10-Q

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 June 30, 2003

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.)

TEN PENN CENTER, 1801 MARKET STREET, PHILADELPHIA, PA 19103-1699

(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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  x    NO  ¨

At June 30, 2003, there were 76,930,470 shares of Common Stock, $1 par value outstanding.

SUNOCO, INC.

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2003 and 2002	1
	Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2003 and 2002	2
	Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 4	Submission of Matters to a Vote of Security Holders	33
Item 6.	Exhibits and Reports on Form 8-K	34
SIGNATURE		36

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Sunoco, Inc. and Subsidiaries

(Millions of Dollars and Shares Except Per Share Amounts)

	For the Six Months Ended June 30
	2003			2002*
	(UNAUDITED)
REVENUES
Sales and other operating revenue (including consumer excise taxes)	$	8,729		$	6,445
Interest income		5			3
Other income (Note 2)		25			39
		8,759			6,487
COSTS AND EXPENSES
Cost of products sold and operating expenses (Note 3)		6,951			5,160
Consumer excise taxes		927			888
Selling, general and administrative expenses (Note 2)		338			300
Depreciation, depletion and amortization		174			161
Payroll, property and other taxes		51			51
Provision for write-down of assets and other matters (Note 4)		—			26
Interest cost and debt expense		57			54
Interest capitalized		(1	)		(1	)
		8,497			6,639
Income (loss) before income tax expense (benefit)		262			(152	)
Income tax expense (benefit)		95			(54	)
NET INCOME (LOSS)	$	167		$	(98	)
Net income (loss) per share of common stock:
Basic	$	2.18		$	(1.29	)
Diluted	$	2.16		$	(1.29	)
Weighted average number of shares outstanding (Note 5):
Basic		76.7			76.1
Diluted		77.3			76.1
Cash dividends paid per share of common stock	$	.50		$	.50

* Restated to reflect the adoption of the fair value method of accounting for employee stock compensation plans effective January 1, 2002 (Note 3).

(See Accompanying Notes)

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Sunoco, Inc. and Subsidiaries

(Millions of Dollars and Shares Except Per Share Amounts)

	For the Three Months Ended June 30
	2003		2002*
	(UNAUDITED)
REVENUES
Sales and other operating revenue (including consumer excise taxes)	$	4,169	$	3,527
Interest income		2		2
Other income (Note 2)		18		27
		4,189		3,556
COSTS AND EXPENSES
Cost of products sold and operating expenses		3,250		2,780
Consumer excise taxes		490		460
Selling, general and administrative expenses (Note 2)		178		146
Depreciation, depletion and amortization		90		82
Payroll, property and other taxes		24		23
Provision for write-down of assets and other matters (Note 4)		—		26
Interest cost and debt expense		29		28
Interest capitalized		—		(1	)
		4,061		3,544
Income before income tax expense		128		12
Income tax expense		47		3
NET INCOME	$	81	$	9
Net income per share of common stock:
Basic
Diluted	$	1.05	$	.12
	$	1.04	$	.12
Weighted average number of shares outstanding (Note 5):
Basic		76.8		76.3
Diluted		77.6		77.2
Cash dividends paid per share of common stock	$	.25	$	.25

* Restated to reflect the adoption of the fair value method of accounting for employee stock compensation plans effective January 1, 2002 (Note 3).

(See Accompanying Notes)

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CONDENSED CONSOLIDATED BALANCE SHEETS

Sunoco, Inc. and Subsidiaries

(Millions of Dollars)

	At June 30 2003		At December 31 2002
	(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents	$	240	$	390
Accounts and notes receivable, net		1,024		923
Inventories:
Crude oil		175		153
Petroleum and chemical products		301		227
Materials, supplies and other		123		111
Deferred income taxes		93		94
Total Current Assets		1,956		1,898
Investments and long-term receivables		222		220
Properties, plants and equipment		7,833		7,522
Less accumulated depreciation, depletion and amortization		3,570		3,423
Properties, plants and equipment, net		4,263		4,099
Prepaid retirement costs		5		5
Deferred charges and other assets (Note 6)		375		219
Total Assets	$	6,821	$	6,441
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	1,425	$	1,316
Accrued liabilities		332		339
Current portion of long-term debt		103		2
Taxes payable		210		119
Total Current Liabilities		2,070		1,776
Long-term debt		1,355		1,453
Retirement benefit liabilities		645		653
Deferred income taxes		564		490
Other deferred credits and liabilities		198		196
Commitments and contingent liabilities (Note 7)
Minority interests (Note 2)		451		479
Shareholders’ equity (Note 8)		1,538		1,394
Total Liabilities and Shareholders’ Equity	$	6,821	$	6,441

(See Accompanying Notes)

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Sunoco, Inc. and Subsidiaries

(Millions of Dollars)

	For the Six Months Ended June 30
	2003			2002*
	(UNAUDITED)
INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	167		$	(98	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for write-down of assets and other matters		—			26
Noncash reduction in minority interest in cokemaking operations (Note 2)		(2	)		(19	)
Depreciation, depletion and amortization		174			161
Deferred income tax expense		77			16
Payments less than (in excess of) expense for retirement plans		(9	)		5
Changes in working capital pertaining to operating activities, net of effect of acquisitions:
Accounts and notes receivable		(101	)		(143	)
Inventories		(76	)		27
Accounts payable and accrued liabilities		98			135
Taxes payable		92			(27	)
Other		5			3
Net cash provided by operating activities		425			86
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(165	)		(158	)
Acquisitions, net of seller financing of $4 in 2003 (Note 6)		(356	)		7
Proceeds from divestments		13			10
Other		(4	)		7
Net cash used in investing activities		(512	)		(134	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term borrowings		—			(279	)
Proceeds from issuance of long-term debt		—			247
Repayments of long-term debt		(2	)		(2	)
Net proceeds from issuance of Sunoco Logistics Partners L.P. limited partnership units (Note 2)		—			98
Cash distributions to investors in cokemaking operations		(28	)		(15	)
Cash dividend payments		(38	)		(38	)
Proceeds from issuance of common stock under management incentive and employee option plans		12			24
Other		(7	)		(3	)
Net cash provided by (used in) financing activities		(63	)		32
Net decrease in cash and cash equivalents		(150	)		(16	)
Cash and cash equivalents at beginning of period		390			42
Cash and cash equivalents at end of period	$	240		$	26

* Reclassified to conform to the 2003 presentation.

(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 accounting principles generally accepted in the United States 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 provision for write-down of assets and other matters (Note 4). Results for the three and six months ended June 30, 2003 are not necessarily indicative of results for the full year 2003.

2. Minority Interests.

Cokemaking Operations

In July 2002, Sunoco transferred an additional interest in its Indiana Harbor cokemaking operations to a third-party investor for $215 million in cash. Since 1995, Sunoco has received $724 million in exchange for interests in its Indiana Harbor and Jewell cokemaking operations in four separate transactions. Sunoco did not recognize any gain at the dates of these transactions as the third-party investors are entitled to a preferential return on their investments, currently equal to 98 percent of the cash flows and tax benefits from the respective cokemaking operations, during a preferential return period which continues until they recover their investments and achieve a cumulative return that averages approximately 10 percent after tax thereon. 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 expected to end in 2011. The preferential return period for the first investor in the Indiana Harbor operation ended in July 2002, at which time the first investor’s interest in the cash flows and tax benefits from Indiana Harbor decreased from 95 percent to 5 percent. As a result of the additional investment in July 2002, third-party investors’ interests increased from 5 percent to 98 percent. The new investor’s preferential return period for the Indiana Harbor operation is expected to end in 2007. The estimated lengths of these preferential return periods are based upon the Company’s current expectations of future operations, including sales volumes and prices, raw material and operating costs and capital expenditure levels. Better-than-expected results will shorten the investors’ preferential return periods, while lower-than-expected results will lengthen the periods.

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

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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 for the six-month periods ended June 30, 2003 and 2002 (in millions of dollars):

	Six Months Ended June 30
	2003			2002
Balance at beginning of year	$	379		$	223
Nonconventional fuel credit and other tax benefits*		(30	)		(32	)
Preferential return*		28			13
Cash distributions to third-party investors		(28	)		(15	)
Balance at end of period	$	349		$	189

__________

* The nonconventional fuel credit and other tax benefits and the preferential return, which comprise the noncash reduction in the minority interest in cokemaking operations, are included in other income in the condensed consolidated statements of operations.

In each of the four transactions in which the Company transferred interests in its cokemaking operations to third-party investors, Sunoco has provided tax indemnifications to the third parties for certain tax benefits allocated to them during the preferential return periods. In certain of these cases, the Company also has the option to purchase the third-party investors’ interests. These indemnifications would require the Company to make payments 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 which would be available to them. These tax indemnifications are in effect until the applicable tax returns are no longer subject to Internal Revenue Service review. Although the Company believes it is remote that it will be required to make any payments under these indemnifications, at June 30, 2003, the maximum potential payment under the tax indemnifications and the options to purchase the third-party investors’ interests, if exercised, would have been approximately $860 million. If this were to occur, the minority interest balance would be reduced by approximately $310 million.

Logistics Operations

On February 8, 2002, the Company contributed a substantial portion of its Logistics business to Sunoco Logistics Partners L.P., a master limited partnership formed in 2001 (the “Partnership”), in exchange for a 73.2 percent limited partnership interest, a 2 percent general partnership interest, incentive distribution rights and a special distribution, representing the net proceeds from the Partnership’s issuance of $250 million of ten-year 7.25 percent senior notes. The Partnership concurrently issued 5.75 million limited partnership units, representing a 24.8 percent interest in the Partnership, in an initial public offering at a price of $20.25 per unit. Proceeds from the offering were used by the Partnership to establish working capital that was not contributed to the Partnership by Sunoco. Sunoco liquidated this retained working capital subsequent to the

6

Partnership’s formation. The accounts of the Partnership continue to be included in Sunoco’s consolidated financial statements. No gain or loss was recognized on this transaction.

Concurrent with the offering, Sunoco entered into various agreements with the Partnership which require Sunoco to pay for minimum storage and throughput usage of certain Partnership assets. These agreements also establish fees for administrative services provided by Sunoco to the Partnership and indemnifications by Sunoco for certain environmental, toxic tort and other liabilities.

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. for the six-month periods ended June 30, 2003 and 2002 (in millions of dollars):

	Six Months Ended June 30
	2003			2002
Balance at beginning of year	$	100		$	—
Net proceeds from the initial public offering on February 8, 2002		—			98
Minority interest share of income*		8			6
Cash distributions to third-party investors		(6	)		(2	)
Balance at end of period	$	102		$	102

__________

* Included in selling, general and administrative expenses in the condensed consolidated statements of operations.

3. Changes in Accounting Principles.

Asset Retirement Obligations

Effective January 1, 2003, Sunoco adopted the provisions of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). This statement significantly changed the method of accruing for costs that an entity is legally obligated to incur associated with the retirement of fixed assets. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the fixed asset and depreciated over its estimated useful life. Prior to January 1, 2003, a liability for an asset retirement obligation was recognized using a cost-accumulation measurement approach.

In conjunction with the adoption of SFAS No. 143 in January 2003, Sunoco recorded an increase in asset retirement obligations of $5 million and a related increase in net properties, plants and equipment of $3 million related to certain of its branded marketing retail sites, coal and cokemaking facilities and chemical assets. The $2 million cumulative effect of this accounting change ($1 million after tax) has been included in cost of products sold and operating expenses in the condensed consolidated statement of operations. Sunoco did not

7

reflect the $1 million after-tax charge as a cumulative effect of accounting change as it was not material. Other than the cumulative effect, this change did not have a significant impact on Sunoco’s results of operations during the first half of 2003. At June 30, 2003, Sunoco’s liability for asset retirement obligations amounted to $8 million. Sunoco has legal asset retirement obligations for several other assets, including its refineries, pipelines and terminals, for which it is not possible to estimate when the obligations will be settled. Consequently, the retirement obligations for these assets cannot be measured at this time.

Exit or Disposal Activities

In July 2002, Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”), was issued. SFAS No. 146 supersedes Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes fair value as the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Under prior accounting principles, certain costs associated with restructuring plans were recognized as of the date of commitment to the plan. This new standard had no impact on Sunoco’s condensed consolidated financial statements during the first half of 2003.

Guarantees

In November 2002, FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FASB Interpretation No. 45”), was issued. The accounting recognition provisions of FASB Interpretation No. 45 became effective January 1, 2003 on a prospective basis. They require that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Under prior accounting principles, a guarantee would not have been recognized as a liability until a loss was probable and reasonably estimable. Adoption of the accounting recognition provisions of FASB Interpretation No. 45 had no impact on Sunoco’s condensed consolidated financial statements during the first half of 2003.

Stock-Based Compensation

During the fourth quarter of 2002, Sunoco adopted the fair value method of accounting for employee stock compensation plans as prescribed by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”). The Company recognized $6 million of expense ($4 million after tax) in 2002 for all unvested stock options attributable to the vesting that occurred in 2002, retroactive to January 1, 2002, using the “modified prospective method” transition rules of SFAS No. 148. Of this amount,

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$3 million ($2 million after tax) was recognized in the first half of 2002. Prior to January 1, 2002, the Company followed the intrinsic value method of accounting for employee stock compensation plans prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Under APB No. 25, the Company did not recognize compensation expense for stock options because the exercise price for the options equaled the market price of the underlying stock on the date of grant.

4. Write-Down of Assets and Other Matters.

During the second quarter of 2002, Sunoco announced that it would shut down a polypropylene line at its LaPorte, TX plant during the third quarter of 2002. Sunoco also announced its intention to shut down certain processing units at its Toledo refinery. The Company decided to shut down these facilities to eliminate less efficient production capacity. In connection with these shutdowns, in the second quarter of 2002, Sunoco recorded provisions to write off the affected units and established accruals for related exit costs, which amounted to $18 million ($12 million after tax) for the LaPorte, TX polypropylene plant and $4 million ($2 million after tax) for the Toledo refinery. In addition, during the second quarter of 2002, the Company established a $4 million accrual ($3 million after tax) relating to a lawsuit concerning the Puerto Rico refinery, which was divested in December 2001.

