UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007                                              

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

For the transition period from                      to                                        

Commission file number: 001-32395         
   

ConocoPhillips

Delaware		01-0562944
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

600 North Dairy Ashford, Houston, TX 77079
(Address of principal executive offices) (Zip Code)

281-293-1000
(Registrant’s telephone number, including area code)

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

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

The registrant had 1,599,556,644 shares of common stock, $.01 par value, outstanding at September 30, 2007.

 

 

CONOCOPHILLIPS

TABLE OF CONTENTS

		Page
Part I – Financial Information
Item 1. Financial Statements
Consolidated Income Statement			1
Consolidated Balance Sheet			2
Consolidated Statement of Cash Flows			3
Notes to Consolidated Financial Statements			4
Supplementary Information—Condensed Consolidating Financial Information			26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Item 3. Quantitative and Qualitative Disclosures About Market Risk			59
Item 4. Controls and Procedures			59
Part II – Other Information
Item 1. Legal Proceedings			60
Item 1A. Risk Factors			61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			62
Item 5. Other Information			62
Item 6. Exhibits			63
Signature			64
Computation of Ratio of Earnings to Fixed Charges
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certifications Pursuant to Section 1350

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Consolidated Income Statement		ConocoPhillips

		Millions of Dollars
		Three Months Ended								Nine Months Ended
		September 30								September 30
		2007				2006				2007				2006
Revenues and Other Income
Sales and other operating revenues*		$	46,062				48,076				134,752				142,131
Equity in earnings of affiliates			1,314				1,196				3,749				3,320
Other income			557				313				1,696				537
Total Revenues and Other Income			47,933				49,585				140,197				145,988
Costs and Expenses
Purchased crude oil, natural gas and products			30,862				30,551				88,397				93,454
Production and operating expenses			2,620				2,640				7,669				7,549
Selling, general and administrative expenses			569				650				1,700				1,826
Exploration expenses			218				197				739				443
Depreciation, depletion and amortization			2,052				2,137				6,092				5,282
Impairment—expropriated assets			—				—				4,588				—
Impairments			188				267				285				317
Taxes other than income taxes*			4,583				4,853				13,654				13,661
Accretion on discounted liabilities			81				74				241				207
Interest and debt expense			391				308				1,017				783
Foreign currency transaction gains			(20	)			(50	)			(198	)			(10	)
Minority interests			25				21				65				60
Total Costs and Expenses			41,569				41,648				124,249				123,572
Income before income taxes			6,364				7,937				15,948				22,416
Provision for income taxes			2,691				4,061				8,428				10,063
Net Income		$	3,673				3,876				7,520				12,353
Net Income Per Share of Common Stock (dollars)
Basic		$	2.26				2.35				4.60				7.90
Diluted			2.23				2.31				4.54				7.78
Dividends Paid Per Share of Common Stock (dollars)		$	.41				.36				1.23				1.08
Average Common Shares Outstanding (in thousands)
Basic			1,622,456				1,652,623				1,635,128				1,564,423
Diluted			1,644,267				1,675,839				1,657,244				1,587,892
*Includes excise taxes on petroleum products sales:		$	3,954				4,098				11,864				12,010

See Notes to Consolidated Financial Statements.

Consolidated Balance Sheet		ConocoPhillips

		Millions of Dollars
		September 30				December 31
		2007				2006
Assets
Cash and cash equivalents		$	1,379				817
Accounts and notes receivable (net of allowance of $64 million in 2007 and $45 million in 2006)			11,867				13,456
Accounts and notes receivable—related parties			1,911				650
Inventories			5,312				5,153
Prepaid expenses and other current assets			3,170				4,990
Total Current Assets			23,639				25,066
Investments and long-term receivables			30,145				19,595
Loans and advances—related parties			1,598				1,118
Net properties, plants and equipment			87,407				86,201
Goodwill			29,374				31,488
Intangibles			899				951
Other assets			365				362
Total Assets		$	173,427				164,781
Liabilities
Accounts payable		$	14,629				14,163
Accounts payable—related parties			1,628				471
Notes payable and long-term debt due within one year			405				4,043
Accrued income and other taxes			4,741				4,407
Employee benefit obligations			740				895
Other accruals			1,935				2,452
Total Current Liabilities			24,078				26,431
Long-term debt			21,471				23,091
Asset retirement obligations and accrued environmental costs			6,561				5,619
Joint venture acquisition obligation—related party			6,445				—
Deferred income taxes			20,924				20,074
Employee benefit obligations			3,419				3,667
Other liabilities and deferred credits			2,416				2,051
Total Liabilities			85,314				80,933
Minority Interests			1,180				1,202
Common Stockholders’ Equity
Common stock (2,500,000,000 shares authorized at $.01 par value)
Issued (2007—1,717,176,211 shares; 2006—1,705,502,609 shares)
Par value			17				17
Capital in excess of par			42,554				41,926
Grantor trusts (at cost: 2007—43,259,722 shares; 2006—44,358,585 shares)			(746	)			(766	)
Treasury stock (at cost: 2007—74,359,845 shares; 2006—15,061,613 shares)			(5,479	)			(964	)
Accumulated other comprehensive income			3,930				1,289
Unearned employee compensation			(133	)			(148	)
Retained earnings			46,790				41,292
Total Common Stockholders’ Equity			86,933				82,646
Total		$	173,427				164,781

See Notes to Consolidated Financial Statements.

