Management's Discussion and Analysis is management's analysis of the financial performance of Sunoco, Inc. and subsidiaries (collectively, "Sunoco" or the "Company") and of significant trends that may affect its future performance. It should be read in conjunction with Sunoco's consolidated financial statements and related notes under Item 8. Those statements in Management's Discussion and Analysis that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See "Forward-Looking Statements" on page 55 for a discussion of the factors that could cause actual results to differ materially from those projected.

Overview

Historically, Sunoco's profitability has primarily been determined by refined product and chemical margins and the reliability and efficiency of its operations. The volatility of crude oil, refined product and chemical prices and the overall supply/demand balance for these commodities have had, and should continue to have, a significant impact on margins and the financial results of the Company. Sunoco's profitability has been increasingly impacted by the growth in the level of earnings in its cokemaking operations.

Throughout most of 2006 and 2007, refined product margins in Sunoco's principal refining centers in the Northeast and Midwest were very strong. Such margins benefited from stringent fuel specifications related to sulfur reductions in gasoline and diesel products, strong premiums for ethanol-blended gasoline, generally tight industry refined product inventory levels on a days-supply basis and strong global refined product demand coupled with refinery maintenance/capital improvement downtime, which led to reductions in spare industry refining capacity. However, refined product margins, particularly for gasoline, declined significantly in the first half of 2008 in response to record high crude oil prices and softening global demand, then strengthened in the second half of 2008 due to supply disruptions in the Gulf Coast attributable to Hurricanes Gustav and Ike and declining crude oil prices. Chemical margins were weak during most of the 2006-2008 period in response to significantly higher feedstock costs and softening demand. In 2008, cokemaking profitability increased significantly primarily in response to increased price realizations from coal and coke production at the Company's Jewell operations.

Sunoco expects that refined product margins will continue to be positive, although at much lower levels than the prior three years as a weakening global economy and lower global demand should continue to place pressure on refined product margins, particularly for gasoline. However, the completion of major capital projects in 2007 has significantly enhanced the earnings potential and flexibility of Sunoco's refining assets and should continue to mitigate the adverse impact of market declines. The Company believes the profitability of the Chemicals business will continue to be challenged in 2009 due to the weakening economy causing ongoing weakness in product demand. The absolute level of refined product and chemical margins is difficult to predict as they are influenced by extremely volatile factors in the global marketplace, including the absolute level of crude oil and other feedstock prices, the effects of weather conditions on product supply and demand and the impact of a weakening global economy. Cokemaking profitability is expected to continue to increase as various growth projects in the Company's coke business come on stream, although Coke segment profitability will be impacted by volatility of coal prices on the Jewell coal and cokemaking operations.

The Company's future operating results and capital spending plans will also be impacted by environmental matters (see "Environmental Matters" below).

Strategic Actions

Sunoco is committed to improving its performance and enhancing its shareholder value while, at the same time, maintaining its financial strength and flexibility by striving to:

• Deliver excellence in health, safety and environmental performance;

• Increase reliability and realize additional operational improvements of Company assets in each of its businesses;

• Reduce expenses;

• Efficiently manage capital spending to minimize outlays during periods of weak profitability;

• Diversify, upgrade and grow the Company's asset base through strategic acquisitions and investments;

• Divest assets that do not meet the Company's return-on-investment criteria; and

• Return cash to the Company's shareholders through the payment of cash dividends.

Sunoco has undertaken the following initiatives as part of this strategy:

In the Refining and Supply business:

• Announced in December 2008 its intention to sell the Tulsa refinery or convert it to a terminal by the end of 2009;

• Completed a $525 million project in May 2007 to expand the capacity of one of the fluid catalytic cracking units at the Philadelphia refinery by 15 thousand barrels per day, which enables an upgrade of an additional 15-20 thousand barrels per day of residual fuel production into higher-value gasoline and distillate production and expands crude oil flexibility;

• Completed a $53 million project in July 2007 at the Toledo refinery, which expands the facility's crude processing capability by 10 thousand barrels per day. In 2008, additional work was performed at this facility to expand crude processing capability by an additional 5 thousand barrels per day; and

• Completed capital projects in 2006 totaling $755 million to comply with the Tier II low-sulfur gasoline and on-road diesel fuel requirements.