5. 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 for the six-month and three-month periods ended June 30, 2003 and 2002 (in millions):

	Six Months Ended June 30		Three Months Ended June 30
	2003	2002*	2003	2002
Weighted average number of common shares outstanding—basic	76.7	76.1	76.8	76.3
Add effect of dilutive stock incentive awards	.6	—	.8	.9
Weighted average number of shares—diluted	77.3	76.1	77.6	77.2

__________

* Since the assumed issuance of common stock under stock incentive awards would not have been dilutive, the weighted average number of shares used to compute diluted EPS is equal to the weighted average number of shares used in the basic EPS computation.

6. Transactions with Equistar Chemicals, L.P. and Marathon Ashland Petroleum LLC.

Effective March 31, 2003, Sunoco formed a limited partnership with Equistar Chemicals, L.P. (“Equistar”) involving Equistar’s ethylene facility in LaPorte, TX. Equistar is a joint venture between Lyondell Chemical Company and Millennium Chemicals Inc. In connection with this transaction, Equistar and the new partnership entered into a 700

9

million pounds-per-year, 15-year propylene supply contract with Sunoco. Of this amount, 500 million pounds per year will be priced on a cost-based formula that includes a fixed discount that declines over the life of the contract, while the remaining 200 million pounds per year will be based on market prices. Sunoco also purchased Equistar’s Bayport polypropylene facility at Pasadena, TX. The purchase price to form the partnership and acquire the Bayport facility consisted of $194 million of cash and $4 million of seller financing and included $11 million for polypropylene inventory.

Through the new partnership, the Company believes it has secured a favorable long-term supply of propylene for its Gulf Coast polypropylene business, while the acquisition of the Bayport facility has increased the Company’s polypropylene capacity. This transaction complements and enhances the Company’s polypropylene business and strengthens its market position.

The purchase price has been tentatively allocated to the assets acquired and liabilities assumed based on their relative estimated fair market values at the acquisition date. The following is a summary of the effects of the transaction on Sunoco’s consolidated financial position (in millions of dollars):

Increase in:
Inventories	$	11
Properties, plants and equipment		30
Deferred charges and other assets		160	*
Accrued liabilities		(2	)
Retirement benefit liabilities		(1	)
		198
Seller financing:
Current portion of long-term debt		(1	)
Long-term debt		(3	)
		(4	)
Cash paid on acquisition date	$	194

__________

* Represents the amounts allocated to the propylene supply contract and the related partnership. The Company will amortize this deferred cost into income over the 15-year life of the supply contract in a manner that reflects the future decline in the fixed discount over the contract period. During the second quarter of 2003, this amortization expense amounted to $4 million.

In the second quarter of 2003, Sunoco completed the purchase of 193 direct Speedway retail gasoline sites from a subsidiary of Marathon Ashland Petroleum LLC for $162 million, including inventory. The sites, which are located primarily in Florida and South Carolina, are all company-operated locations with convenience stores. Of the 193 outlets, Sunoco is the lessee for 54 sites under long-term lease agreements.

The Company believes this acquisition fits its long-term strategy to build a retail and convenience store network that will provide attractive long-term returns. The addition of these high-volume convenience stores gives Sunoco critical mass in the high-growth market in the Southeast.

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The purchase price has been tentatively allocated to the assets acquired and liabilities assumed based on their relative estimated fair market values at the acquisition date. The following is a summary of the effects of the transaction on Sunoco’s consolidated financial position (in millions of dollars):

Increase in:
Inventories	$	21
Properties, plants and equipment		143
Other deferred credits and liabilities		(2	)
Cash paid on acquisition date	$	162

The unaudited pro forma sales and other operating revenue, net income (loss) and net income (loss) per share of common stock of Sunoco, as if the acquisition of the Bayport polypropylene facility and the 193 service stations in the Southeast had occurred on January 1, 2002, are as follows (in millions of dollars, except per share amounts):

	Six Months Ended June 30
	2003		2002
Sales and other operating revenue	$	9,087	$	6,842
Net income (loss)	$	168	$	(101	)
Net income (loss) per share of common stock—diluted	$	2.17	$	(1.33	)

The pro forma amounts above do not include any effects attributable to the propylene supply contract or the related partnership.

The pro forma information does not purport to be indicative of the results that actually would have been obtained if the Bayport polypropylene facility and the 193 service stations in the Southeast had been part of Sunoco’s businesses during the periods presented and is not intended to be a projection of future results. Accordingly, the pro forma results do not reflect any restructuring costs, changes in operating levels, or potential cost savings and other synergies.

7. Commitments and Contingent Liabilities.

Sunoco is contingently liable under an arrangement, which guarantees a $120 million term loan due in 2006 of the Epsilon Products Company, LLC polypropylene joint venture in which the Company is a partner. Under this arrangement, Sunoco also guarantees borrowings under the joint venture’s $40 million revolving credit facility, which amounted to $29 million at June 30, 2003. Sunoco is also contingently liable under various other arrangements, which guarantee debt of other third parties aggregating approximately $13 million at June 30, 2003. 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, coal mines, oil and gas properties and various other assets. In connection with these sales, the Company has indemnified the purchasers for potential environmental and other contingent liabilities related to the period prior to the transaction

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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 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.

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 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 the 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 third-party or formerly owned sites. The accrued liability for environmental remediation is classified in the condensed consolidated balance sheets as follows (in millions of dollars):

	At June 30 2003		At December 31 2002
Accrued liabilities	$	42	$	43
Other deferred credits and liabilities		113		116
	$	155	$	159

The following table summarizes the changes in the accrued liability for environmental remediation activities by category for the six-month periods ended June 30, 2003 and 2002 (in millions of dollars):

	Refineries			Marketing Sites			Chemicals Facilities			Pipelines and Terminals			Hazardous Waste Sites			Other		Total
Balance at January 1, 2002	$	61		$	45		$	10		$	18		$	8		$	3	$	145
Accruals		(3	)		8			1			4			—			—		10
Payments		(3	)		(11	)		(2	)		(3	)		(2	)		—		(21	)
Balance at June 30, 2002	$	55		$	42		$	9		$	19		$	6		$	3	$	134
Balance at January 1, 2003	$	52		$	72		$	8		$	19		$	5		$	3	$	159
Accruals		—			9			1			3			1			—		14
Payments		(3	)		(9	)		(1	)		(4	)		(2	)		—		(19	)
Other*		—			—			—			1			—			—		1
Balance at June 30, 2003	$	49		$	72		$	8		$	19		$	4		$	3	$	155

* Consists of an increase in the accrued liability for which recovery from third parties is probable.

Sunoco’s accruals for environmental remediation activities reflect its 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,

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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 be incurred. At June 30, 2003, the aggregate of the estimated maximum additional reasonably possible losses, which relate to numerous individual sites, totaled $95 million. However, the Company believes it is very unlikely that it will realize the maximum 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, would not have a material impact on the Company’s financial position.

Under various environmental laws, including the Resource Conservation and Recovery Act (“RCRA”), 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.

Future costs for environmental remediation activities at the Company’s marketing sites also will be influenced by the extent of MTBE contamination of groundwater aquifers, 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, installation of additional remedial or monitoring wells and purchase of more expensive equipment because of the presence of MTBE.

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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.

The accrued liability for hazardous waste sites in the table above 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”). Under CERCLA, Sunoco is potentially subject to joint and several liability for the costs of remediation at sites at which it has been identified as a “potentially responsible party” (“PRP”). As of June 30, 2003, Sunoco had been named as a PRP at 50 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 is less than $7 million at June 30, 2003. 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 $29 million at June 30, 2003 and are included primarily in deferred charges and other assets in the condensed consolidated balance sheets.

In December 1999, the U.S. Environmental Protection Agency (“EPA”) adopted a rule under the Clean Air Act which phases in limitations on

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the sulfur content of gasoline beginning in 2004 and, in January 2001, adopted another rule which will require limitations on the allowable sulfur content of on-road diesel fuel beginning in 2006. The rules include banking and trading credit systems, which could provide refiners flexibility until 2006 for the low-sulfur gasoline and until 2010 for the on-road low-sulfur diesel. These rules are expected to have a significant impact on Sunoco and its operations, primarily with respect to the capital and operating expenditures at its four refineries. Most of the capital spending is likely to occur in the 2003-2006 period, while the higher operating costs will be incurred when the low-sulfur fuels are produced. The Company estimates that the total capital outlays to comply with the new gasoline and diesel requirements will be in the range of $300-$400 million, of which approximately $30 million is expected to be spent in 2003. The ultimate impact of the rules may be affected by such factors as technology selection, the effectiveness of the systems pertaining to banking and trading credits, timing uncertainties created by permitting requirements and construction schedules and any effect on prices created by changes in the level of gasoline and diesel fuel production.

In April 2002, the EPA issued regulations implementing Phase II of the petroleum refinery Maximum Achievable Control Technology (“MACT II”) rule under the Clean Air Act. This rule regulates emissions of hazardous air pollutants (including organics, reduced sulfur compounds, inorganics and particulate metals) from certain sources at petroleum refineries, including catalytic cracking and reforming units and sulfur recovery units. The rule requires all petroleum refineries that are major sources of hazardous air pollutants to meet emission standards reflecting the application of the maximum achievable control technology at the affected sources by 2005. Analysis of this rule to determine its impact is ongoing. Although the ultimate impact of the rule cannot be determined at this time, it could have a significant impact on Sunoco and its operations, primarily with respect to capital expenditures at its refineries.

Since the late 1990s, the EPA has undertaken significant enforcement initiatives under authority of the Clean Air Act, targeting industries with large manufacturing facilities that are significant sources of emissions, including the refining industry. The EPA has asserted that many of these facilities have modified or expanded their operations over time without complying with New Source Review regulations that require permits and new emission controls in connection with any significant facility modifications or expansions that could increase emissions above certain thresholds, and have violated various other provisions of the Clean Air Act, including the New Source Review and Prevention of Significant Deterioration (“NSR/PSD”) Program, Benzene Waste Operations National Emissions Standards for Hazardous Air Pollutants (“NESHAP”), Leak Detection and Repair (“LDAR”) and flaring requirements. As part of this enforcement initiative, the EPA has entered into consent agreements with several refiners that require them to pay civil fines and penalties and make significant capital expenditures to install emissions control equipment at selected facilities. For some of these refineries, the cost of the required emissions control equipment is significant, depending on the size, age and configuration of the refinery. Sunoco received information requests in 2000, 2001 and 2002 in connection with the enforcement initiative pertaining to its four current refineries, the Puerto Rico

15

refinery divested in 2001 and its phenol facility in Philadelphia, PA. Sunoco has completed its responses to the EPA. In 2003, Sunoco received an additional information request at its phenol plant in Philadelphia.

Sunoco has received Notices of Violation and Findings of Violation from the EPA relating to its Marcus Hook, Philadelphia and Toledo refineries. The Notices and Findings of Violation allege failure to comply with certain requirements relating to benzene wastewater emissions at the Company’s Marcus Hook, Toledo and Philadelphia refineries and failure to comply with certain requirements relating to leak detection and repair at the Toledo refinery. In addition, the EPA has alleged that: at the Company’s Philadelphia refinery, certain modifications were made to one of the fluid catalytic cracking units in 1992 and 1998 without obtaining requisite permits; at the Company’s Marcus Hook refinery, certain modifications were made to the fluid catalytic cracking unit in 1990 and 1996 without obtaining requisite permits; and at the Company’s Toledo refinery, certain physical and operational changes were made to the fluid catalytic cracking unit in 1985 without obtaining requisite permits. The EPA has also alleged that at the Company’s Toledo refinery, certain physical and operational changes were made to the sulfur plant in 1995, 1998 and 1999 without obtaining requisite permits; certain physical and operational changes were made to a flare system without obtaining requisite permits; and that the flare system was not being operated in compliance with the Clean Air Act. Sunoco has met with representatives of the EPA on these Notices and Findings of Violation and is currently evaluating its position. Although Sunoco does not believe that it has violated any Clean Air Act requirements, as part of this initiative, Sunoco could be required to make significant capital expenditures, operate these refineries at reduced levels and pay significant penalties. There are no liabilities accrued at June 30, 2003 in connection with this initiative.

Energy policy legislation continues to be debated in the 2003 Congressional session and uncertainty remains over federal action on fuels standards. The U.S. House and Senate have recently passed different versions of energy legislation. Both versions repeal the oxygenate mandate, and set certain requirements (although at different levels) for ethanol or renewable fuels usage. However, among other differences, the U.S. House energy bill does not ban MTBE, while the U.S. Senate version provides for a ban of this gasoline additive. A conference committee will be formed to resolve the differences in the legislation. During the 2002 Congressional session, the Senate and House both approved bills; however, a conference committee was unable to resolve differences between the two pieces of legislation. Sunoco uses MTBE and ethanol as oxygenates in different geographic areas of its refining and marketing system. While federal action is uncertain, some states, including California, New York and Connecticut, are scheduled to begin enforcing MTBE bans in January 2004. Sunoco does not market in California but is preparing to comply with the bans in New York and Connecticut. These bans, which will result in unique gasoline blends, could have a significant impact on market conditions depending on the details of future regulations, the impact on gasoline supplies, the cost and availability of alternate oxygenates if the minimum oxygenate requirements remain in effect, and the ability of Sunoco and the industry in general to recover their costs in the

16

marketplace. A number of additional states are considering bans on MTBE although no immediate action is anticipated.

Sunoco is a one-third partner in Belvieu Environmental Fuels (“BEF”), a joint venture that owns and operates an MTBE production facility in Mont Belvieu, TX. The joint venture is currently evaluating alternative uses for this facility in the event MTBE is banned, including the conversion from the production of MTBE to the production of alkylate or some other gasoline blending component. If the Company determines that it is not economical to convert the facility, the write-down of its $48 million investment in this operation may be necessary.

Sunoco is a defendant in various cases alleging MTBE contamination in groundwater. The plaintiffs generally allege that refiners, manufacturers and sellers of gasoline containing MTBE are liable for manufacturing a defective product and that owners and operators of retail gasoline sites have allowed MTBE to be discharged into the groundwater. In New York, one such case has been brought by a county and its water authority and another case has been brought by numerous litigants. Among other things, plaintiffs in these two cases are seeking injunctive relief and compensatory and punitive damages. Based on its review of the limited available information, at this time, the Company cannot estimate the impact of these lawsuits but does not believe that the outcome of either of these cases will be material in relation to its consolidated financial position.