Consolidated Statement of Cash Flows		ConocoPhillips

		Millions of Dollars
		Nine Months Ended
		September 30
		2007				2006
Cash Flows From Operating Activities
Net income		$	7,520				12,353
Adjustments to reconcile net income to net cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and amortization			6,092				5,282
Impairment—expropriated assets			4,588				—
Impairments			285				317
Dry hole costs and leasehold impairments			355				141
Accretion on discounted liabilities			241				207
Deferred taxes			55				273
Undistributed equity earnings			(1,472	)			(1,007	)
Gain on asset dispositions			(1,316	)			(64	)
Other			28				(296	)
Working capital adjustments*
Decrease in accounts and notes receivable			411				172
Increase in inventories			(334	)			(1,922	)
Decrease (increase) in prepaid expenses and other current assets			430				(669	)
Increase in accounts payable			1,052				181
Decrease (increase) in taxes and other accruals			(305	)			911
Net Cash Provided by Operating Activities			17,630				15,879
Cash Flows From Investing Activities
Acquisition of Burlington Resources Inc.**			—				(14,285	)
Capital expenditures and investments, including dry hole costs**			(7,907	)			(11,513	)
Proceeds from asset dispositions			3,057				246
Long-term advances/loans to affiliates			(449	)			(632	)
Collection of advances/loans to affiliates			66				115
Other			24				—
Net Cash Used in Investing Activities			(5,209	)			(26,069	)
Cash Flows From Financing Activities
Issuance of debt			824				15,263
Repayment of debt			(6,141	)			(4,325	)
Issuance of company common stock			251				145
Repurchase of company common stock			(4,501	)			(675	)
Dividends paid on company common stock			(2,009	)			(1,684	)
Other			(289	)			(123	)
Net Cash Provided by (Used in) Financing Activities			(11,865	)			8,601
Effect of Exchange Rate Changes on Cash and Cash Equivalents			6				71
Net Change in Cash and Cash Equivalents			562				(1,518	)
Cash and cash equivalents at beginning of period			817				2,214
Cash and Cash Equivalents at End of Period		$	1,379				696

*	Net of acquisition and disposition of businesses.
**	Net of cash acquired.

See Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements		ConocoPhillips

Note 1—Interim Financial Information

The interim-period financial information presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments, in the opinion of management, necessary for a fair presentation of the consolidated financial position of ConocoPhillips and its results of operations and cash flows for such periods. All such adjustments are of a normal and recurring nature. The acquisition of Burlington Resources Inc. was reflected in our balance sheet beginning at March 31, 2006, and was reflected in our results of operations beginning April 1, 2006.

To enhance your understanding of these interim financial statements, see the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K.

Note 2—Changes in Accounting Principles

Effective April 1, 2006, we implemented Emerging Issues Task Force Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” Issue No. 04-13 requires purchases and sales of inventory with the same counterparty and entered into “in contemplation” of one another to be combined and reported net (i.e., on the same income statement line). Exceptions to this are exchanges of finished goods for raw materials or work-in-progress within the same line of business, which are only reported net if the transaction lacks economic substance. The implementation of Issue No. 04-13 did not have a material impact on net income.

The table below shows the actual nine months ended September 30, 2007, sales and other operating revenues, and purchased crude oil, natural gas and products under Issue No. 04-13, and the respective pro forma amounts had this new guidance been effective for the period included in this report prior to April 1, 2006.

		Millions of Dollars
		Nine Months Ended
		September 30
		Actual				Pro Forma
		2007				2006
Sales and other operating revenues		$	134,752				135,474
Purchased crude oil, natural gas and products			88,397				86,797

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). This Interpretation provides guidance on recognition, classification and disclosure concerning uncertain tax liabilities. The evaluation of a tax position requires recognition of a tax benefit if it is more likely than not it will be sustained upon examination. We adopted FIN 48 effective January 1, 2007. The adoption did not have a material impact on our consolidated financial statements.

At January 1, 2007, we had unrecognized tax benefits of $912 million. Included in this balance was $468 million which, if recognized, would affect our effective tax rate.

We recognize accrued interest related to unrecognized tax benefits in interest expense, and penalties in production and operating expenses. At January 1, 2007, accrued liabilities for interest and penalties totaled $99 million, net of accrued income taxes. See Note 21—Income Taxes, for additional information about income taxes.

Note 3—Acquisition of Burlington Resources Inc.

On March 31, 2006, ConocoPhillips completed the $33.9 billion acquisition of Burlington Resources Inc., an independent exploration and production company that held a substantial position in North American natural gas proved reserves, production and exploratory acreage.

The final allocation of the purchase price to specific assets and liabilities was completed in the first quarter of 2007. It was based on the final outside appraisal of the fair value of Burlington Resources long-lived assets and the conclusion of the fair value determination of all other Burlington Resources assets and liabilities.

The following table summarizes the final purchase price allocation of the fair value of the assets acquired and liabilities assumed as of March 31, 2006:

		Millions
		of Dollars
Cash and cash equivalents		$	3,238
Accounts and notes receivable			1,432
Inventories			229
Prepaid expenses and other current assets			108
Investments and long-term receivables			268
Properties, plants and equipment			28,176
Goodwill			16,787
Intangibles			107
Other assets			46
Total Assets		$	50,391
Accounts payable		$	1,487
Notes payable and long-term debt due within one year			1,009
Accrued income and other taxes			697
Employee benefit obligations—current			248
Other accruals			254
Long-term debt			3,330
Asset retirement obligations			730
Accrued environmental costs			174
Deferred income taxes			7,849
Employee benefit obligations			347
Other liabilities and deferred credits			397
Common stockholders’ equity			33,869
Total Liabilities and Equity		$	50,391

All of the goodwill was assigned to the Worldwide Exploration and Production reporting unit. Of the $16,787 million of goodwill, $7,953 million relates to net deferred tax liabilities arising from differences

between the allocated financial bases and deductible tax bases of the acquired assets. None of the goodwill is deductible for tax purposes.