In the Retail Marketing business:

• Continued to execute a Retail Portfolio Management program in 2008 designed to enhance overall return on capital employed in the business. Under this program, Sunoco is selectively reducing its invested capital in Company-owned or leased sites, while retaining most of the gasoline sales volumes attributable to the divested sites. During the 2006-2008 period, Sunoco generated $133 million of divestment proceeds related to the sale of 181 sites. In early 2009, Sunoco announced the addition of approximately 150 sites to the program and expects to generate an estimated $180 million of proceeds, primarily over the next two years, from divestment activities.

In the Chemicals business:

• Announced in December 2008 its decision to sell the business if it can obtain an appropriate value; and

• Announced in January 2009 its decision to permanently shut down the Bayport, TX polypropylene plant no later than April 30, 2009.

In the Logistics business:

• Completed an acquisition totaling $185 million in November 2008 of a refined products pipeline system, refined products terminal facilities and certain other related assets located in Texas and Louisiana;

• Continued construction in 2008 of a crude oil pipeline from the Nederland terminal to Motiva Enterprise LLC's Port Arthur, TX refinery and three related crude oil storage tanks, which are to be completed in 2010 at a cost of approximately $90 million; and

• Completed acquisitions totaling $109 million in March 2006 of two crude oil pipeline systems and related storage facilities located in Texas.

In the Coke business:

• Commenced construction in 2008 of a 650 thousand tons-per-year cokemaking facility in Granite City, IL. SunCoke Energy will own and operate the new facility, which is expected to cost approximately $300 million and be completed in the fourth quarter of 2009;

• Entered into an agreement in 2008 to build, own and operate a 550 thousand tons-per-year cokemaking facility and associated cogeneration power plant capable of providing 46 megawatts of power in Middletown, OH. Construction of these facilities, which is expected to cost approximately $350 million, is subject to resolution of all contingencies, including necessary

• Completed construction and began operations in 2008 at Haverhill II, a second 550 thousand tons-per-year cokemaking facility and associated cogeneration power plant located at the Company's Haverhill, OH site;

• Began operations in 2007 at a new 1.7 million tons-per-year cokemaking facility in Vitσria, Brazil. SunCoke Energy has a $41 million preferred stock investment in this facility and receives fees for operating the plant as well as for licensing its proprietary technology to the project company; and

• Completed in December 2006 the $155 million purchase of the minority interest in the Jewell cokemaking operations.

Sunoco also:

• Commenced a business improvement initiative in the fourth quarter of 2008 to reduce costs and improve business processes. Implementation is expected to commence in the first quarter of 2009 with a goal of significantly reducing costs by moving the Company's cost structure from an average industry performance to first quartile performance. Cash outlays in connection with this initiative, which largely consist of severance and related benefits, are likely to occur over approximately one year. However, the Company does not expect these cash costs to be incremental to the salary and benefits which would otherwise have been paid to employees who are terminated.

• Repurchased 0.8, 4.0 and 12.2 million shares during 2008, 2007 and 2006, respectively, of its outstanding common stock for $49, $300 and $871 million, respectively. Additional repurchases of Company stock will be dependent on prevailing market conditions, available cash and the attractiveness of repurchasing stock relative to other investment alternatives; and

• Increased the quarterly cash dividend on its common stock, effective with the second quarter of 2008, to $.30 per share ($1.20 per year), following increases from $.25 per share to $.275 per share in the second quarter of 2007 and from $.20 per share to $.25 per share in the second quarter of 2006.

For additional information regarding the above actions, see Notes 2, 15 and 16 to the Consolidated Financial Statements (Item 8).