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 these proceedings and the matters discussed 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 June 30, 2003. 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. Shareholders’ Equity.

	At June 30 2003			At December 31 2002
	(Millions of Dollars)
Common stock, par value $1 per share	$	135		$	135
Capital in excess of par value		1,508			1,489
Earnings employed in the business		2,272			2,143
Accumulated other comprehensive loss		(197	)		(195	)
Common stock held in treasury, at cost		(2,180	)		(2,178	)
Total	$	1,538		$	1,394

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9. Comprehensive Income (Loss).

The following table sets forth Sunoco’s comprehensive income (loss) for the six-month periods ended June 30, 2003 and 2002 (in millions of dollars):

	Six Months Ended June 30
	2003			2002
Net income (loss)	$	167		$	(98	)
Other comprehensive income (loss):
Net hedging gains (net of related tax expense of $2 in 2003 and $1 in 2002)		4			1
Reclassifications of net hedging (gains) losses to earnings (net of related tax (benefit) expense of $(3) in 2003 and $3 in 2002)		(6	)		6
Comprehensive income (loss)	$	165		$	(91	)

10. Business Segment Information.

The following table sets forth certain income statement information concerning Sunoco’s business segments for the six-month and three-month periods ended June 30, 2003 and 2002 (in millions of dollars):

	Sales and Other Operating Revenue
Six Months Ended June 30, 2003	Unaffiliated Customers		Inter- segment		Segment Income (Loss) (after tax)
Refining and Supply	$	3,574	$	2,312	$	143
Retail Marketing		3,518		—		46
Chemicals		808		—		6
Logistics		706		667		20
Coke		123		—		21
Corporate and Other		—		—		(69	)*
Consolidated	$	8,729			$	167
Six Months Ended June 30, 2002
Refining and Supply	$	2,614	$	1,718	$	(61	)
Retail Marketing		2,841		—		1
Chemicals		626		—		1
Logistics		264		556		17
Coke		100		—		16
Corporate and Other		—		—		(72	)**
Consolidated	$	6,445			$	(98	)

__________

* Consists of $19 million of after-tax corporate expenses and $50 million of after-tax net financing expenses and other.

** Consists of $14 million of after-tax corporate expenses, $41 million of after-tax net financing expenses and other and a $17 million after-tax provision for write-down of assets and other matters (Note 4).

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Three Months Ended June 30, 2003	Sales and Other Operating Revenue				Segment Income (Loss) (after tax)
	Unaffiliated Customers		Inter- segment
Refining and Supply	$	1,598	$	1,106	$	50
Retail Marketing		1,760		—		36
Chemicals		407		—		10
Logistics		344		313		9
Coke		60		—		11
Corporate and Other		—		—		(35	)*
Consolidated	$	4,169			$	81
Three Months Ended June 30, 2002
Refining and Supply	$	1,420	$	976	$	15
Retail Marketing		1,570		—		21
Chemicals		343		—		(1	)
Logistics		143		303		9
Coke		51		—		9
Corporate and Other		—		—		(44	)**
Consolidated	$	3,527			$	9

__________

* Consists of $10 million of after-tax corporate expenses and $25 million of after-tax net financing expenses and other.

** Consists of $6 million of after-tax corporate expenses, $21 million of after-tax net financing expenses and other and a $17 million after-tax provision for write-down of assets and other matters (Note 4).

11. New Accounting Standard.

In January 2003, FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FASB Interpretation No. 46”), was issued. It clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to certain entities in which the equity investors do not have a controlling financial interest or do not have sufficient equity at risk. FASB Interpretation No. 46 became effective on January 31, 2003 for entities acquired after such date. The effective date for entities acquired on or before January 31, 2003 is July 1, 2003. Sunoco has not completed its evaluation of FASB Interpretation No. 46 and, therefore, is unable to estimate its impact on the Company’s consolidated financial statements at this time. However, it is reasonably possible that Sunoco will be required to consolidate its investment in the Epsilon Products Company, LLC polypropylene joint venture.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS—SIX MONTHS

Earnings Profile of Sunoco Businesses (after tax)

	Six Months Ended June 30
	2003			2002			Variance
	(Millions of Dollars)
Refining and Supply	$	143		$	(61	)	$	204
Retail Marketing		46			1			45
Chemicals		6			1			5
Logistics		20			17			3
Coke		21			16			5
Corporate and Other:
Corporate expenses		(19	)		(14	)		(5	)
Net financing expenses and other		(50	)		(41	)		(9	)
Write-down of assets and other matters		—			(17	)		17
Consolidated net income (loss)	$	167		$	(98	)	$	265

Analysis of Earnings Profile of Sunoco Businesses

In the six-month period ended June 30, 2003, Sunoco earned $167 million, or $2.16 per share of common stock on a diluted basis, compared to a net loss of $98 million, or $1.29 per share, for the first half of 2002.

Refining and Supply—Refining and Supply earned $143 million in the current half versus a loss of $61 million in the first half of 2002. The $204 million improvement in results was primarily due to significantly higher margins in the Northeast and Toledo refining centers ($234 million) and a 2 percent increase in total production volumes ($9 million). Partially offsetting these positive factors were higher expenses ($28 million), primarily refinery fuel and utility costs and employee-related expenses, and lower results at the Tulsa refinery ($11 million), largely due to higher natural gas costs and lower margins for lubricant base oil products.

In Sunoco’s Northeast refining system, realized margins were $5.04 per barrel, up $3.30 per barrel from the 2002 first-half level. Margins were higher for most products, particularly for heating oil and other distillates and residual fuels due to the exceptionally cold winter and high natural gas prices. Despite some cold-weather-induced reliability

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issues during the first quarter, input to crude units averaged 97 percent of rated capacity and production was up 1 percent versus the year-ago period.

Results were also much improved at the Toledo refinery. Realized margins averaged $4.55 per barrel, up over $1.80 per barrel from the comparable 2002 half. Operating performance was also improved as crude inputs averaged 99 percent of rated capacity during the first half of 2003 and production was 3 percent higher than the 2002 first half.

In April 2003, Sunoco signed a letter of intent to acquire El Paso Corporation’s 150 thousand barrels-per-day Eagle Point refinery and related assets located in Westville, NJ near the Company’s existing Northeast Refining operations. The related assets include certain pipeline and other logistics assets associated with the refinery which Sunoco intends to make available to Sunoco Logistics Partners L.P., a 75 percent owned master limited partnership formed in 2001. The purchase price is $130 million plus the fair market value of crude oil and refined product inventories at time of closing. The transaction is subject to the satisfaction of certain conditions including regulatory approval and negotiation of final definitive agreements. In June 2003, the Federal Trade Commission requested additional information regarding this transaction. The Company is in the process of complying with this request and believes that the acquisition will be completed by the end of 2003.

For many years, sulfur gas generated during the refining process at Sunoco’s Marcus Hook refinery has been sent to a third party, General Chemical, for processing into sulfur. In 2002, General Chemical experienced a series of operating failures. As a result of these incidents, Sunoco entered into a consent decree with the Delaware Department of Natural Resources and Environmental Control which, among other things, imposes penalties of up to $10 thousand per day if Sunoco incinerates sulfur gas as a result of General Chemical’s failure to accept the gas. Sunoco believes it is in full compliance with the consent decree. In October 2002, General Chemical’s parent company, GenTek, filed for Chapter 11 bankruptcy reorganization. As part of this proceeding, General Chemical petitioned the court in February 2003, seeking to close the sulfur processing portion of its facility on or about September 30, 2003. As a result, Sunoco entered into an agreement for construction and delivery of two modular sulfur plants at Marcus Hook by September 30, 2003 at an expected cost of $50-$60 million. However, this is an extremely aggressive project schedule, and Sunoco filed objections to General Chemical’s petition in an effort to postpone the sulfur plant closure. In July 2003, the parties reached a settlement agreement under which Sunoco agreed to give up its claims against General Chemical, and General Chemical agreed to operate the plant until November 11, 2003, if needed, at no additional cost to Sunoco. The final settlement has been submitted to the court for approval. Barring unforeseen circumstances, the settlement agreement between Sunoco and General Chemical should provide Sunoco with additional time, if needed, to bring on-line the new sulfur recovery units. Sunoco is working with the State of Delaware to obtain the necessary permits.

Retail Marketing—Retail Marketing earned $46 million in the current half versus $1 million in the first half of 2002. The $45 million increase in earnings was primarily due to higher retail gasoline margins ($48 million). Average retail gasoline margins were 10.0 cents per gallon during the first half of 2003, up almost 4 cents per gallon compared to the prior-year half. Also contributing to the improvement were higher retail distillate margins

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($4 million) and higher gasoline and distillate sales volumes ($4 million). Partially offsetting these positive factors were higher planned expenses ($12 million). The acquisition of Speedway retail sites from a subsidiary of Marathon Ashland Petroleum LLC (“Marathon”) (see below) had a minimal impact on earnings for the first half.

In the second quarter of 2003, Sunoco completed the purchase of 193 direct retail gasoline sites from Marathon for $162 million, including inventory. The sites, which are located primarily in Florida and South Carolina, are all company-operated locations with convenience stores. Of the 193 outlets, Sunoco is the lessee for 54 sites under long-term lease agreements. (See Note 6 to the condensed consolidated financial statements.)

In April 2003, Sunoco announced its intention to sell its interest in 190 direct-supplied retail sites in Michigan and the southern Ohio markets of Columbus, Dayton and Cincinnati. Sunoco intends to continue to supply branded gasoline to the outlets by securing long-term supply agreements with distributors. The sales effort is expected to take 12-18 months to complete.

Chemicals—Chemicals earned $6 million in the first half of 2003 versus income of $1 million in the prior-year half. The $5 million increase in earnings was due largely to higher margins for both phenol and polypropylene ($21 million) and $5 million of after-tax income related to a supply agreement with Equistar Chemicals, L.P. (“Equistar”) and from the polypropylene facility acquired from Equistar (see below). Partially offsetting the positive variances were higher fuel costs ($5 million), lower sales volumes ($5 million) and lower equity income from Belvieu Environmental Fuels (“BEF”), the Company’s MTBE joint venture ($7 million), due to weakness in MTBE demand. The first half of 2003 also includes after-tax charges totaling $3 million primarily related to a fire at the Company’s LaPorte, TX facility and employee terminations in connection with a productivity improvement plan.

Effective March 31, 2003, Sunoco formed a limited partnership with Equistar involving Equistar’s ethylene facility in LaPorte, TX. Equistar is a joint venture between Lyondell Chemical Company and Millennium Chemicals Inc. In connection with this transaction, Equistar and the new partnership entered into a 700 million pounds-per-year, 15-year propylene supply contract with Sunoco. Of this amount, 500 million pounds per year will be priced on a cost-based formula that includes a fixed discount, while the remaining 200 million pounds per year will be based on market prices. Sunoco also purchased Equistar’s 400 million pounds-per-year Bayport polypropylene facility at Pasadena, TX. The purchase price to form the partnership and acquire the Bayport facility consisted of $194 million of cash and $4 million of seller financing and included $11 million for polypropylene inventory. (See Note 6 to the condensed consolidated financial statements.)

In April 2003, Sunoco signed a letter of intent to sell its plasticizer operations to BASF. The sale will include the Company’s Pasadena, TX, site, including the land, phthalic anhydride and oxo-alcohol manufacturing plants, plus the plasticizer esters, 2-ethylhexanol and phthalic anhydride businesses. Sunoco’s investment in the business, including inventory, is approximately $100 million. Although the Company’s Neville Island, PA, site is not part of the transaction, it will produce plasticizers for BASF under a tolling agreement. The transaction is subject to satisfaction of certain conditions including regulatory approval. In June 2003, the Federal Trade Commission requested additional information regarding this transaction. The

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Company is in the process of complying with this request and believes that the sale will be completed by the end of 2003.

Logistics—Sunoco’s Logistics business, which is now comprised of Sunoco’s 75-percent interest in Sunoco Logistics Partners L.P. as well as certain other assets and joint venture interests, earned $20 million in the first half of 2003 versus $17 million in the year-ago period. The $3 million increase was due largely to improved Western crude operations and increased joint-venture income associated with assets acquired in November 2002.

Coke—Coke earned $21 million in the first half of 2003 versus $16 million in the first half of 2002. The $5 million increase in earnings was primarily due to higher coke prices at Jewell Coke and the absence of a $4 million after-tax write-off of accounts receivable from National Steel Corporation, Jewell’s former long-term contract customer, which was recognized in the first quarter of 2002, partially offset by lower tax benefits from Jewell Coke operations. Jewell’s 2002 coke sales were made into lower-value spot markets due to National’s bankruptcy. In October 2002, the Coke business entered into a three-year sales contract with International Steel Group (“ISG”) under which the Coke business is providing ISG approximately 700,000 tons of Jewell’s production annually through 2005.

In April 2003, Sun Coke agreed with three major steel companies and a major iron ore producer to build and operate a coke production facility and associated cogeneration power plant in Vitória, Brazil. The companies have agreed to long-term commitments whereby Sun Coke will produce coke for the customers under a tolling agreement, and each customer will purchase a pro-rata share of the power produced at the facility. Sun Coke’s commitment to this project is subject to a number of contingencies including: approval by Sunoco’s Board of Directors; finalization of the construction cost; obtaining all requisite permits; and obtaining financing satisfactory to Sunoco. If these contingencies are satisfied, construction of the facilities, which is estimated to cost approximately $300-$350 million, would begin in 2004, and the facilities would be operational in 2006.

Corporate and Other

Corporate Expenses—Corporate administrative expenses were $19 million after tax in the current half versus $14 million in the first half of 2002. The $5 million increase was largely due to higher employee-related expenses, including pension and performance-related incentive compensation.

Net Financing Expenses and Other—Net financing expenses and other were $50 million after tax in the first half of 2003 versus $41 million in the year-ago period. The $9 million increase was primarily due to higher after-tax expense attributable to the preferential return of third-party investors in Sunoco’s cokemaking operations. In July 2002, Sunoco transferred an additional interest in its Indiana Harbor cokemaking operation to a third-party investor for $215 million in cash.