The following table presents pro forma information for the nine months ended September 30, 2006, as if the acquisition had occurred at the beginning of 2006.

		Millions
		of Dollars
Pro Forma
Sales and other operating revenues		$	144,036
Net income			12,747
Net income per share of common stock (dollars)
Basic			7.71
Diluted			7.60

The pro forma information is not intended to reflect the actual results that would have occurred if the companies had been combined during the period presented, nor is it intended to be indicative of the results of operations that may be achieved by ConocoPhillips in the future.

Note 4—Restructuring

In connection with the acquisition of Burlington Resources, we implemented a restructuring program as part of the effort to capture the synergies of combining the two companies. Under this program, we recorded accruals totaling $230 million in 2006 for employee severance payments, site closings, incremental pension benefit costs associated with workforce reductions, and employee relocations. Approximately 600 positions were identified for elimination during 2006, most of which were in the United States. During 2007, an additional 35 positions were identified for elimination.

Of the total accrual, $224 million was reflected in the Burlington Resources purchase price allocation as an assumed liability, and $6 million related to ConocoPhillips was reflected in selling, general and administrative expenses in 2006. The following table summarizes activity related to the non-pension portion of the accrual in the first nine months of 2007:

		Millions
		of Dollars
Balance at December 31, 2006		$	120
Benefit payments			(57	)
Adjustments			17
Balance at September 30, 2007*		$	80

*	Includes current liabilities of $35 million. All workforce reductions are expected to be completed by March 2008. Some costs for site closings, continuation of employee benefits, and employee relocations are expected to extend beyond one year from September 30, 2007.

Note 5—Variable Interest Entities (VIEs)

In June 2006, ConocoPhillips acquired a 24 percent interest in West2East Pipeline LLC (West2East), a company holding a 100 percent interest in Rockies Express Pipeline LLC (Rockies Express). West2East is a VIE, but we are not the primary beneficiary. We use the equity method of accounting for our investment. We issued a guarantee for 24 percent of the $2 billion in credit facilities of Rockies Express. In addition, we have a guarantee for 24 percent of $600 million of Floating Rate Notes due 2009 issued by Rockies Express in September 2007. See Note 13—Guarantees, for additional information.

In June 2005, ConocoPhillips and OAO LUKOIL (LUKOIL) created the OOO Naryanmarneftegaz (NMNG) joint venture to develop resources in the Timan-Pechora province of Russia. The NMNG joint venture is a VIE, but we are not the primary beneficiary. We use the equity method of accounting for this investment. At September 30, 2007, the book value of our investment in the venture was $1,403 million.

See Note 11—Debt, for information about the liquidation of Phillips 66 Capital II.

Note 6—Inventories

Inventories consisted of the following:

		Millions of Dollars
		September 30				December 31
		2007				2006
Crude oil and petroleum products		$	4,500				4,351
Materials, supplies and other			812				802
		$	5,312				5,153

Inventories valued on the last-in, first-out (LIFO) basis totaled $4,156 million and $4,043 million at September 30, 2007, and December 31, 2006, respectively. The remainder of our inventories is valued under various methods, including first-in, first-out and weighted average. The excess of current replacement cost over LIFO cost of inventories amounted to $5,977 million and $4,178 million at September 30, 2007, and December 31, 2006, respectively.

Note 7—Assets Held for Sale

In 2006, we commenced asset rationalization efforts that led to the classification of certain assets as “held for sale” under Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, at December 31, 2006, we classified $3,051 million of non-current assets and $604 million of non-current liabilities as current assets and current liabilities, respectively.

During the first nine months of 2007, a portion of these held-for-sale assets were sold, additional assets met the held-for-sale criteria, and other assets no longer met the held-for-sale criteria. As a result, at September 30, 2007, we classified $1,352 million of non-current assets as “Prepaid expenses and other current assets” on our consolidated balance sheet and we classified $193 million of non-current liabilities as current liabilities, consisting of $142 million in “Accrued income and other taxes” and $51 million in “Other accruals.” We expect the disposal of these assets to be substantially completed by the end of 2008.

The major classes of non-current assets and non-current liabilities held for sale at September 30, 2007, classified as current were:

		Millions
		of Dollars
Assets
Investments and long-term receivables		$	53
Net properties, plants and equipment			1,215
Goodwill			65
Intangibles			2
Other assets			17
Total assets reclassified		$	1,352
Exploration and Production (E&P)		$	214
Refining and Marketing (R&M)			1,138
		$	1,352
Liabilities
Asset retirement obligations and accrued environmental costs		$	28
Deferred income taxes			142
Other liabilities and deferred credits			23
Total liabilities reclassified		$	193
E&P		$	29
R&M			164
		$	193

Note 8—Investments, Loans and Long-Term Receivables

Investments in Venezuela

See the “Expropriated Assets” section of Note 10—Impairments, for information on the complete impairment of our investments in the Hamaca and Petrozuata projects.