Results of Operations

Earnings Profile of Sunoco Businesses (millions of dollars after tax)



                                                           2008     2007     2006
      Refining and Supply                                  $515     $772     $881
      Retail Marketing                                      201       69       76
      Chemicals                                              36       26       43
      Logistics                                              85       45       36
      Coke                                                  105       29       50
      Corporate and Other:
      Corporate expenses                                    (46 )    (67 )    (58 )
      Net financing expenses and other                      (22 )    (41 )    (49 )
      Asset write-downs and other matters                  (138 )    (32 )      -
      Income tax matters                                     26        -        -
      Issuance of Sunoco Logistics Partners L.P. limited
      partnership units                                      14       90        -

      Consolidated net income                              $776     $891     $979

Analysis of Earnings Profile of Sunoco Businesses

In 2008, Sunoco earned $776 million, or $6.63 per share of common stock on a diluted basis, compared to $891 million, or $7.43 per share, in 2007 and $979 million, or $7.59 per share, in 2006.

The $115 million decrease in net income in 2008 was primarily due to higher provisions for asset write-down and other matters ($102 million), lower gains related to the prior issuance of Sunoco Logistics Partners L.P. limited partnership units ($76 million), higher expenses ($124 million), lower production of refined products ($85 million), lower refined product margins ($21 million), lower gains on asset divestments ($18 million) and lower gasoline and distillate sales volumes ($22 million). Partially offsetting these negative factors were higher average retail gasoline and distillate margins ($178 million); higher income attributable to Sunoco's Coke ($76 million), Logistics ($40 million) and Chemicals ($10 million) businesses; lower net financing expenses ($19 million); and gains recognized in 2008 related to certain income tax matters ($26 million).

The $88 million decrease in net income in 2007 was primarily due to higher expenses ($116 million), a provision for asset write-downs and other matters recognized in 2007 ($32 million), lower margins in Sunoco's Refining and Supply ($44 million) and Retail Marketing ($12 million) businesses and lower income attributable to the Coke business ($21 million) primarily due to lower tax benefits. Partially offsetting these negative factors were the gain related to the prior issuance of Sunoco Logistics Partners L.P. limited partnership units ($90 million), higher gains on asset divestments ($11 million), higher earnings from the Logistics business ($9 million), lower net financing expenses ($8 million) and a lower effective income tax rate ($14 million).

Refining and Supply

The Refining and Supply business manufactures petroleum products and commodity petrochemicals at its Marcus Hook, Philadelphia, Eagle Point and Toledo refineries and petroleum and lubricant products at its Tulsa refinery and sells these products to other Sunoco businesses and to wholesale and industrial customers. Refining operations are comprised of Northeast Refining (the Marcus Hook, Philadelphia and Eagle Point refineries) and MidContinent Refining (the Toledo and Tulsa refineries). Sunoco intends to sell the Tulsa refinery or convert it to a terminal by the end of 2009.

                                                              2008     2007        2006
Income (millions of dollars)                                   $515     $772        $881
Wholesale margin* (per barrel):
Total Refining and Supply                                     $8.77    $8.87       $9.09
Northeast Refining                                            $8.90    $7.38       $7.92
MidContinent Refining                                         $8.38   $13.17      $12.46
Throughputs (thousands of barrels daily):
Crude oil                                                     783.3    834.7       840.6
Other feedstocks                                               84.8     80.0        72.8

Total throughputs                                             868.1    914.7       913.4

Products manufactured (thousands of barrels daily):
Gasoline                                                      399.9    439.2       436.2
Middle distillates                                            316.2    314.4       305.5
Residual fuel                                                  56.4     66.6        74.0
Petrochemicals                                                 34.5     37.2        35.6
Lubricants                                                     11.4     11.6        13.2
Other                                                          82.1     80.4        82.2

Total production                                              900.5    949.4       946.7
Less: Production used as fuel in refinery operations           40.5     43.4        43.9

Total production available for sale                           860.0    906.0       902.8

Crude unit capacity (thousands of barrels daily) at
December 31                                                   910.0    910.0 **    900.0
Crude unit capacity utilized                                    86%      92%         93%
Conversion capacity*** (thousands of barrels daily) at
December 31                                                   407.0    407.0       392.0
Conversion capacity utilized                                    87%      94%         95%

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

** Reflects a 10 thousand barrels-per-day increase in MidContinent Refining in July 2007 attributable to a crude unit debottleneck project at the Toledo refinery.