Write-Down of Assets and Other Matters—During the first half of 2002, Sunoco recorded a $17 million after-tax provision primarily for asset write-downs and associated charges related to the shutdown of a production line at the LaPorte, TX polypropylene plant ($12 million after tax) and the shutdown of certain processing units at the Company’s Toledo refinery ($2 million after tax). Also included in the provision was a $3 million after-tax accrual relating to a lawsuit concerning the Puerto Rico refinery,

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which was divested in December 2001. (See Note 4 to the condensed consolidated financial statements.)

Analysis of Condensed Consolidated Statements of Operations

Revenues—Total revenues were $8.76 billion in the first half of 2003 compared to $6.49 billion in the first half of 2002. The 35 percent increase was primarily due to significantly 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.

Costs and Expenses—Total pretax costs and expenses were $8.50 billion in the first half of 2003 compared to $6.64 billion in the first half of 2002. The 28 percent increase was primarily due to significantly higher crude oil and refined product acquisition costs, largely as a result of crude oil price increases. Also contributing to the increase were higher crude oil costs in connection with the crude oil gathering and marketing activities of the Company’s Logistics operations.

RESULTS OF OPERATIONS—THREE MONTHS

Earnings Profile of Sunoco Businesses (after tax)

	Three Months Ended June 30
	2003			2002			Variance
	(Millions of Dollars)
Refining and Supply	$	50		$	15		$	35
Retail Marketing		36			21			15
Chemicals		10			(1	)		11
Logistics		9			9			—
Coke		11			9			2
Corporate and Other:
Corporate expenses		(10	)		(6	)		(4	)
Net financing expenses and other		(25	)		(21	)		(4	)
Write-down of assets and other matters		—			(17	)		17
Consolidated net income	$	81		$	9		$	72

Analysis of Earnings Profile of Sunoco Businesses

In the three-month period ended June 30, 2003, Sunoco earned $81 million, or $1.04 per share of common stock on a diluted basis, compared to $9 million, or $.12 per share, for the second quarter of 2002.

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Refining and Supply—Refining and Supply earned $50 million in the current quarter versus $15 million in the second quarter of 2002. Significantly higher margins in the Northeast refining center ($57 million) led to the much improved results versus the comparable prior-year quarter. Partially offsetting the margin improvement were higher expenses ($15 million), primarily refinery fuel costs and employee-related expenses.

In Sunoco’s Northeast refining system, realized margins were $4.42 per barrel, up $1.76 per barrel from the 2002 second-quarter level. Margins for distillates and residual fuels continued to be higher than 2002 due to low inventories and higher natural gas prices. Gasoline margins, particularly for reformulated and premium grades, also improved considerably during the quarter and were higher than second-quarter 2002 levels.

Realized margins and overall results at Sunoco’s Mid-Continent refineries in Toledo and Tulsa were down versus the comparable 2002 second quarter. Higher crude acquisition costs, in part due to an unfavorable crude market, and higher natural gas fuel costs contributed to the lower results in this region.

Retail Marketing—Retail Marketing earned $36 million in the current quarter versus $21 million in the second quarter of 2002. The $15 million increase in earnings was primarily due to higher retail gasoline margins ($16 million). Average retail gasoline margins were 11.6 cents per gallon during the second quarter of 2003, up 2.4 cents per gallon compared to the prior-year quarter. Also contributing to the improvement were higher retail distillate margins ($3 million) and higher gasoline and distillate sales volumes ($1 million). Partially offsetting these positive factors were higher expenses ($6 million). The Speedway retail sites acquired in June 2003 had a minimal impact on earnings for the current quarter.

Chemicals—Chemicals earned $10 million in the second quarter of 2003 versus a loss of $1 million in the prior-year quarter. The $11 million increase in earnings was due largely to higher margins for both phenol and polypropylene ($25 million) and $5 million of after-tax income related to a supply agreement with Equistar and from the polypropylene facility acquired from Equistar. Partially offsetting these improvements were lower sales volumes ($8 million), higher fuel costs ($2 million) and lower equity income from BEF, the Company’s MTBE joint venture. Results from BEF were down $6 million versus the 2002 second quarter due to weakness in MTBE demand. The current quarter also includes after-tax charges totaling $3 million primarily related to a fire at the Company’s LaPorte, TX facility and employee terminations in connection with a productivity improvement plan.

Logistics—Sunoco’s Logistics business earned $9 million in both second-quarter periods.

Coke—The Coke business earned $11 million in the second quarter of 2003 versus $9 million in the second quarter of 2002. The $2 million increase was primarily due to higher coke prices at Jewell Coke, partially offset by lower tax benefits from Jewell Coke operations.

Corporate and Other

Corporate Expenses—Corporate administrative expenses were $10 million after tax in the current quarter versus $6 million in the comparable quarter last year. The $4 million increase was largely due to higher

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employee-related expenses, including pension and performance-related incentive compensation.

Net Financing Expenses and Other—Net financing expenses and other were $25 million after tax in the second quarter of 2003 versus $21 million in the year-ago period. The $4 million increase was primarily due to higher after-tax expense attributable to the preferential return of third-party investors in Sunoco’s cokemaking operations.

Write-Down of Assets and Other Matters—For a discussion of the write-down of assets and other matters recorded in the second quarter of 2002, see Note 4 to the condensed consolidated financial statements.

Analysis of Condensed Consolidated Statements of Operations

Revenues—Total revenues were $4.19 billion in the second quarter of 2003 compared to $3.56 billion in the second quarter of 2002. The 18 percent increase was primarily due to significantly 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.

Costs and Expenses—Total pretax costs and expenses were $4.06 billion in the second quarter of 2003 compared to $3.54 billion in the second quarter of 2002. The 15 percent increase was primarily due to significantly higher crude oil and refined product acquisition costs, largely as a result of crude oil price increases. Also contributing to the increase were higher crude oil costs in connection with the crude oil gathering and marketing activities of the Company’s Logistics operations.

FINANCIAL CONDITION

Cash and Working Capital

At June 30, 2003, Sunoco had cash and cash equivalents of $240 million compared to $390 million at December 31, 2002, and had a working capital deficit of $114 million compared to working capital of $122 million at December 31, 2002. The $150 million decrease in cash and cash equivalents was due to a $512 million net use of cash in investing activities and a $63 million net use of cash in financing activities, partially offset by $425 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 June 30, 2003 by $969 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 six months of 2003, Sunoco’s cash generation was $425 million compared to $86 million in the first half of 2002. This $339 million increase in cash generation was primarily due to the increase in net income, higher deferred income tax expense and a $73 million income tax

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refund received in March 2003, partially offset by an increase in working capital uses pertaining to operating activities.

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 $785 million, which consists of a $385 million commitment through July 2005 and a $400 million commitment that matures in July 2004. During the second quarter of 2003, a $385 million commitment maturing in July 2003 was extended one year to July 2004 and increased $15 million from the prior commitment level. The Facility provides the Company with access to short-term financing and is intended to support the issuance of commercial paper and letters of credit. 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 $1.0 billion and 50 percent of adjusted net income (as defined in the Facility) for each quarter ended after March 31, 2002). At June 30, 2003, the Company’s tangible net worth was $1.6 billion and its targeted tangible net worth was $1.0 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 June 30, 2003, this ratio was .46 to 1. There were no borrowings under the Facility at June 30, 2003.

Concurrent with Sunoco Logistics Partners L.P.’s initial public offering, the Partnership entered into a three-year $150 million revolving credit facility. This credit facility, which is available to fund its working capital requirements, to finance acquisitions, and for general partnership purposes, includes a $20 million distribution sublimit that is available for distributions to third-party unitholders and Sunoco. During April 2003, the commitment under the revolving credit facility was increased to $250 million. The credit facility contains convenants requiring the Partnership to maintain a ratio of up to 4 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 3.5 to 1. At June 30, 2003, the Partnership’s ratio of its consolidated debt to its consolidated EBITDA was 3.0 to 1 and the interest coverage ratio was 5.1 to 1. At June 30, 2003, $65 million was outstanding under this credit facility.

A wholly owned subsidiary of the Company, Sunoco Receivables Corporation, Inc., is a party to an accounts receivable securitization facility that terminates in 2004 under which the subsidiary may sell on a revolving basis up to a $200 million undivided interest in a designated pool of certain

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Sunoco accounts receivable. No receivables have been sold under this facility.

Debt

The following table sets forth Sunoco’s outstanding borrowings (in millions of dollars):

	At June 30 2003		At December 31 2002
Current portion of long-term debt	$	103	$	2
Long-term debt		1,355		1,453
Total outstanding borrowings	$	1,458	$	1,455

Sunoco’s ratio of debt (net of cash and cash equivalents) to total capital was 44.2 percent at June 30, 2003 compared to 43.3 percent at December 31, 2002. Management believes there is sufficient borrowing capacity available to pursue strategic investment opportunities as they arise. In addition, the Company has the option of issuing additional common or preference stock as a means of increasing its equity base.

The Company has an effective 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 June 30, 2003, $1,300 million remains available under this shelf registration statement. Sunoco Logistics Partners L.P. also has a shelf registration statement, which became effective in the first quarter of 2003. Under this registration statement, the Partnership may sell up to a total of $500 million of debt or common units representing limited partner interests. The amount, type and timing of any 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.

Capital Expenditures

During the first quarter of 2003, the Company reduced its full year 2003 capital expenditure plan to approximately $470 million. The reduced spending reflects a combination of capital deferrals and reductions, partially offset by accelerated construction of a sulfur plant at the Company’s Marcus Hook refinery (see discussion above under “Results of Operations – Six Months – Analysis of Earnings Profile of Sunoco Businesses”).

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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 for the first half of 2003 and the full year 2002 (in millions of dollars):

	Six Months Ended June 30, 2003			Year Ended December 31, 2002
Market value of investments at beginning of period	$	930		$	1,110
Increase (reduction) in market value of investments resulting from:
Plan benefit payments		(64	)		(141	)
Net investment income (loss)		88			(91	)
Company contributions		31			52
	$	985		$	930

Despite the Company contribution during 2002, the accumulated benefit obligation of these plans exceeded the market value of plan assets at December 31, 2002. Accordingly, the Company was required to record an after-tax charge totaling $176 million to the accumulated other comprehensive loss component of shareholders’ equity in its consolidated balance sheet at December 31, 2002.

The present value of Sunoco’s future pension obligations was determined using a discount rate of 6.75 percent at December 31, 2002. This discount rate is based on the yields on high-quality, fixed income investments (such as Moody’s Aa-rated long-term corporate bonds). During the first seven months of 2003, the interest rates associated with high-quality, fixed income investments have declined approximately 0.35 percent. A one percent decrease in the discount rate would result in an estimated increase of $150 million in the projected benefit obligation for the Company’s defined benefit pension plans.

Management currently intends to make additional contributions of approximately $20 million to the plans during the remainder of 2003. Management believes any additional contributions to the pension plans can be funded without a significant impact on liquidity. Future poor performance in the equity markets and/or a decrease in the discount rate could result in additional significant charges to the accumulated other comprehensive loss component of shareholders’ equity and significant increases in future pension expense and funding requirements.

SHARE REPURCHASES

The Company did not repurchase any shares of common stock during the first six months of 2003. At June 30, 2003, the Company had a remaining authorization from its Board of Directors to purchase up to $338 million of Company common stock in the open market or through privately negotiated transactions from time to time depending on prevailing market conditions and available cash.

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FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements discuss 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,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions that convey the uncertainty of future events or outcomes. Although Sunoco 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 refining, marketing and chemical margins;

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

• Volatility 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;

• Changes in the reliability and efficiency of the Company’s operating facilities or those of third parties;

• Changes in the level of operating expenses and hazards common to operating facilities (including equipment malfunction, explosions, fires, oil spills, and the effects of severe weather conditions);

• Changes in the expected level of environmental capital, operating or remediation expenditures;

• Delays related to work on facilities and the issuance of applicable permits;

• Changes in product specifications;

• Availability and pricing of oxygenates such as MTBE and ethanol;

• Phase-outs or restrictions on the use of MTBE;

• Political and economic conditions in the markets in which the Company operates, including the impact of potential terrorist acts and international hostilities;

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• 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;

• Changes in the availability and cost of debt and equity financing;

• Changes in insurance markets impacting costs and the level and types of coverage available;

• Changes in financial markets impacting pension expense and funding requirements;

• Risks related to labor relations;

• Nonperformance by major customers, suppliers 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 to which the Company is a party, or liability resulting from litigation or administrative 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. Unpredictable or unknown 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

There have been no material changes to the Company’s exposure to market risk since December 31, 2002.

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

31

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. There have been no significant changes in the Company’s internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. However, the Company has recently decided that, in order to enhance its internal controls, it will centralize certain accounting functions currently performed by business unit personnel into corporate accounting.

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.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

County of Suffolk and Suffolk County Water Authority v. Sunoco, et al. (Supreme Court of the State of New York, County of Suffolk), was filed in March 2003. Sunoco is one of 17 petrochemical company defendants which include manufacturers, refiners, formulators, distributors, suppliers, sellers and/or marketers of MTBE and/or gasoline containing MTBE. This case alleges product liability/defective product, public and private nuisance, failure to warn, negligence, deceptive business acts and practices, and violation of Navigation Law. Plaintiffs seek injunctive relief, compensatory and punitive damages, and interest and costs.

Armstrong, et al. v Sunoco, et al. (Supreme Court of the State of New York, County of Orange), was filed in June 2003 by residential and commercial property owners, lessees and the Town of Highlands. Sunoco is one of several defendants which include MTBE manufacturers and distributors and owners/operators of gasoline service stations. This case alleges product liability/defective product, nuisance, trespass, interference with the right to appropriate water, declaratory relief, unfair competition, outrageous conduct causing the infliction of emotional distress, violation of Navigation Law, and negligence. Plaintiffs seek a mandatory injunction requiring a court supervised sampling program and an independent water source, compensatory damages and punitive damages, remediation costs for abatement of MTBE, and disgorgement of profits.

Based on its review of the limited available information, at this time, the Company cannot currently estimate the impact of these lawsuits but does not believe that the outcome of either of these

32

cases will be material in relation to its consolidated financial position.

In May 2002, Sunoco, Inc. (R&M) received a Consent Assessment of Civil Penalty in excess of $100,000 from the Pennsylvania Department of Environmental Protection for allegedly failing to install continuous emission monitors on two boilers at its Marcus Hook, PA refinery. In June 2003, the Pennsylvania Department of Environmental Protection and Sunoco settled this matter. Under this settlement, Sunoco paid a civil penalty of $226,297.