EnCana Business Ventures

In October 2006, we announced a business venture with EnCana Corporation (EnCana) to create an integrated North American heavy-oil business. The transaction closed on January 3, 2007, and consists of two 50/50 business ventures, a Canadian upstream general partnership, FCCL Oil Sands Partnership (FCCL), and a U.S. downstream limited liability company, WRB Refining LLC (WRB). We use the equity method of accounting for both entities, with the operating results of our investment in FCCL reflecting its use of the full-cost method of accounting for oil and gas exploration and development activities.

FCCL’s operating assets consist of the Foster Creek and Christina Lake steam-assisted gravity drainage bitumen projects, both located in the eastern flank of the Athabasca oil sands in northeast Alberta. A subsidiary of EnCana is the operator and managing partner of FCCL. We are obligated to contribute $7.5 billion, plus accrued interest, to FCCL over a 10-year period beginning in 2007. For additional information on this obligation, see Note 17—Joint Venture Acquisition Obligation.

WRB’s operating assets consist of the Wood River and Borger refineries, located in Roxana, Illinois, and Borger, Texas, respectively. As a result of our contribution of these two assets to WRB, a basis difference of $5.0 billion was created due to the fair value of the contributed assets recorded by WRB exceeding their

historic book value. The difference is amortized and recognized as a benefit evenly over a period of 25 years, which is the estimated remaining useful life of the refineries at the closing date. The basis difference at September 30, 2007, was approximately $4.9 billion. We are the operator and managing partner of WRB. EnCana is obligated to contribute $7.5 billion, plus accrued interest, to WRB over a 10-year period beginning in 2007. For the Wood River refinery, operating results are shared 50/50 starting upon formation. For the Borger refinery, we are entitled to 85 percent of the operating results in 2007, 65 percent in 2008, and 50 percent in all years thereafter.

LUKOIL

Our ownership interest in LUKOIL was 20.0 percent at September 30, 2007, based on 851 million issued shares. For financial reporting under U.S. generally accepted accounting principles, treasury shares held by LUKOIL are not considered outstanding for determining our equity-method ownership interest in LUKOIL. Our ownership interest, based on estimated shares outstanding, was 20.5 percent at September 30, 2007.

At September 30, 2007, the book value of our ordinary share investment in LUKOIL was $10,496 million. Our share of the net assets of LUKOIL was estimated to be $7,939 million. This basis difference of $2,557 million is primarily being amortized on a unit-of-production basis and recognized as a reduction of earnings. On September 30, 2007, the closing price of LUKOIL shares on the London Stock Exchange was $83.00 per share, making the total market value of our LUKOIL investment $14,119 million.

Loans to Related Parties

As part of our normal ongoing business operations and consistent with industry practice, we invest and enter into numerous agreements with other parties to pursue business opportunities, which share costs and apportion risks among the parties as governed by the agreements. Included in such activity are loans made to certain affiliated companies. Significant loans to affiliated companies at September 30, 2007, included the following:

	•		$648 million in loan financing, including $74 million of accrued interest, to Freeport LNG for the construction of a liquefied natural gas (LNG) facility. We expect to provide loan financing of approximately $631 million for the construction of the facility, excluding accrued interest.
	•		$303 million in loan financing, including $25 million of accrued interest, to Varandey Terminal Company associated with the costs of a terminal expansion. We expect our total obligation for the terminal expansion to be approximately $410 million at current exchange rates, excluding interest to be accrued during construction.
	•		$608 million of project financing, including $34 million of accrued interest, to Qatargas 3, an integrated project to produce and liquefy natural gas from Qatar’s North field. Our maximum exposure to this financing structure is $1.2 billion, excluding accrued interest.

Note 9—Properties, Plants and Equipment

The company’s investment in properties, plants and equipment (PP&E), with accumulated depreciation, depletion and amortization (Accum. DD&A), was:

		Millions of Dollars
		September 30, 2007												December 31, 2006
		Gross				Accum.				Net				Gross				Accum.				Net
		PP&E				DD&A				PP&E				PP&E				DD&A				PP&E
E&P		$	99,574				28,799				70,775				88,592				21,102				67,490
Midstream			332				167				165				330				157				173
R&M			19,252				4,506				14,746				22,115				5,199				16,916
LUKOIL Investment			—				—				—				—				—				—
Chemicals			—				—				—				—				—				—
Emerging Businesses			1,167				130				1,037				1,006				98				908
Corporate and Other			1,355				671				684				1,229				515				714
		$	121,680				34,273				87,407				113,272				27,071				86,201

Suspended Wells

The following table reflects the net changes in suspended exploratory well costs during the first nine months of 2007:

		Millions of Dollars
		Nine Months Ended
		September 30, 2007
Beginning balance at January 1		$	537
Additions pending the determination of proved reserves			100
Reclassifications to proved properties			(24	)
Sales of suspended well investment			(22	)
Charged to dry hole expense			(10	)
Ending balance at September 30		$	581

The following table provides an aging of suspended well balances at September 30, 2007, and December 31, 2006:

		Millions of Dollars
		September 30				December 31
		2007				2006
Exploratory well costs capitalized for a period of one year or less		$	167				225
Exploratory well costs capitalized for a period greater than one year			414				312
Ending balance		$	581				537
Number of projects that have exploratory well costs that have been capitalized for a period greater than one year			36				22

The following table provides a further aging of those exploratory well costs that have been capitalized for more than one year after drilling is completed, as of September 30, 2007:

		Millions of Dollars
						Suspended Since
Project		Total				2006				2005				2004				2003				2002				2001
Alpine satellite—Alaska (2)		$	21				—				—				—				—				21				—
Kashagan—Kazakhstan (1)			18				—				—				—				9				—				9
Aktote—Kazakhstan (2)			19				—				—				7				12				—				—
Kairan—Kazakhstan (2)			13				—				—				13				—				—				—
Gumusut—Malaysia (2)			30				—				6				11				13				—				—
Malikai—Malaysia (2)			45				16				19				10				—				—				—
Plataforma Deltana—Venezuela (2)			21				—				6				15				—				—				—
Uge—Nigeria (1)			15				—				15				—				—				—				—
Su Tu Trang—Vietnam (2)			23				7				8				—				8				—				—
Caldita—Australia (1)			33				—				33				—				—				—				—
Enochdhu/Finlaggen—U.K. (1)			11				11				—				—				—				—				—
Humphrey—U.K. (2)			12				12				—				—				—				—				—
Clair—U.K. (1)			17				17				—				—				—				—				—
K4—U.K. (2)			12				12				—				—				—				—				—
West Sak—Alaska (2)			10				6				3				1				—				—				—
Jasmine—U.K. (1)			28				28				—				—				—				—				—
Twenty projects of less than $10 million each (1)(2)			86				36				33				2				11				4				—
Total of 36 projects		$	414				145				123				59				53				25				9

(1)	Additional appraisal wells planned.
(2)	Appraisal drilling complete; costs being incurred to assess development.

Note 10—Impairments

Expropriated Assets

On January 31, 2007, Venezuela’s National Assembly passed a law allowing the president of Venezuela to pass laws on certain matters by decree. On February 26, 2007, the president of Venezuela issued a decree (the Nationalization Decree) mandating the termination of the then-existing structures related to our heavy-oil ventures and oil production risk contracts and the transfer of all rights relating to our heavy-oil ventures and oil production risk contracts to joint ventures (“empresas mixtas”) that will be controlled by the Venezuelan national oil company or its subsidiaries.

On June 26, 2007, we announced we had been unable to reach agreement with respect to our migration to an empresa mixta structure mandated by the Nationalization Decree. In response, Petróleos de Venezuela S.A. (PDVSA) or its affiliates directly assumed the activities associated with ConocoPhillips’ interests in the Petrozuata and Hamaca heavy-oil ventures and the offshore Corocoro oil development project. Based on Venezuelan statements that the expropriation of our oil interests in Venezuela occurred on June 26, 2007, management determined such expropriation required a complete impairment, under U.S. generally accepted accounting principles, of our investments in the Petrozuata and Hamaca heavy-oil ventures and the offshore Corocoro oil development project. Accordingly, we recorded a non-cash impairment, including allocable goodwill, of $4,588 million before-tax ($4,512 million after-tax) in the second quarter of 2007.

The impairment included equity-method investments and properties, plants and equipment. Also, this expropriation of our oil interests is viewed as a partial disposition of our Worldwide Exploration and Production reporting unit and, under the guidance in SFAS No. 142, “Goodwill and Other Intangible Assets,” required an allocation of goodwill to the expropriation event. The amount of goodwill impaired as a result of this allocation was $1,925 million.

Negotiations continue between ConocoPhillips and Venezuelan authorities concerning appropriate compensation for the expropriation of the company’s interests. We continue to preserve all our rights with respect to this situation, including our rights under the contracts we signed and under international and Venezuelan law. We continue to evaluate our options in realizing adequate compensation for the value of our oil investments and operations in Venezuela and expect to file a request for international arbitration on November 2, 2007.

We believe the value of our expropriated Venezuelan oil operations substantially exceeds the historical cost-based carrying value plus goodwill allocable to those operations. Although negotiations continue with Venezuelan authorities, it is not possible to predict with any certainty the outcome of these negotiations. Additionally, should we pursue other means of dispute resolution, U.S. generally accepted accounting principles require a claim that is the subject of litigation be presumed to not be probable of realization. Accordingly, any compensation for our expropriated assets was not considered when making the impairment determination, since to do so could result in the recognition of compensation for the expropriation prior to its realization.

At December 31, 2006, we had recorded 1,088 million barrels of oil equivalent of proved reserves related to Petrozuata and Hamaca, and 17 million barrels of oil equivalent of proved reserves related to Corocoro. The loss of proved reserves related to these projects will be reflected as a downward adjustment in our 2007 reserves.

Other Impairments

During the first nine months of 2007 and 2006, we recognized the following net impairments, excluding impairments of expropriated assets:

		Millions of Dollars
		Three Months Ended								Nine Months Ended
		September 30								September 30
		2007				2006				2007				2006
Asset write-downs
E&P
United States		$	—				—				1				40
International			151				7				326				17
R&M
Goodwill and intangible assets			10				130				8				130
Other			21				130				70				130
Corporate			8				—				8				—
Increase in fair value of previously impaired assets—R&M			(2	)			—				(128	)			—
		$	188				267				285				317

During the third quarter and nine-month period of 2007, we recorded property impairments primarily for:

	•		The write-down of held-for-sale assets to fair value, less cost to sell.
	•		Changes in asset retirement obligations for properties at the end of their economic life.
	•		The write-down of abandoned properties or projects.

In addition and in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the nine-month period of 2007 included a $128 million gain for the subsequent increase in the fair value of certain assets impaired in the prior year to primarily reflect finalized sales agreements. This gain was netted with write-downs into the “Impairments” line of the consolidated income statement.