*** Represents capacity to upgrade lower-value, heavier petroleum products into higher-value, lighter products. Reflects a 15 thousand barrels-per-day increase in Northeast Refining in May 2007 attributable to an expansion project.

Refining and Supply segment results decreased $257 million in 2008 primarily due to higher expenses ($145 million) and lower production volumes ($85 million). Also contributing to the decline were lower realized margins ($21 million). The higher expenses were largely the result of increased prices for purchased fuel and utilities. Production volumes decreased approximately 17 million barrels in 2008 compared to 2007. Planned and unplanned maintenance work and economically driven rate reductions in 2008 reduced production throughout the refining system, while production in 2007 was negatively impacted by major turnaround and expansion work at the Philadelphia refinery as well as a turnaround at the Tulsa refinery. In 2008, Sunoco announced its intention to sell its Tulsa refinery or convert it to a terminal by the end of 2009 and, as a result, recorded a $95 million after-tax provision to write down the affected assets to their estimated fair values. This charge is reported as part of the Asset Write-Downs and Other Matters shown separately in Corporate and Other in the Earnings Profile of Sunoco Businesses (see Note 2 to the Consolidated Financial Statements under Item 8).

Refining and Supply segment results decreased $109 million in 2007 largely due to higher expenses ($92 million) and lower realized margins ($44 million), partially offset by higher production volumes ($6 million) and a lower effective income tax rate ($18 million). The lower margins reflect the negative impact of higher average crude oil costs, while the higher expenses were largely the result of costs associated with the major turnaround and expansion work at the Philadelphia refinery and the turnaround work at the Tulsa refinery as well as increased operating costs to produce low-sulfur fuels.

Retail Marketing

The Retail Marketing business sells gasoline and middle distillates at retail
and operates convenience stores in 26 states, primarily on the East Coast and in
the Midwest region of the United States.



                                                   2008    2007    2006
             Income (millions of dollars)           $201     $69     $76
             Retail margin* (per barrel):
             Gasoline                              $6.30   $3.92   $4.16
             Middle distillates                    $7.20   $5.05   $4.69
             Sales (thousands of barrels daily):
             Gasoline                              287.4   301.0   303.2
             Middle distillates                     37.7    40.6    42.9

                                                   325.1   341.6   346.1

             Retail gasoline outlets               4,720   4,684   4,691

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

Retail Marketing segment income increased $132 million in 2008 primarily due to higher retail gasoline ($159 million) and distillate ($19 million) margins, partially offset by lower retail gasoline ($18 million) and distillate ($4 million) sales volumes and lower divestment gains attributable to the Retail Portfolio Management program ($18 million), in part due to the recognition in 2008 of impairment losses and associated costs totaling $6 million after tax on certain properties held for sale.

Retail Marketing segment income decreased $7 million in 2007 primarily due to lower average retail gasoline margins ($15 million) and higher expenses ($6 million), which include a $3 million after-tax charge associated with a litigation settlement in 2007 and a $6 million after-tax charge related to an environmental litigation accrual in 2006. Partially offsetting these negative factors were higher gains attributable to the Retail Portfolio Management program ($11 million) and higher average distillate margins ($3 million).

During the 2006-2008 period, Sunoco generated $133 million of divestment proceeds related to the sale of 181 sites under a Retail Portfolio Management ("RPM") program to selectively reduce the Company's invested capital in Company-owned or leased sites. Most of the sites were converted to contract dealers or distributors thereby retaining most of the gasoline sales volume attributable to the divested sites within the Sunoco branded business. During 2008, 2007 and 2006, net after-tax gains totaling $3, $21 and $10 million, respectively, were recognized in connection with the RPM program. In early 2009, Sunoco announced the addition of approximately 150 sites to the RPM program. There are currently approximately 200 sites in the program, of which approximately 110 are company-operated locations. These sites are expected to be divested or converted to contract dealers or distributors primarily over the next two years, generating an estimated $180 million of divestment proceeds.