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 June 30, 2003.

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of the Company’s shareholders was held on May 1, 2003. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to the Company’s solicitations. At this meeting, the shareholders were requested: (1) to elect a Board of Directors; (2) to approve the amendment and restatement of the Long-Term Performance Enhancement Plan II (“LTPEP II”); and (3) to ratify the appointment of independent auditors. The following action was taken by the Company’s shareholders with respect to each of the above items:

1. Concerning the election of a Board of Directors of the Company, there was a total of 67,092,067 votes cast. The tabulation below sets forth the number of votes cast for or withheld (abstentions) from each director. There were no broker non-votes.

NAME	Number “FOR”	Number “WITHHELD” (ABSTENTIONS)
R. J. Darnall	65,308,383	1,783,684
J. G. Drosdick	65,090,101	2,001,966
U. F. Fairbairn	65,361,566	1,730,501
T. P. Gerrity	65,289,703	1,802,364
R. B. Greco	65,319,666	1,772,401
J. G. Kaiser	65,351,373	1,740,694
R. D. Kennedy	65,351,252	1,740,815
R. H. Lenny	65,321,031	1,771,036
N. S. Matthews	65,350,260	1,741,807
R. A. Pew	65,344,187	1,747,880
G. J. Ratcliffe	65,361,820	1,730,247

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2. Concerning the motion to approve the amendment and restatement of the Long-Term Performance Enhancement Plan II (“LTPEP II”), there was a total of 67,092,067 votes cast, with an aggregate of 63,912,720 votes cast approving the amendment and restatement of LTPEP II and 2,297,789 votes against. There were 881,558 withheld (abstentions). There were no broker non-votes.

3. Concerning the motion to ratify the appointment of Ernst & Young LLP as the Company’s independent auditors, there was a total of 67,092,067 votes cast, with an aggregate of 65,026,811 votes cast in favor of ratification of such appointment and 1,440,918 against. There were 624,338 withheld (abstentions). There were no broker non-votes.

Item 6. Exhibits and Reports on Form 8-K

Exhibits:

10.1	—	Sunoco, Inc. Long-Term Performance Enhancement Plan II, as amended and restated as of May 1, 2003.
10.2	—	Retainer Stock Plan for Outside Directors, as amended May 1, 2003.
12	—	Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges for the Six-Month Period Ended June 30, 2003.
31.1	—	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	—	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	—	Certification of Periodic Financial Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	—	Certification of Periodic Financial Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Reports on Form 8-K:

On April 2, 2003, the Company furnished information under Item 7 – “Financial Statements, Pro Forma Financial Information and Exhibits” and Item 9 – “Regulation FD Disclosure” of Form 8-K that was presented to certain investors by Sunoco executives at the Howard Weil Energy Conference held on April 2, 2003.

On April 24, 2003, the Company furnished under Item 7 – “Financial Statements, Pro Forma Financial Information and Exhibits” and Item 9 – “Regulation FD Disclosure” of Form 8-K, a copy of its earnings press release for the first quarter of 2003 that was issued on April 24, 2003. This release, which is required under Item 12, “Results of Operations and Financial Condition”, has been included under Item 9 pursuant to interim reporting guidance provided by the SEC. In this Form 8-K, the Company also furnished under Items 7 and 9 additional information concerning the Company’s first quarter earnings that was presented to investors in a teleconference call on April 24, 2003.

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On May 19, 2003, the Company furnished information under Item 7 – “Financial Statements, Pro Forma Financial Information and Exhibits” and Item 9 – “Regulation FD Disclosure” of Form 8-K that was presented to certain investors by Sunoco executives at the UBS Warburg 2003 Global Energy Conference held on May 20, 2003.

On July 24, 2003, the Company furnished under Item 7 – “Financial Statements, Pro Forma Financial Information and Exhibits” and Item 9 – “Regulation FD Disclosure” of Form 8-K, a copy of its earnings press release for the second quarter of 2003 that was issued on July 24, 2003. In this Form 8-K, the Company also furnished under Items 7 and 9 additional information concerning the Company’s second quarter earnings that was presented to investors in a teleconference call on July 24, 2003.

**********

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

Sunoco, Inc.

Investor Relations

Ten Penn Center

1801 Market Street

Philadelphia, PA 19103-1699

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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 August 6, 2003

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EXHIBIT INDEX

Exhibit Number	Exhibit
10.1	Sunoco, Inc. Long-Term Performance Enhancement Plan II, as amended and restated as of May 1, 2003.
10.2	Retainer Stock Plan for Outside Directors, as amended May 1, 2003.
12	Statement re Sunoco, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges for the Six-Month Period Ended June 30, 2003.
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Periodic Financial Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Periodic Financial Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.1

Exhibit 10.1

SUNOCO, INC.

LONG-TERM PERFORMANCE ENHANCEMENT PLAN II

(Amended and Restated as of May 1, 2003)

ARTICLE I

Definitions

As used in this Plan, the following terms shall have the meanings herein specified:

1.1 Affiliate—shall mean any entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with Sunoco, Inc.

1.2 Board of Directors—shall mean the Board of Directors of Sunoco, Inc.

1.3 Business Combination—shall have the meaning provided herein at Section 1.4(c).

1.4 Change in Control—shall mean the occurrence of any of the following events:

(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (1) the then-outstanding shares of common stock of Sunoco, Inc. (the “Outstanding Company Common Stock”) or (2) the combined voting power of the then-outstanding voting securities of Sunoco, Inc. entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of this Section (a), the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from Sunoco, Inc., (B) any acquisition by Sunoco, Inc., (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Sunoco, Inc. or any company controlled by, controlling or under common control with Sunoco, Inc., or (D) any acquisition by any entity pursuant to a transaction that complies with Sections (c) (1), (c) (2) and (c) (3) of this definition;

(b) Individuals who, as of September 6, 2001, constitute the Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the shareholders of Sunoco, Inc., was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election

1

or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors;

(c) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving Sunoco, Inc. or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of Sunoco, Inc. or the acquisition of assets or stock of another entity by Sunoco, Inc. or any of its subsidiaries (each, a “Business Combination”), in each case unless, following such Business Combination, (1) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns Sunoco, Inc. or all or substantially all of the assets of Sunoco, Inc., either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of Sunoco, Inc. or such corporation resulting from such Business Combination or any of their respective subsidiaries) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors providing for such Business Combination; or

(d) Approval by the shareholders of Sunoco, Inc. of a complete liquidation or dissolution of Sunoco, Inc.

1.5 Code—shall mean the Internal Revenue Code of 1986, as amended.

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1.6 Committee—shall mean the committee appointed to administer this Plan by the Board of Directors, as constituted from time to time. The Committee shall consist of at least two (2) members of the Board of Directors, each of whom shall meet applicable requirements set forth in the pertinent regulations under Section 16 of the Exchange Act and Section 162(m) of the Code.

1.7 Common Stock—shall mean the authorized and unissued or treasury shares of common stock of Sunoco, Inc.

1.8 Common Stock Units—shall have the meaning provided herein at Section 6.1.

1.9 Company—shall mean Sunoco, Inc., and any Affiliate.

1.10 CSU Payout Date—shall have the meaning provided herein at Section 6.9.

1.11 Dividend Equivalents—shall have the meaning provided herein at Section 6.3.

1.12 Dividend Equivalent Account—shall have the meaning provided herein at Section 6.3.

1.13 Employment Termination Date—shall mean the date on which the employment relationship between the Participant and the Company is terminated, or on which the Participant ceases to be a member of the Board of Directors.

1.14 Exchange Act—shall mean the Securities Exchange Act of 1934, as amended.

1.15 Exercise Period—shall have the meaning provided herein at Section 5.3.

1.16 Fair Market Value—shall mean, as of any date and in respect of any share of Common Stock, the opening price on such date of a share of Common Stock (which price shall be the closing price on the previous trading day of a share of Common Stock as reflected in the consolidated trading tables of the Wall Street Journal under the caption “New York Stock Exchange Composite Transactions” or any other publication selected by the Committee). If there is no sale of shares of Common Stock on the New York Stock Exchange for more than ten (10) days immediately preceding such date, the Fair Market Value of the shares of Common Stock shall be as determined by the Committee in such other manner as it may deem appropriate. In no event shall the Fair Market Value of any share of Common Stock be less than its par value.

1.17 Immediate Family Member—shall mean spouse (or common law spouse), siblings, parents, children, stepchildren, adoptive relationships and/or grandchildren of the Participant (and, for this purpose, also shall include the Participant).

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1.18 Incentive Stock Options—shall have the meaning provided herein at Section 4.1.

1.19 Incumbent Board—shall have the meaning provided herein at Section 1.4(b).

1.20 Just Cause—shall mean, for any Participant who is a participant in the Sunoco, Inc. Special Executive Severance Plan, “Just Cause” as defined in such plan, and for any other Participant:

(a) the willful and continued failure of the Participant to perform substantially the Participant’s duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness or following notice of employment termination by the Participant pursuant to Section 1.34), after a written demand for substantial performance is delivered to the Participant by the Board of Directors or any employee of the Company with supervisory authority over the Participant that specifically identifies the manner in which the Board of Directors or such supervising employee believes that the Participant has not substantially performed the Participant’s duties, or

(b) the willful engaging by the Participant in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company.

1.21 Limited Rights—shall have the meaning provided herein at Section 5.1.

1.22 Market Price—shall have the meaning provided herein at Section 5.4.

1.23 Option—shall mean Stock Option and/or Incentive Stock Option.

1.24 Option Price—shall mean the purchase price per share of Common Stock deliverable upon the exercise of an Option.

1.25 Optionee—shall mean the holder of an Option.

1.26 Outstanding Company Common Stock—shall have the meaning provided herein at Section 1.4(a).

1.27 Outstanding Company Voting Securities—shall have the meaning provided herein at Section 1.4(a).

1.28 Participant—shall have the meaning provided herein at Section 2.4(a).

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1.29 Performance Factors—shall mean the various payout percentages related to the attainment levels of one or more Performance Goals, as determined by the Committee.

1.30 Performance Goals—shall mean the specific targeted amounts of, or changes in, financial or operating goals including: revenues; expenses; net income; operating income; equity; return on equity, assets or capital employed; working capital; shareholder return; operating capacity utilized; production or sales volumes; or throughput. Other financial or operating goals may also be used as determined by the Committee. Such goals may be applicable to the Company as a whole or one or more of its business units and may be applied in total or on a per share, per barrel or percentage basis and on an absolute basis or relative to other companies, industries or indices or any combination thereof, as determined by the Committee.

1.31 Performance Period—shall have the meaning provided herein at Section 6.4.

1.32 Person—shall have the meaning provided herein at Section 1.4(a).

1.33 Plan—shall have the meaning provided herein at Section 2.2.

1.34 Qualifying Termination—shall mean, with respect to the employment of any Participant who is a participant in the Sunoco, Inc. Special Executive Severance Plan, a “Qualifying Termination” as defined in such plan, and with respect to the employment of any other Participant, the following:

(a) a termination of employment by the Company within seven (7) months after a Change in Control, other than for Just Cause, death or permanent disability;

(b) a termination of employment by the Participant within seven (7) months after a Change in Control for one or more of the following reasons:

(1) the assignment to such Participant of any duties inconsistent in a way significantly adverse to such Participant, with such Participant’s positions, duties, responsibilities and status with the Company immediately prior to the Change in Control, or a significant reduction in the duties and responsibilities held by the Participant immediately prior to the Change in Control, in each case except in connection with such Participant’s termination of employment by the Company for Just Cause; or

(2) a reduction by the Company in the Participant’s combined annual base salary and guideline (target) bonus as in effect immediately prior to the

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Change in Control; or

(3) the Company requires the Participant to be based anywhere other than the Participant’s present work location or a location within thirty-five (35) miles from the present location; or the Company requires the Participant to travel on Company business to an extent substantially more burdensome than such Participant’s travel obligations during the period of twelve (12) consecutive months immediately preceding the Change in Control;

provided, however, that in the case of any such termination of employment by the Participant under this subparagraph (b), such termination shall not be deemed to be a Qualifying Termination unless the termination occurs within 120 days after the occurrence of the event or events constituting the reason for the termination; or

(c) before a Change in Control, a termination of employment by the Company, other than a termination for Just Cause, or a termination of employment by the Participant for one of the reasons set forth in (b) above, if the affected Participant can demonstrate that such termination or circumstance in (b) above leading to the termination:

(1) was at the request of a third party with which the Company had entered into negotiations or an agreement with regard to a Change in Control; or

(2) otherwise occurred in connection with a Change in Control;

provided, however, that in either such case, a Change in Control actually occurs within one (1) year following the Employment Termination Date.

1.35 Stock Options—shall have the meaning provided herein at Section 3.1.

1.36 Subsidiary—shall mean any corporation of which, at the time, more than fifty percent (50%) of the shares entitled to vote generally in an election of directors are owned directly or indirectly by Sunoco, Inc. or any subsidiary thereof.

1.37 Sunoco, Inc.—shall mean Sunoco, Inc., a Pennsylvania corporation, and any successor thereto by merger, consolidation, liquidation or purchase of assets or stock or similar transaction.

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ARTICLE II

Background, Purpose and Term of Plan; Participation & Eligibility

for Benefits

2.1 Background. Effective on December 31, 2001, no further awards shall be made under the Sunoco, Inc. Long-Term Performance Enhancement Plan adopted in May, 1997; provided, however, that any rights theretofore granted under that plan shall not be affected.

2.2 Purpose of the Plan. The purposes of this Sunoco, Inc. Long-Term Performance Enhancement Plan II (the “Plan”) are to:

(a) better align the interests of shareholders and management of the Company by creating a direct linkage between Participants’ rewards and shareholders’ gains;

(b) provide management with the ability to increase equity ownership in Sunoco, Inc.;

(c) provide competitive compensation opportunities that can be realized through attainment of performance goals; and

(d) provide an incentive to management for continuous employment with the Company.

It is intended that most awards made under the Plan will qualify as performance-based compensation under Section 162(m) of the Code.