Impairments during the third quarter of 2006 included $266 million associated with planned asset dispositions in our E&P and R&M segments. Impairments for the nine-month period of 2006 also included a $40 million property impairment as a result of our decision to withdraw an application for a proposed liquefied natural gas regasification terminal. We also impaired properties due to changes in asset retirement obligation estimates for properties at the end of their economic life.

Note 11—Debt

In September 2007, we replaced our $5 billion and $2.5 billion revolving credit facilities with a $7.5 billion revolving credit facility expiring in September 2012. The new facility contains the same terms as the previous facilities. The facility may be used as direct bank borrowings, as support for the ConocoPhillips $7.5 billion commercial paper program, as support for the ConocoPhillips Qatar Funding Ltd. $1.5 billion commercial paper program, or as support for issuances of letters of credit totaling up to $750 million. At September 30, 2007, and December 31, 2006, we had no outstanding borrowings under our credit facilities, but $41 million in letters of credit had been issued at both dates. Under both commercial paper programs, there was $603 million of commercial paper outstanding at September 30, 2007, compared with $2,931 million at December 31, 2006.

At September 30, 2007, we had classified $603 million of short-term debt as long-term debt, based on our ability and intent to refinance the obligation on a long-term basis under our revolving credit facilities.

At December 31, 2006, Phillips 66 Capital II (Trust II), an unconsolidated VIE, had outstanding $350 million of 8% Capital Securities (Capital Securities). The sole asset of Trust II was $361 million of the company’s 8% Junior Subordinated Deferrable Interest Debentures due 2037 (Subordinated Debt Securities II). Effective January 15, 2007, we redeemed the Subordinated Debt Securities II at a premium of $14 million, plus accrued interest, resulting in the immediate redemption of the Capital Securities. Upon redemption of the Capital Securities, Trust II was liquidated.

In January 2007, we redeemed our $153 million 7.25% Notes due 2007 upon their maturity. In February 2007, we reduced our Floating Rate Five-Year Term Note due 2011 from $5 billion to $4 billion, with a subsequent reduction in July 2007 to $3 billion. In April 2007, we redeemed our $1 billion Floating Rate Notes due 2007 upon their maturity.

In May 2007, Polar Tankers, Inc., a wholly owned subsidiary, issued an offering of $645 million 5.951% Notes due 2037. The notes are fully and unconditionally guaranteed by ConocoPhillips and ConocoPhillips Company.

On October 31, 2007, we redeemed $300 million of ConocoPhillips Australia Funding Company’s Floating Rate Notes due 2009 at par plus accrued interest.

Note 12—Contingencies and Commitments

In the case of all known non-income-tax-related contingencies, we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we adopted FIN 48, effective January 1, 2007. FIN 48 requires a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain. See Note 2—Changes in Accounting Principles and Note 21—Income Taxes, for additional information about income-tax related contingencies.

Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.

Environmental

We are subject to federal, state and local environmental laws and regulations. These may result in obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various sites. When we prepare our financial statements, we record accruals for environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into consideration the likely effects of societal and economic factors. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities and we accrue them in the period that they are both probable and reasonably estimable.

Although liability of those potentially responsible for environmental remediation costs is generally joint and several for federal sites and frequently so for state sites, we are usually only one of many companies cited at a particular site. Due to the joint and several liabilities, we could be responsible for all of the cleanup costs related to any site at which we have been designated as a potentially responsible party. If we were solely responsible, the costs, in some cases, could be material to our, or one of our segments’, results of operations, capital resources or liquidity. However, settlements and costs incurred in matters that previously have been resolved have not been material to our results of operations or financial condition. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability and adjust our accruals accordingly.

As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit and some of the indemnifications are subject to dollar limits and time limits. We have not recorded accruals for any potential contingent liabilities that we expect to be funded by the prior owners under these indemnifications.

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except for those acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable that future costs will be incurred and these costs can be reasonably estimated. At September 30, 2007, our balance sheet included a total environmental accrual of $1,042 million, compared with $1,062 million at December 31, 2006. We expect to incur the majority of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

Legal Proceedings

Our legal organization applies its knowledge, experience, and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases. This process also enables us to track those cases which have been scheduled for trial, as well as the pace of settlement discussions in individual matters. Based on our professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization believes there is only a remote likelihood that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements.

Other Contingencies

We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized. In addition, at September 30, 2007, we had performance obligations secured by letters of credit totaling $1,041 million (of which $41 million was issued under the provisions of our revolving credit facilities, and the remainder was issued as direct bank letters of credit) and various purchase commitments for materials, supplies, services and items of permanent investment incident to the ordinary conduct of business.

See Note 10—Impairments, for additional information about expropriated assets in Venezuela and the contingencies related to receiving adequate compensation for our oil interests in Venezuela.

Note 13—Guarantees

At September 30, 2007, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial.

Construction Completion Guarantees

•

In June 2006, we issued a guarantee for 24 percent of the $2 billion in credit facilities of Rockies Express Pipeline LLC (Rockies Express), which will be used to construct a natural gas pipeline across a portion of the United States. At September 30, 2007, Rockies Express had $1,758 million outstanding under the credit facilities, with our 24 percent guarantee equaling $422 million. The maximum potential amount of future payments to third-party lenders under the guarantee is estimated to be $480 million, which could become payable if the credit facility is fully utilized and Rockies Express fails to meet its obligations under the credit agreement. In addition, we also have a guarantee for 24 percent of $600 million of Floating Rate Notes due 2009 issued by Rockies Express in September 2007. It is anticipated that construction completion will be achieved at the end of 2009, and refinancing will take place at that time, making the debt non-recourse. At September 30, 2007, the total carrying value of these guarantees to third-party lenders was $12 million. See Note 5—Variable Interest Entities (VIEs), for additional information.