Chemicals

The Chemicals business manufactures phenol and related products at chemical plants in Philadelphia, PA and Haverhill, OH; and polypropylene at facilities in LaPorte, TX, Neal, WV, Bayport, TX and Marcus Hook, PA. The Chemicals business also distributes and markets these products. Sunoco intends to permanently shut down the Bayport polypropylene facility no later than April 30, 2009. Sunoco also intents to sell its Chemicals business if it can obtain an appropriate value.

                                                2008    2007    2006
                 Income (millions of dollars)     $36     $26     $43
                 Margin* (cents per pound):
                 All products**                 10.7’    9.8’    9.9’
                 Phenol and related products     9.6’    8.5’    8.0’
                 Polypropylene**                12.1’   11.6’   12.4’
                 Sales (millions of pounds):
                 Phenol and related products    2,274   2,508   2,535
                 Polypropylene                  2,204   2,297   2,243
                 Other                             65      80      88

                                                4,543   4,885   4,866

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

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

Chemicals segment income increased $10 million in 2008 due primarily to higher margins ($31 million) and lower expenses ($17 million), partially offset by lower sales volumes ($24 million) and a provision to write down polypropylene inventory to market value ($12 million). The lower expenses were largely due to the transfer of cumene and propylene splitter assets to Refining and Supply, effective January 1, 2008.

Chemicals segment income decreased $17 million in 2007 primarily due to higher expenses ($9 million), lower margins ($3 million) and the absence of a deferred tax benefit recognized in 2006 as a result of a state tax law change ($4 million).

During January 2009, Sunoco decided that it will permanently shut down its Bayport, TX polypropylene plant which has become uneconomic to operate and in 2008 also determined that the goodwill related to its polypropylene business no longer had value. In connection therewith, the Company recorded a $54 million after-tax provision to write down the affected Bayport assets to estimated fair value and to write off the remaining polypropylene business goodwill. During 2007, Sunoco decided to permanently shut down a previously idled phenol production line at its Haverhill, OH plant that had become uneconomic to restart. In connection with this shutdown, the Company recorded an $8 million after-tax provision to write off the affected

production line. During 2007, Sunoco also recorded a $7 million after-tax loss associated with the sale of its Neville Island, PA terminal facility, which included an accrual for enhanced pension benefits associated with employee terminations and for other required exit costs. These items are reported as part of the Asset Write-Downs and Other Matters shown separately in Corporate and Other in the Earnings Profile of Sunoco Businesses (see Note 2 to the Consolidated Financial Statements under Item 8).

During 2003, Sunoco formed a limited partnership with Equistar Chemicals, L.P. ("Equistar") involving Equistar's ethylene facility in LaPorte, TX. Equistar is a wholly owned subsidiary of LyondellBasell Industries. Under the terms of the partnership agreement, the partnership has agreed to provide Sunoco with 500 million pounds per year of propylene for 15 years priced on a cost-based formula that includes a fixed discount that declines over the life of the partnership. Under a separate 15-year supply contract, Equistar provides Sunoco with 200 million pounds per year of propylene at market prices. Through the partnership and the supply contract, the Company believes it has secured a favorable long-term supply of propylene for its Gulf Coast polypropylene business. Realization of these benefits is largely dependent upon performance by Equistar. In January 2009, LyondellBasell Industries announced that its U.S. operations (including Equistar) filed to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Neither the partnership nor the Equistar entities that are partners of the partnership has filed for bankruptcy. In addition, Equistar has not given any indication that it will not perform under its contracts. Sunoco does not believe that the bankruptcy will have a significant adverse impact on its business. However, in the event of nonperformance, Sunoco has oversight, performance and other contractual rights under the partnership agreement.

Logistics

The Logistics business operates refined product and crude oil pipelines and terminals and conducts crude oil acquisition and marketing activities primarily in the Northeast, Midwest and South Central regions of the United States. In addition, the Logistics business has an ownership interest in several refined product and crude oil pipeline joint ventures. Substantially all logistics . . .