2.3 Term of the Plan. The original Plan was approved by shareholders at Sunoco, Inc.’s 2001 Annual Meeting of Shareholders and first became effective at that time. The amended and restated version of the Plan, presented at Sunoco, Inc.’s 2003 Annual Meeting of Shareholders, will become effective upon approval by the holders of a majority of the votes present, in person or represented by proxy, at such meeting. No awards will be made under this Plan after December 31, 2008 unless the Board of Directors extends this date to a date no later than December 31, 2013. The Plan and all awards made under the Plan prior to such date (or extended date) shall remain in effect until such awards have been satisfied or terminated in accordance with the Plan and the terms of such awards.

2.4 Administration. The Plan shall be administered by the Committee, which shall have the authority, in its sole discretion and from time to time to:

(a) designate the employees or directors, or classes of employees or directors, eligible to participate in the Plan (each such employee or director being, a “Participant”);

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(b) grant awards provided in the Plan in such form and amount as the Committee shall determine;

(c) impose such limitations, restrictions and conditions upon any such award as the Committee shall deem appropriate; and

(d) interpret the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan.

The decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be conclusive. No member of the Committee shall be liable for any action taken or not taken or decision made or not made in good faith relating to the Plan or any award thereunder.

2.5 Eligibility for Participation. Participants in the Plan shall be:

(a) non-employee members of the Board of Directors; and

(b) those officers and other key employees occupying responsible managerial or professional positions at the Company, and capable of substantially contributing to its success.

In making this selection and in determining the amount of awards, the Committee shall consider any factors deemed relevant, including the individual’s functions, responsibilities, value of services to the Company and past and potential contributions to its profitability and sound growth.

2.6 Types of Awards Under the Plan. Awards under the Plan may be in the form of any one or more of the following:

(a) Stock Options, as described in Article III;

(b) Incentive Stock Options, as described in Article IV;

(c) Limited Rights, as described in Article V; and/or

(d) Common Stock Units, as described in Article VI.

2.7 Aggregate Limitation on Awards. Shares of stock which may be issued under the Plan shall be Common Stock. The maximum number of shares of Common Stock authorized for issuance under the

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Plan as originally adopted by the shareholders at Sunoco, Inc.’s 2001 Annual Meeting was four million (4,000,000). No Option may be granted if the number of shares of Common Stock to which such Option relates, when added to the number of shares of Common Stock previously issued under the Plan, exceeds the number of such shares reserved under the preceding sentence. For purposes of calculating the maximum number of shares of Common Stock which may be issued under the Plan:

(a) all the shares issued (including the shares, if any, withheld for tax withholding requirements) shall be counted when cash is used as full payment for shares issued upon exercise of an Option;

(b) only the shares issued (including the shares, if any, withheld for tax withholding requirements) net of shares of Common Stock used as full or partial payment for such shares upon exercise of an Option, shall be counted; and

(c) only the shares issued (including the shares, if any, withheld for tax withholding) upon vesting and payment of Common Stock Units, shall be counted.

In addition to shares of Common Stock actually issued pursuant to the exercise of Options, there shall be deemed to have been issued a number of shares equal to the number of shares of Common Stock in respect of which Limited Rights (as described in Article V) shall have been exercised. Shares tendered by a Participant as payment for shares issued upon exercise of an Option shall be available for issuance under the Plan. Any shares distributed pursuant to an Option may consist, in whole or in part, of authorized and unissued shares or treasury shares including shares of Common Stock acquired by purchase in the open market or in private transactions. Any shares of Common Stock subject to an Option, which for any reason is terminated, unexercised or expires shall again be available for issuance under the Plan, but shares subject to an Option that, as a result of the exercise of Limited Rights, are not issued, shall not be available for issuance under the Plan.

(d) The maximum number of Options that shall be granted in any calendar year to a Participant shall be four hundred thousand (400,000).

(e) The maximum number of Common Stock Units granted in any calendar year to a Participant shall be one hundred fifty thousand (150,000).

(f) The maximum number of Common Stock Units granted under the Plan will be two million (2,000,000).

The share limits set forth in this Section 2.7 shall be adjusted to reflect any capitalization changes as discussed in

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Section 7.8.

ARTICLE III

Stock Options

3.1 Award of Stock Options. The Committee, from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, may grant to any Participant in the Plan one or more options to purchase for cash or shares the number of shares of Common Stock (“Stock Options”) allotted by the Committee. The date a Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of options to a Participant pursuant to the Plan.

3.2 Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Stock Option Agreement, executed by the Company and the holder of a Stock Option, stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Committee may from time to time determine.

3.3 Stock Option Price. The Option Price per share of Common Stock deliverable upon the exercise of a Stock Option shall be not less than 100% of the Fair Market Value of a share of Common Stock on the date the Stock Option is granted.

3.4 Term and Exercise. The term and the vesting schedule of the Stock Options shall be determined by the Committee. However, except as otherwise provided in Section 3.11, no Stock Option may be exercisable before the first anniversary of the date of grant or after the tenth anniversary of the date of grant. No Stock Option shall be exercisable after the expiration of its term.

3.5 Transferability. No Stock Option may be transferred by the Participant other than by will, by the laws of descent and distribution or, to the extent not inconsistent with the applicable provisions of the Code, pursuant to a domestic relations order under applicable provisions of law, and during the Participant’s lifetime the option may be exercised only by the Participant; provided, however, that, subject to such limits as the Committee may establish, the Committee, in its discretion, may allow the Participant to transfer a Stock Option for no consideration to, or for the benefit of, an Immediate Family Member or to a bona fide trust for the exclusive benefit of such Immediate Family Members, or a partnership or limited liability company in which such Immediate Family Members are the only partners or members.

Such transfer may only be effected following the advance written notice from the Participant to the Committee, describing the terms and conditions of the proposed transfer, and such

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transfer shall become effective only when recorded in the Company’s record of outstanding Stock Options. Any such transferable Stock Option is further conditioned on the Participant and such Immediate Family Member or other transferee agreeing to abide by the Company’s then-current Stock Option transfer guidelines. In the discretion of the Committee, the foregoing right to transfer a Stock Option also will apply to the right to transfer ancillary rights associated with such Stock Option, and to the right to consent to any amendment to the applicable Stock Option Agreement.

Subsequent transfers shall be prohibited except in accordance with the laws of descent and distribution, or by will. Following transfer, any such Stock Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and the terms “Optionee” or “Participant” shall be deemed to include the transferee; provided, however, that the events of termination of employment of Sections 3.8 (“Retirement or Disability”), 3.9 (“Termination for Other Reasons”) and 3.10 (“Death of Optionee”) hereof shall continue to be applied with respect to the original Optionee, following which the options shall be exercisable by the transferee only to the extent, and for the respective periods specified therein. Neither the Committee nor the Company will have any obligation to inform any transferee of a Stock Option or stock appreciation right of any expiration, termination, lapse or acceleration of such Option. The Company will have no obligation to register with any federal or state securities commission or agency any Common Stock issuable or issued under a Stock Option or stock appreciation right that has been transferred by a Participant under this Section 3.5.

3.6 Manner of Payment. Each Stock Option Agreement shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the Option Price for such shares (together with payment for any taxes which the Company is required by law to withhold by reason of such exercise) with cash or with Common Stock. All shares of Common Stock issued under this Plan, or any other Company plan, must be held at least six (6) months before they may be used as payment of the Option Price.

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3.7 Issuance and Delivery of Shares. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for, or otherwise register the Optionee on the books and records of the Company as a holder of, such shares of Common Stock. The Optionee shall become a shareholder of Sunoco, Inc. with respect to the Common Stock so registered, or represented by share certificates so issued, and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a shareholder except to the extent otherwise provided in the Option award.

(a) Notwithstanding the foregoing, and at the discretion of the Committee, any Optionee subject to minimum stock ownership guidelines (as established from time to time by the Committee or the Company), but failing to meet the applicable personal ownership requirement within the prescribed period may, upon exercise of the Options, receive a number of shares of Common Stock subject to the following restrictions which shall remain in place until compliance with such ownership guidelines is attained:

(1) The number of shares subject to the restrictions shall be equal to the total number of shares received in the exercise of the Options, minus the sum of:

(i) to the extent that shares received upon exercise of the Option are used to pay the Option Price, the number of shares which have a Fair Market Value on the date of the Option exercise equal to the total amount paid for all the shares received in the Option exercise; and

(ii) to the extent that shares received upon exercise of the Option are used to pay taxes and brokerage fees, the number of shares which have a Fair Market Value on the date of the Option exercise equal to the applicable federal, state and local withholding tax on the total Option exercise and any brokerage commission or interest charges, if applicable to the exercise.

(2) Other than transfers to family members or trusts that are permitted in accordance with the applicable stock ownership guidelines, and that will not result in a reduction in the level of ownership

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attributable to the Participant under such guidelines, the Optionee shall be prohibited from effecting the sale, exchange, transfer, pledge, hypothecation, gift or other disposition of such shares of Common Stock until the earlier of:

(i) attainment of compliance with applicable stock ownership guidelines;

(ii) the Optionee’s death, retirement, or permanent disability (as determined by the Committee); or

(iii) occurrence of the Optionee’s Employment Termination Date, for any reason other than Just Cause.

Notwithstanding the foregoing, six (6) months after the exercise of the Stock Option, such shares of Common Stock may be used as payment of the Option Price of shares issued upon the exercise of other Stock Options. However, all such shares issued will be restricted shares.

(3) The restrictions shall apply to any new, additional or different securities the Optionee may become entitled to receive with respect to such shares by virtue of a stock split or stock dividend or any other change in the corporate or capital structure of the Company.

(b) Until such time as the restrictions hereunder lapse, the shares will be held in “book-entry form” and appropriate notation of these restrictions will be maintained in the records of the Company’s transfer agent and registrar. Any share certificate representing such shares will bear a conspicuous legend evidencing these restrictions, and the Company may require the Optionee to deposit the share certificate with the Company or its agent, endorsed in blank or accompanied by a duly executed irrevocable stock power or other instrument of transfer.

3.8 Retirement or Disability. Upon termination of the Optionee’s employment by reason of retirement or permanent disability (as each is determined by the Committee), the Optionee may, within sixty (60) months from the date of termination, exercise any Stock Options to the extent such options are exercisable during such 60-month period.

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3.9 Termination for Other Reasons. Except as provided in Sections 3.8 and 3.10, or except as otherwise determined by the Committee, upon termination of an Optionee’s employment, all unvested Stock Options shall terminate immediately, and all vested Stock Options shall terminate:

(a) immediately, in the case of an Optionee terminated by the Company for Just Cause; or

(b) upon the expiration of ninety (90) calendar days following the occurrence of the Optionee’s Employment Termination Date, other than for Just Cause;

provided, however, that the Limited Rights awarded in tandem with such Stock Options shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination.

3.10 Death of Optionee. Any rights in respect of Stock Options to the extent exercisable on the date of the Optionee’s death may be exercised by the Optionee’s estate or by any person that acquires the legal right to exercise such Stock Option by bequest, inheritance, or otherwise by reason of the death of the Optionee. Any such exercise to be valid must occur within the remaining option term of the Stock Option. The foregoing provisions of this Section 3.10 shall apply to an Optionee who dies while employed by the Company and to an Optionee whose employment may have terminated prior to death; provided, however, that:

(a) an Optionee who dies while employed by the Company will be treated as if the Optionee had retired on the date of death. Accordingly, the Optionee’s estate or a person who acquires the right to exercise such Stock Option by bequest or inheritance will have the right to exercise the Stock Option in accordance with Section 3.8; or

(b) the estate or a person who acquires the right to exercise a Stock Option by bequest or inheritance from an Optionee who dies after terminating employment with the Company will have the remainder of any exercise period provided under Sections 3.8 and 3.9.

3.11 Acceleration of Options. Notwithstanding any provisions to the contrary in agreements evidencing Options granted thereunder or in this Plan, each outstanding Option shall become immediately and fully exercisable upon the occurrence of any Change in Control.

3.12 Effect of Exercise. The exercise of any Stock Options shall cancel that number of related Limited Rights, if any, which is equal to the number of shares of Common Stock purchased pursuant

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to said Options.

ARTICLE IV

Incentive Stock Options

4.1 Award of Incentive Stock Options. The Committee, from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, may grant to any Participant in the Plan one or more “incentive stock options” (intended to qualify as such under the provisions of Section 422 of the Code (“Incentive Stock Options”)) to purchase for cash or shares the number of shares of Common Stock allotted by the Committee. The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of options to a Participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of ten percent (10%) or more of the total combined voting power of Sunoco, Inc. and its subsidiaries (within the meaning of Section 424(f) of the Code).

4.2 Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Incentive Stock Option Agreement, executed by the Company and the holder of an Incentive Stock Option stating the number of shares of Common Stock subject to the Incentive Stock Option evidenced thereby, and in such form as the Committee may from time to time determine.

4.3 Incentive Stock Option Price. The Option Price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Incentive Stock Option is granted.

4.4 Term and Exercise. The term and the vesting schedule of the Incentive Stock Option shall be determined by the Committee. However, no Incentive Stock Option may be exercisable before the first anniversary of the date of grant or after the tenth anniversary of such date. No Incentive Stock Option shall be exercisable after the expiration of its term.

4.5 Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of grant with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year, under this Plan or any other stock option plan of Sunoco, Inc. and its subsidiaries (within the meaning of Section 424(f) of the Code) exceeds One Hundred Thousand Dollars ($100,000.00), then the Option, as to the excess shall be treated as a non-qualified stock option. An Incentive Stock Option shall not be granted to any person who is not an “employee” of the Company (within the meaning of Section 424(f) of the Code).

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4.6 Retirement or Disability. Upon the termination of the Optionee’s employment by reason of retirement or permanent disability (as each is determined by the Committee), the Optionee may, within sixty (60) months from the date of such termination of employment, exercise any Incentive Stock Options to the extent such Incentive Stock Options are exercisable during such 60-month period. Notwithstanding the foregoing, the tax treatment available pursuant to Section 422 of the Code upon the exercise of an Incentive Stock Option will not be available to an Optionee who exercises any Incentive Stock Option more than:

(a) twelve (12) months after the date of termination of employment due to permanent disability; or

(b) three (3) months after the date of termination of employment due to retirement.