•

In December 2005, we issued a construction completion guarantee for 30 percent of the $4.0 billion in loan facilities of Qatargas 3, which will be used to construct an LNG train in Qatar. Of the $4.0 billion in loan facilities, ConocoPhillips has committed to provide $1.2 billion. The maximum potential amount of future payments to third-party lenders under the guarantee is estimated to be $850 million, which could become payable if the full debt financing is utilized and completion of the Qatargas 3 project is not achieved. The project financing will be non-recourse upon certified completion, which is expected in 2010. At September 30, 2007, the carrying value of the guarantee to the third-party lenders was $11 million. For additional information, see Note 8—Investments, Loans and Long-Term Receivables.

Guarantees of Joint-Venture Debt

•

At September 30, 2007, we had guarantees outstanding for our portion of joint-venture debt obligations, which have terms of up to 17 years. The maximum potential amount of future payments under the guarantees is approximately $130 million. Payment would be required if a joint venture defaults on its debt obligations.

Other Guarantees

	•		The Merey Sweeny, L.P. (MSLP) joint-venture project agreement requires the partners in the venture to pay cash calls to cover operating expenses in the event the venture does not have enough cash to cover operating expenses after setting aside the amount required for debt service over the next 17 years. Although there is no maximum limit stated in the agreement, the intent is to cover short-term cash deficiencies should they occur. Our maximum potential future payments under the agreement are currently estimated to be $100 million, assuming such a shortfall exists at some point in the future due to an extended operational disruption.
	•		In February 2003, we entered into two agreements establishing separate guarantee facilities of $50 million each for two LNG ships. Subject to the terms of each such facility, we will be required to make payments should the charter revenue generated by the respective ship fall below certain specified minimum thresholds, and we will receive payments to the extent that such revenues exceed

			those thresholds. The net maximum future payments that we may have to make over the 20-year terms of the two agreements could be up to $100 million in total. To the extent we receive any such payments, our actual gross payments over the 20 years could exceed that amount. In the event either ship is sold or a total loss occurs, we also may have recourse to the sales or insurance proceeds to recoup payments made under the guarantee facilities.
	•		We have guarantees of the residual value of leased corporate aircraft. The maximum potential payment under these guarantees at September 30, 2007, was $150 million.
	•		We have other guarantees with maximum future potential payment amounts totaling $350 million, which consist primarily of dealer and jobber loan guarantees to support our marketing business, guarantees to fund the short-term cash liquidity deficits of certain joint ventures, two small construction completion guarantees, a guarantee associated with a pending lawsuit, guarantees relating to the startup of a refining joint venture, a guarantee supporting a third-party pipeline construction and guarantees of the lease payment obligations of a joint venture. The carrying amount recorded for these other guarantees, at September 30, 2007, was $55 million. These guarantees generally extend up to 15 years and payment would be required only if the dealer, jobber or lessee goes into default, if the joint ventures have cash liquidity issues, if construction projects are not completed, if guaranteed parties default on lease payments, or if an adverse decision occurs in the pending lawsuit.

Indemnifications

Over the years, we have entered into various agreements to sell ownership interests in certain corporations and joint ventures and have sold several assets, including downstream and midstream assets, certain exploration and production assets, and downstream retail and wholesale sites that gave rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, environmental liabilities, permits and licenses, employee claims, real estate indemnity against tenant defaults, and litigation. The terms of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, the term is generally indefinite and the maximum amount of future payments is generally unlimited. The carrying amount recorded for these indemnifications at September 30, 2007, was $457 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the carrying amount recorded were $280 million of environmental accruals for known contamination that is included in asset retirement obligations and accrued environmental costs at September 30, 2007. For additional information about environmental liabilities, see Note 12—Contingencies and Commitments.

Note 14—Financial Instruments and Derivative Contracts

Derivative assets and liabilities were:

		Millions of Dollars
		September 30				December 31
		2007				2006
Derivative Assets
Current		$	545				924
Long-term			97				82
		$	642				1,006
Derivative Liabilities
Current		$	533				681
Long-term			58				126
		$	591				807

These derivative assets and liabilities appear as prepaid expenses and other current assets, other assets, other accruals, or other liabilities and deferred credits on the balance sheet.

Note 15—Comprehensive Income

ConocoPhillips’ comprehensive income was as follows:

		Millions of Dollars
		Three Months Ended								Nine Months Ended
		September 30								September 30
		2007				2006				2007				2006
Net income		$	3,673				3,876				7,520				12,353
After-tax changes in:
Defined benefit pension plans
Net prior service cost			5				—				15				—
Net actuarial loss			8				—				38				—
Non-sponsored plans			—				—				(3	)			—
Foreign currency translation adjustments			1,320				(32	)			2,596				906
Hedging activities			(2	)			(5	)			(5	)			2
Comprehensive income		$	5,004				3,839				10,161				13,261

Accumulated other comprehensive income in the equity section of the balance sheet included:

		Millions of Dollars
		September 30				December 31
		2007				2006
Defined benefit pension plans		$	(615	)			(665	)
Foreign currency translation adjustments			4,554				1,958
Deferred net hedging loss			(9	)			(4	)
Accumulated other comprehensive income		$	3,930				1,289

