compensation and Benefits Trust Agreement.                                                                 
|       | 
|12   - |  | Statements re Sunoco, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges for the Nine-Month Periods Ended September 30, 2006 and 2005.



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##### Table of Contents

|       |  |                                                                                                                                                                                                                    
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|31.1 - |  | Certification Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                     
|       | 
|31.2 - |  | Certification Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                     
|       | 
|32.1 - |  | Certification Pursuant to Exchange Act Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|       | 
|32.2 - |  | Certification Pursuant to Exchange Act Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

*******

We are pleased to furnish this Form 10-Q to shareholders who request it by writing to:

Sunoco, Inc.

Investor Relations

1735 Market Street

Philadelphia, PA 19103-7583



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##### Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.



|             |  |                               
|------------ |  | ------------------------------
|SUNOCO, INC.
|             | 
|BY           |  | /s/ JOSEPH P. KROTT           
|             |  | Joseph P. Krott               
|             |  | Comptroller                   
|             |  | (Principal Accounting Officer)

DATE November 1, 2006



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit                                                                                                                                                                                                            
|              | 
|10            |  | Amended Schedule 2.1 to the Directors Deferred Compensation and Benefits Trust Agreement.                                                                                                                         
|              | 
|12            |  | Statements re Sunoco, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges for the Nine-Month Periods Ended September 30, 2006 and 2005.                                                        
|              | 
|31.1          |  | Certification Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                     
|              | 
|31.2          |  | Certification Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                     
|              | 
|32.1          |  | Certification Pursuant to Exchange Act Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|              | 
|32.2          |  | Certification Pursuant to Exchange Act Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.