4.7 Termination for Other Reasons. Except as provided in Sections 4.6 and 4.8, or except as otherwise determined by the Committee, upon termination of an Optionee’s employment, all unvested Incentive Stock Options shall terminate immediately, and all vested Incentive Stock Options shall terminate:

(a) immediately, in the case of an Optionee terminated by the Company for Just Cause; or

(b) upon the expiration of ninety (90) calendar days following the date of termination of an Optionee’s employment other than for Just Cause;

provided, however, that the Limited Rights awarded in tandem with such Incentive Stock Options shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination.

4.8 Death of Optionee. Any rights in respect of Incentive Stock Options to the extent exercisable on the date of the Optionee’s death may be exercised by the Optionee’s estate or by any person that acquires the legal right to exercise such Stock Option by bequest, inheritance, or otherwise by reason of the death of the Optionee. Any such exercise to be valid must occur within the remaining option term of the Incentive Stock Option. The foregoing provisions of this Section 4.8 shall apply to an Optionee who dies while employed by the Company and to an Optionee whose employment may have terminated prior to death; provided, however, that:

(a) an Optionee who dies while employed by the Company will be treated as if the Optionee had retired on the date of death. Accordingly, the Optionee’s estate or a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance

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will have the right to exercise the Incentive Stock Option in accordance with Section 4.6; or

(b) the estate or a person who acquires the right to exercise a stock option by bequest or inheritance from an Optionee who dies after terminating employment with the Company will have the remainder of any exercise period provided under Section 4.6 and 4.7.

4.9 Applicability of Stock Options Selections. Section 3.6 (“Manner of Payment”), Section 3.7 (“Issuance and Delivery of Shares”), Section 3.11 (“Acceleration of Options”) and Section 3.12 (“Effect of Exercise”), applicable to Stock Options, shall apply equally to Incentive Stock Options. Said Sections are incorporated by reference in this Article IV as though fully set forth herein.

ARTICLE V

Limited Rights

5.1 Award of Limited Rights. Concurrently with or subsequent to the award of any Option, the Committee may, subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, award to the Optionee with respect to each Option, a related limited right permitting the Optionee, during a specified limited time period, to be paid the appreciation on the Option in lieu of exercising the Option (“Limited Right”).

5.2 Limited Rights Agreement. Limited Rights granted under the Plan shall be evidenced by written agreements in such form as the Committee may from time to time determine.

5.3 Exercise Period. Limited Rights are immediately exercisable in full upon grant for a period of up to seven (7) months following the date of a Change in Control (the “Exercise Period”).

5.4 Amount of Payment. The amount of payment to which an Optionee shall be entitled upon the exercise of each Limited Right shall be equal to 100% of the amount, if any, which is equal to the difference between the Option Price of the related Option and the Market Price of a share of such Common Stock. “Market Price” is defined to be the greater of:

(a) the highest price per share of Common Stock paid in connection with any Change in Control during the period from the sixtieth (60th) calendar day immediately prior to the Change in Control through the ninetieth (90th) calendar day following the Change in Control; and

(b) the highest trading price per share of Common Stock reflected in the consolidated trading tables of

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The Wall Street Journal (presently the New York Stock Exchange Composite Transactions quotations) during the 60-day period immediately prior to the Change in Control.

5.5 Form of Payment. Payment of the amount to which an Optionee is entitled upon the exercise of Limited Rights, as determined pursuant to Section 5.4, shall be made solely in cash.

5.6 Effect of Exercise. If Limited Rights are exercised, the Stock Options, if any, related to such Limited Rights cease to be exercisable to the extent of the number of shares with respect to which the Limited Rights were exercised. Upon the exercise or termination of the Options, if any, related to such Limited Rights, the Limited Rights granted with respect thereto terminate to the extent of the number of shares as to which the related Options were exercised or terminated; provided, however, that with respect to Options that are terminated as a result of the termination of the Optionee’s employment status, the Limited Rights awarded in tandem therewith shall not terminate and such Limited Rights shall remain exercisable during the Exercise Period for any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination.

5.7 Retirement or Disability. Upon termination of the Optionee’s employment by reason of permanent disability or retirement (as each is determined by the Committee), the Optionee may, within six (6) months from the date of termination, exercise any Limited Rights to the extent such Limited Right is exercisable during such six-month period.

5.8 Death of Optionee or Termination for Other Reasons. Except as provided in Sections 5.7 and 5.9 or except as otherwise determined by the Committee, all Limited Rights granted under the Plan shall terminate upon the termination of the Optionee’s employment or upon the death of the Optionee.

5.9 Termination Related to a Change in Control. The requirement that an Optionee be terminated by reason of retirement or permanent disability or be employed by the Company at the time of exercise pursuant to Sections 5.7 and 5.8 respectively, is waived during the Exercise Period as to any Optionee whose employment relationship with the Company has been terminated as a result of any Qualifying Termination.

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ARTICLE VI

Common Stock Units

6.1 Award of Common Stock Units. The Committee, from time to time, and subject to the provisions of the Plan, may grant to any Participant in the Plan rights to receive shares of Common Stock which are subject to a risk of forfeiture by the Participant (“Common Stock Units”). At the time it grants any Common Stock Units, the Committee shall determine whether the payment of such Common Stock Units shall be conditioned upon either:

(a) the Participant’s continued employment with the Company throughout a stated period (Section 6.4); or

(b) the attainment of certain predetermined performance objectives during a stated period (Section 6.5).

The date Common Stock Units are granted shall mean the date selected by the Committee as of which the Committee allots a specific number of Common Stock Units to a Participant pursuant to the Plan.

6.2 Common Stock Unit Agreements. Common Stock Units granted under the Plan shall be evidenced by written agreements stating the number of Common Stock Units evidenced thereby or in such form and as the Committee may from time to time determine.

6.3 Dividend Equivalents. A holder of Common Stock Units will be entitled to receive payment from the Company in an amount equal to each cash dividend (“Dividend Equivalent”) Sunoco, Inc. would have paid to such holder had he, on the record date for payment of such dividend, been the holder of record of shares of Common Stock equal to the number of Common Stock Units which had been awarded to such holder as of the close of business on such record date. The Company shall establish a bookkeeping account on behalf of each Participant in which the Dividend Equivalents that would have been paid to the holder of Common Stock Units (“Dividend Equivalent Account”) shall be credited. The Dividend Equivalent Account will not bear interest.

6.4 Performance Period. Upon making an award, the Committee shall determine (and the Common Stock Unit Agreement shall state) the length of the applicable period during which employment must be maintained or certain performance targets must be attained (the “Performance Period”). Performance Periods will normally be from three (3) to five (5) years; provided, however, that the Committee at its sole discretion may establish other time periods; and further provided, that the Performance Period for an award conditioned upon a Participant’s continued employment with the Company shall not be less than three (3) years.

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6.5 Performance Goals. Common Stock Units and the related Dividend Equivalent Account earned may be based upon the attainment of Performance Goals established by the Committee in accordance with Section 162(m) of the Code. Within the first ninety (90) days of the Performance Period, the Committee shall establish, in writing, the weighted Performance Goals and related Performance Factors for various goal achievement levels for the Company. In establishing the weighted Performance Goals, the Committee shall take the necessary steps to insure that the Company’s ability to achieve the pre-established goals is uncertain at the time the goals are set. The established written Performance Goals, assigned weights, and Performance Factors shall be written in terms of an objective formula, whereby any third party having knowledge of the relevant Company performance results could calculate the amount to be paid. Such Performance Goals may vary by Participant and by grant.

The number of Common Stock Units and Dividend Equivalents earned will be equal to the amounts awarded multiplied by the applicable Performance Factors. However, the Committee shall have the discretion, by Participant and by grant, to reduce (but not to increase) some or all of the amount that would otherwise be payable by reason of the satisfaction of the Performance Goals. In making any such determination, the Committee is authorized to take into account any such factor or factors it determines are appropriate, including but not limited to Company, business unit and individual performance.

6.6 Payment of Common Stock Units and Dividend Equivalent Account. Payment in respect of Common Stock Units earned (as determined under Sections 6.4 and 6.5) shall be made to the holder thereof within ninety (90) days after the Performance Period for such units has ended, but only to the extent the Committee certifies in writing that the continuing employment and/or any applicable performance targets have been met.

Except as may be otherwise provided by Section 6.9, payment for Common Stock Units earned shall be made either in shares of Common Stock, or in cash, at the sole discretion of the Committee. The medium of payment, whether in shares of Common Stock or in cash, shall be set forth in the Committee’s resolution granting the Common Stock Units and in the Agreement with the Participant.

For an award of Common Stock Units to be paid out in shares, the number of shares paid shall be equal to the number of Common Stock Units earned. The holder may elect to reduce this amount by the number of shares of Common Stock which have, on the date the Common Stock Units are paid, a Fair Market Value equal to the applicable federal, state and local withholding tax due on the receipt of Common Stock, in lieu of making a cash payment equal to the amount of such withholding tax due.

For an award of Common Stock Units to be settled in cash, the amount of cash paid shall be equal to the number of Common Stock

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Units earned multiplied by the Fair Market Value of a share of Common Stock on such date following the lapse of the Performance Period, and the satisfaction of any other applicable conditions established by the Committee at the time of grant, that the Participant first becomes entitled to receive such payment. Such amount will be reduced by applicable federal, state and local withholding tax due.

A holder of Common Stock Units (whether or not such Common Stock Units are to be paid out in Common Stock, or settled in cash) will be entitled to receive from the Company, at the end of the Performance Period, payment of an amount in cash equal to the Dividend Equivalent Account earned (as determined under Sections 6.4 and 6.5) by the holder minus applicable federal, state and local withholding tax due.

(a) Notwithstanding the foregoing, and at the discretion of the Committee, any Participant subject to minimum stock ownership guidelines (as established from time to time by the Committee or the Company), but failing to meet the applicable personal ownership requirement within the prescribed period may receive a number of shares of Common Stock upon payment of the Common Stock Units, subject to the following restrictions which shall remain in place until compliance with such ownership guidelines is attained:

(1) The number of shares subject to the restrictions shall be equal to the total number of Common Stock Units being paid out, minus the number of shares of Common Stock used to pay applicable federal, state and local withholding tax on the total payment of such Common Stock Units.

(2) Other than transfers to family members or trusts that are permitted in accordance with the applicable stock ownership guidelines, and that will not result in a reduction in the level of ownership attributable to the Participant under such guidelines, the Participant shall be prohibited from effecting the sale, exchange, transfer, pledge, hypothecation, gift or other disposition of such shares of Common Stock until the earlier of:

(i) attainment of compliance with applicable stock ownership guidelines;

(ii) the Participant’s death,

21

retirement, or permanent disability (as determined by the Committee); or

(iii) occurrence of the Participant’s Employment Termination Date, for any reason other than Just Cause.

(3) These restrictions shall apply to any new, additional or different securities the Participant may become entitled to receive with respect to such shares by virtue of a stock split or stock dividend or any other change in the corporate or capital structure of the Company.

(b) Until such time as the restrictions hereunder lapse, the shares will be held in “book-entry form” and appropriate notation of these restrictions will be maintained in the records of the Company’s transfer agent and registrar. Any share certificate representing such shares will bear a conspicuous legend evidencing these restrictions, and the Company may require the Participant to deposit the share certificate with the Company or its agent, endorsed in blank or accompanied by a duly executed irrevocable stock power or other instrument of transfer.

6.7 Death, Disability or Retirement.

(a) Upon the occurrence of a Participant’s Employment Termination Date, by reason of death, permanent disability or retirement (as each is determined by the Committee) prior to the end of the Performance Period:

(1) in the case of an award of Common Stock Units made pursuant to Section 6.1(a) hereof and conditioned upon the Participant’s continued employment, the conditions to payout, if any, shall be determined by the Committee and shall be as set forth in the agreement granting the Common Stock Units.

(2) in the case of an award of Common Stock Units made pursuant to Section 6.1(b) hereof and conditioned upon the attainment of certain predetermined performance objectives, no portion of the Participant’s Common Stock Units and the Dividend Equivalent Account related to such award shall be forfeited, and the Common Stock Units, together with related

22

Dividend Equivalents, shall be paid out as though such Participant continued to be an employee or director of the Company through any applicable Performance Period, and as, if, and when the applicable Performance Goals have been met.

6.8 Termination of Employment. Except as provided in Sections 6.7 and 6.9, or as determined by the Committee, 100% of all Common Stock Units of a Participant under the Plan shall be forfeited and the Dividend Equivalent Account shall be forfeited upon the occurrence of the Participant’s Employment Termination Date prior to the end of the Performance Period, and in such event the Participant shall not be entitled to receive any Common Stock or any payment of the Dividend Equivalent Account regardless of the level of Performance Goals achieved for the respective Performance Periods.

6.9 Change in Control. In the event of a Change in Control, Common Stock Units shall be paid to the Participant no later than ninety (90) days following the date of occurrence of such Change in Control (the “CSU Payout Date”), regardless of whether the applicable Performance Period has expired or whether the applicable Performance Goals have been met. For a Change in Control occurring within the first consecutive twelve-month period following the date of grant, the number of performance-based Common Stock Units paid out with regard to such grant shall be equal to the total number of Common Stock Units outstanding in such grant as the Change in Control, not adjusted for any Performance Factors described in Section 6.5. For a Change in Control occurring after the first consecutive twelve-month period following the date of grant, the number of performance-based Common Stock Units paid out with regard to such grant shall be the greater of (i) the total number of Common Stock Units outstanding in such grant as of the Change in Control, not adjusted for any Performance factors described in Section 6.5 or (ii) the total number of such Common Stock Units outstanding in such grant, multiplied by the applicable Performance Factors related to the Company’s actual performance immediately prior to the Change in Control. In the case of an award of Common Stock Units conditioned upon the Participant’s continued employment, the total number of Common Stock Units outstanding in such grant as of the Change in Control shall be paid to the Participant. The Participant’s Common Stock Units shall be payable to the Participant in cash or stock, as determined by the Committee prior to the Change in Control, as follows:

(a) if the Participant is to receive stock, the Participant will receive shares of Common Stock equal in number to the total number of Common Stock Units as stated above in this Section 6.9; or

(b) if the Participant is to receive cash, the Participant will be paid an amount in cash equal to the number of Common Stock Units stated above in this Section 6.9

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multiplied by the Market Price as defined in Section 5.4. Such amount will be reduced by the applicable federal, state and local withholding taxes due.

On or before the CSU Payout Date, the Participant will be paid an amount in cash equal to the applicable Dividend Equivalents on the number of Common Stock Units being paid pursuant to this Section 6.9 for the time period immediately preceding the Change in Control. Payout of Common Stock Units and the Dividend Equivalents shall be made to each Participant:

(c) who is employed by the Company on the CSU Payout Date; or

(d) whose employment relationship with the Company is terminated:

(1) as a result of any Qualifying Termination prior to the CSU Payout Date; or

(2) as a result of death, permanent disability or retirement (as each is determined by the Committee), that has occurred prior to the CSU Payout Date.

The Committee may establish, at the time of the grant of Common Stock Units, other conditions which must be met for payout to occur. These conditions shall be set forth in the Committee’s resolution granting the Common Stock Units and in the Agreement with the holders.

ARTICLE VII

Miscellaneous

7.1 General Restriction. Each award under the Plan shall be subject to the requirement that if, at any time, the Committee shall determine that:

(a) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law; or

(b) the consent or approval of any government regulatory body; or

(c) an agreement by the recipient of an award with respect to the disposition of shares of Common Stock,

is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue or purchase of shares of Common Stock thereunder, then such award may not be consummated in whole or in part unless such listing, registration, qualification,

24

consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee.

7.2 Non-Assignability. Awards under the Plan shall not be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution except as otherwise determined by the Committee. Accordingly, during the life of the recipient, such award shall be exercisable only by such person or by such person’s guardian or legal representative, unless the Committee determines otherwise.

7.3 Right to Terminate Employment; Effect of Disaffiliation. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any Participant the right to continue in the employment of the Company, to continue to be nominated or serve on the Board of Directors, or affect any right which the Company may have to terminate the employment of such Participant. If an Affiliate ceases to be an Affiliate as a result of the sale or other disposition by Sunoco, Inc. or one of its continuing Affiliates of its ownership interest in the former Affiliate, or otherwise, then individuals who remain employed by such former Affiliate thereafter shall be considered for all purposes under the Plan to have terminated their employment relationship with the Company.

7.4 Non-Uniform Determinations. The Committee’s determinations under the Plan (including without limitation, determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards, and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated.

7.5 Rights as a Shareholder. The recipient of any award under the Plan shall have no rights as a shareholder with respect thereto unless and until shares of Common Stock are issued on behalf of such recipient in “book-entry” form, in the records of the Company’s transfer agent and registrar, or certificates have been issued for such shares.

7.6 Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (a) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (b) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any recipient who takes such leaves of absence.

7.7 Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and awards

25

as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an award or incentive period.

7.8 Adjustments. In any event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Options theretofore granted under the Plan, the Option Price of Options theretofore granted under the Plan, the number of Common Stock Units theretofore awarded under the Plan and any and all other matters deemed appropriate by the Committee.

7.9 Amendment of the Plan.

(a) The Committee may, without further action by the shareholders and without receiving further consideration from the Participants, amend this Plan or condition or modify awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements.

(b) The Committee may at any time, and from time to time, modify or amend the Plan, or any award granted under the Plan, in any respect; provided, however, that, without shareholder approval the Committee may not:

(1) increase the maximum award levels established in Section 2.7, including the maximum number of shares of Common Stock which may be issued under the Plan (other than increases pursuant to Section 7.8);

(2) extend the term during which an Option may be exercised beyond ten years from the date of grant; or

(3) alter the terms of any Option to reduce the Option Price, or cancel any outstanding Option award and replace it with a new Option, having a lower Option Price, where the economic effect would be the same as reducing the Option Price of the cancelled Option.

Except as provided in Section 7.9(a) above, no termination, modification or amendment of the Plan (or any award granted under the Plan), shall, without the consent of a Participant, affect the Participant’s rights under an award previously granted.

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EX-10.2

Exhibit 10.2

Sunoco, Inc.

Retainer Stock Plan for Outside Directors

(As Amended May 1, 2003)

ARTICLE I

Purpose

The purpose of the Sunoco, Inc. Retainer Stock Plan for Outside Directors (the “Plan”) is to provide ownership of the Company’s Common Stock to Outside Directors of the Sunoco, Inc. Board of Directors by paying, in shares of Common Stock, a portion of the retainer fee paid to each Outside Director, and thereby improve the Company’s ability to attract and retain highly qualified individuals to serve as directors of the Company; provide competitive remuneration for Board service; enhance the breadth of Outside Director remuneration; and strengthen the commonality of interest between directors and shareholders.

ARTICLE II

Effective Date

This Plan shall become effective upon its approval by the shareholders of the Company.

ARTICLE III

Definitions

In this Plan, the following definitions apply:

(1) “Annual Meeting” means the Annual Meeting of Shareholders of Sunoco, Inc.

(2) “Award” means the annual award of an equal number of shares of Common Stock to each Outside Director under this Plan.

(3) “Board” means the Board of Directors of Sunoco, Inc.

(4) “Chairman” shall mean the Chairman of the Board of Directors of Sunoco, Inc.

(5) “Common Stock” means Sunoco, Inc. common stock.

(6) “Company” means Sunoco, Inc., a Pennsylvania corporation.

(7) “Outside Director” means any member of the Company’s Board of Directors who is not also a principal officer of the Company.

(8) “Participant” means each Outside Director to whom an award of Common Stock is granted under this Plan upon his or her election or reelection to the Board.

(9) “Plan” means this Sunoco, Inc. Retainer Stock Plan for Outside Directors, as it may be amended from time to time.

(10) “Restricted” means stock may not be sold or transferred for a period of one year from the date of issuance.

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ARTICLE IV

Administration

(1) The Board shall administer this Plan. The Chairman shall have responsibility to conclusively interpret the provisions of this Plan and decide all questions of fact arising in its application and such determinations shall be final and binding on the Company and the Outside Director.

(2) Determinations made with respect to any individual under this Plan shall be made without the participation of such individual.

(3) This Plan and all action taken under it shall be governed, as to construction and administration, by the laws of the Commonwealth of Pennsylvania.

ARTICLE V

Eligibility and Awards

(1) Eligibility. Each Outside Director shall participate in this Plan.

(2) Grant of Awards. Commencing with the 2003 Annual Meeting, each Participant shall be granted an Award of a number of shares of Common Stock (rounded up to the nearest five whole shares), the market value of which shall equal Thirty Three Thousand Dollars ($33,000). For the purposes of determining such market value, the closing price of Common Stock on the New York Stock Exchange on the fifth business day prior to the applicable Annual Meeting shall be used.

(3) Award Limitations.

(a) Notwithstanding the above subsection, the number of shares of Common Stock to be awarded to each Participant shall be limited to an amount the fair market value of which shall not exceed $40,000, as determined by the closing price of Common Stock on the New York Stock Exchange on the day prior to such Participant’s election or reelection.

(b) The maximum number of shares of Common Stock which may be issued under this Plan shall be two hundred and fifty thousand shares (250,000), subject to adjustments pursuant to ARTICLE VII.

(c) Subject to applicable rules and regulations of the Securities and Exchange Commission, shares of Common Stock issued hereunder shall be restricted stock, and may not be sold or transferred for a period of one year from the date of issuance.

(4) Pro Ration of Certain Awards. In the event that any Outside Director is elected by the Board to fill a vacancy between Annual Meetings, such Outside Director shall participate in this Plan and he or she shall receive a number of shares representing a pro rata portion of the number of shares of Common Stock awarded to the Participants as of the Annual Meeting which immediately preceded the election of such Outside Director; however, in no event shall the fair market value of such shares exceed $40,000 as determined pursuant to subparagraph (3) (a).

2

(5) Issuance of Common Stock. As soon as practicable after the applicable Annual Meeting or the date an Outside Director is otherwise elected as described above, the Company shall, at the Company’s discretion, cause either (i) a stock certificate to be issued and delivered to each Outside Director, registered in the name of such Outside Director, or (ii) as an alternative to issuing such certificate, registration of such shares on the books and records of the Company (“book-entry registration”) in the name of such Outside Director as a holder of such shares of Common Stock, evidencing the award of Common Stock pursuant to this Plan. Outside Directors shall not be deemed for any purpose to be, or to have any rights as, shareholders of the Company with respect to any shares of Common Stock awarded under this Plan, except as and when certificates are issued or such shares have been registered by book-entry registration, as applicable. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date of such stock certificate or book-entry registration.

(6) Discontinuation. The Board may at any time discontinue granting Awards under this Plan.

(7) Deferral of Award. Notwithstanding the provisions of subsection (5) above, if a Participant so desires, awards of shares of Common Stock granted hereunder may be deferred in the form of Share Units pursuant to the Sunoco, Inc. Directors’ Deferred Compensation Plan (“Deferred Plan”). Such deferral shall be subject to the provisions of the Deferred Plan except that the following terms shall supersede the terms of the Deferred Plan:

(a) The deferral of shares of Common Stock under this Plan as Share Units under the Deferred Plan shall be pursuant to a one-time irrevocable election by a Participant.

(b) The irrevocable election shall apply to all shares of Common Stock granted subsequent to such election.

(c) The method of payment or distribution of deferred amounts must be irrevocably specified in a notice delivered to the Compensation Committee. The method of payment or distribution may be changed with respect to future awards of shares of Common Stock by filing notice of such change with the Compensation Committee. Any such change shall apply only to shares of Common Stock awarded on or after the first day of the quarter following the calendar quarter in which the notice is received by the Compensation Committee. Such notice shall continue, and be effective, until revoked.

ARTICLE VI

Regulatory Compliance and Listing

The issuance or delivery of any shares of Common Stock may be postponed by the Company for such period as may be required to comply with any applicable requirements under the federal securities laws, any applicable listing requirements of any national securities exchange, or any requirements under any other law or regulation applicable to the issuance or delivery of such shares. The Company shall not be obligated to issue or deliver any such shares if the issuance or delivery thereof shall

3

constitute a violation of any provision of any law or of any regulation of any governmental authority or any national securities exchange.

ARTICLE VII

Adjustments

In the event of any change in the outstanding shares of Common Stock by reason of a stock dividend or distribution, reorganization, recapitalization, merger, consolidation, split-up, combination, exchange of shares of Common Stock or the like, the Board may appropriately adjust the number of shares of Common Stock which may be issued under this Plan.

ARTICLE VIII

Amendment of the Plan

(1) The Board may, without further action by the shareholders and without further consideration to the Company, amend this Plan or condition or modify Awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements.

(2) The Board may, from time to time, amend this Plan or any provisions thereof without further action by the shareholders except that no amendment may:

(a) change the provisions of ARTICLE V, subsection (2), more than once in any six month period, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder;

(b) increase awards (i) retroactively, (ii) more than once in any calendar year, or (iii) to an amount greater than $40,000 per year as determined pursuant to this Plan;

(c) change the eligibility for Awards or otherwise materially modify the terms of this Plan; or

(d) affect an Outside Director’s rights under any Award made under this Plan prior to such amendment without such Outside Director’s consent.

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EX-12

EXHIBIT 12

STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(a)

Sunoco, Inc. and Subsidiaries

(Millions of Dollars Except Ratio)

	For the Six Months Ended June 30, 2003
	(UNAUDITED)
Fixed Charges:
Consolidated interest cost and debt expense	$	57
Proportionate share of interest cost and debt expense of 50 percent-owned-but-not-controlled investees(b)		2
Interest allocable to rental expense(c)		22
Total	$	81
Earnings:
Consolidated income before income tax expense	$	262
Minority interest in net income of subsidiaries having fixed charges		8
Proportionate share of income tax expense of 50 percent-owned-but-not-controlled investees		2
Equity in income of less than 50 percent owned investees		(7	)
Dividends received from less than 50 percent owned investees		5
Fixed charges		81
Interest capitalized		(1	)
Amortization of previously capitalized interest		1
Total	$	351
Ratio of Earnings to Fixed Charges		4.33

(a) The consolidated financial statements of Sunoco, Inc. and subsidiaries contain the accounts of all operations that are controlled (generally more than 50 percent owned). Corporate joint ventures and other investees over which the Company has the ability to exercise significant influence but that are not controlled (generally 20 to 50 percent owned) are accounted for by the equity method.

(b) Consists of Sunoco’s share of interest cost and debt expense of the Epsilon Products Company, LLC (“Epsilon”) polypropylene joint venture in which the Company is a partner. Sunoco guarantees Epsilon’s $120 million term loan due in 2006 and borrowings under Epsilon’s $40 million revolving credit facility maturing in 2006, which amounted to $29 million at June 30, 2003. Epsilon’s interest and debt expense totaled $2 million for the six months ended June 30, 2003.

(c) Represents one-third of total operating lease rental expense which is that portion deemed to be interest.

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EX-31.1

Exhibit 31.1

Certification

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John G. Drosdick, Chairman, Chief Executive Officer and President of Sunoco, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sunoco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	August 6, 2003	/s/ John G. Drosdick
		John G. Drosdick
		Chairman, Chief Executive Officer and President

EX-31.2

Exhibit 31.2

Certification

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Thomas W. Hofmann, Senior Vice President and Chief Financial Officer of Sunoco, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sunoco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	August 6, 2003	/s/ Thomas W. Hofmann
		Thomas W. Hofmann
		Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification

Of

Periodic Financial Report

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, John G. Drosdick, Chairman, Chief Executive Officer and President of Sunoco, Inc., hereby certify that the Quarterly Report on Form 10-Q for the Quarter ended June 30, 2003 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Sunoco, Inc.

Date:	August 6, 2003	/s/ John G. Drosdick
		John G. Drosdick
		Chairman, Chief Executive Officer and President

Note: A signed original of this written statement required by Section 906 has been provided to Sunoco, Inc. and will be retained by Sunoco, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification

Of

Periodic Financial Report

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Thomas W. Hofmann, Senior Vice President and Chief Financial Officer of Sunoco, Inc., hereby certify that the Quarterly Report on Form 10-Q for the Quarter ended June 30, 2003 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Sunoco, Inc.

Date:	August 6, 2003	/s/ Thomas W. Hofmann
		Thomas W. Hofmann
		Senior Vice President and Chief Financial Officer

Note: A signed original of this written statement required by Section 906 has been provided to Sunoco, Inc. and will be retained by Sunoco, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.