Note 16—Supplemental Cash Flow Information

		Millions of Dollars
		Nine Months Ended
		September 30
		2007				2006
Non-Cash Investing and Financing Activities
Issuance of stock and options for the acquisition of Burlington Resources Inc.		$	—				16,343
Investment in an upstream business venture through issuance of an acquisition obligation			7,313				—
Investment in a downstream business venture through contribution of non-cash assets and liabilities			2,415				—
Cash Payments
Interest		$	650				514
Income taxes			7,969				9,313

Note 17—Joint Venture Acquisition Obligation

On January 3, 2007, we closed on a business venture with EnCana Corporation. As part of this transaction, we expect to add approximately 400 million barrels of oil equivalent to our proved reserves in 2007. In addition, we are obligated to contribute $7.5 billion, plus accrued interest, over a 10-year period, beginning in 2007, to the upstream business venture, FCCL Oil Sands Partnership, formed as a result of the transaction. An initial cash contribution of $188 million was made upon closing in January.

Quarterly principal and interest payments of $237 million began in the second quarter of 2007, and will continue until the balance is paid. This obligation is reflected as a liability on our September 30, 2007, consolidated balance sheet. Of the principal obligation amount, approximately $586 million is short-term and is included in the “Accounts payable—related parties” line on our consolidated balance sheet. The principal portion of these payments is presented on our consolidated statement of cash flows as an other financing activity. Interest accrues at a fixed annual rate of 5.3 percent on the unpaid principal balance. Fifty percent of the quarterly interest payment is reflected as an investment purchase and is included in the “Capital expenditures and investments” line on our consolidated statement of cash flows.

Note 18—Employee Benefit Plans

Pension and Postretirement Plans

		Millions of Dollars
		Pension Benefits																Other Benefits
		September 30																September 30
Components of Net Periodic Benefit Cost		2007								2006								2007				2006
		U.S.				Int’l.				U.S.				Int’l.
Three Months Ended
Service cost		$	44				25				44				22				3				4
Interest cost			57				41				54				34				12				12
Expected return on plan assets			(51	)			(37	)			(43	)			(31	)			—				—
Amortization of prior service cost			3				1				2				2				3				4
Recognized net actuarial loss (gain)			15				12				22				10				(5	)			(4	)
Net periodic benefit costs		$	68				42				79				37				13				16
Nine Months Ended
Service cost		$	132				73				130				65				10				11
Interest cost			171				120				157				99				34				35
Expected return on plan assets			(153	)			(109	)			(126	)			(91	)			—				—
Amortization of prior service cost			8				5				7				6				10				14
Recognized net actuarial loss (gain)			46				35				66				30				(15	)			(12	)
Net periodic benefit costs		$	204				124				234				109				39				48

During the first nine months of 2007, we contributed $415 million to our domestic qualified and non-qualified plans and $135 million to our international benefit plans. We currently expect to contribute a total of $440 million to our domestic plans and $195 million to our international plans in 2007.

Note 19—Related Party Transactions

Significant transactions with related parties were:

		Millions of Dollars
		Three Months Ended								Nine Months Ended
		September 30								September 30
		2007				2006		*		2007				2006		*
Revenues and other income (a)		$	2,465				2,391				7,967				6,610
Purchases (b)			4,156				1,966				11,455				5,286
Operating expenses and selling, general and administrative expenses (c)			103				103				309				282
Net interest income (d)			25				2				80				10

(a)		We sold natural gas to DCP Midstream and crude oil to the Malaysian Refining Company Sdn. Bhd (MRC), among others, for processing and marketing. Natural gas liquids, solvents and petrochemical feedstocks were sold to Chevron Phillips Chemical Company LLC (CPChem), gas oil and hydrogen feedstocks were sold to Excel Paralubes, and refined products were sold primarily to CFJ Properties and LUKOIL. Natural gas, crude oil, blendstock and other intermediate products were sold to WRB Refining LLC. We also sold various international marketing companies to LUKOIL in the second quarter of 2007. In addition, we charged several of our affiliates, including CPChem, Merey Sweeny L.P. (MSLP), and Hamaca Holding LLC, (up through June 25, 2007) for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities.
(b)		We purchased refined products from WRB Refining. We purchased natural gas and natural gas liquids from DCP Midstream and CPChem for use in our refinery processes and other feedstocks from various affiliates. We purchased crude oil from LUKOIL, upgraded crude oil from Petrozuata C.A. (up through June 25, 2007) and refined products from MRC. We also paid fees to various pipeline equity companies for transporting finished refined products and a price upgrade to MSLP for heavy crude processing. We purchased base oils and fuel products from Excel Paralubes for use in our refinery and specialty businesses.
(c)		We paid processing fees to various affiliates. Additionally, we paid crude oil transportation fees to pipeline equity companies.
(d)		We paid and/or received interest to/from various affiliates, including FCCL Oil Sands Partnership.

Elimination amounts related to our equity percentage share of profit or loss on the above transactions were not material.

Note 20—Segment Disclosures and Related Information

We have organized our reporting structure based on the grouping of similar products and services, resulting in six operating segments:

	1)		E&P—This segment primarily explores for, produces and markets crude oil, natural gas and natural gas liquids on a worldwide basis. At September 30, 2007, our E&P operations were producing in the United States, Norway, the United Kingdom, the Netherlands, Canada, Nigeria, Ecuador, Argentina, offshore Timor Leste in the Timor Sea, Australia, China, Indonesia, Algeria, Libya, Vietnam, and Russia. The E&P segment’s U.S. and international operations are disclosed separately for reporting purposes.
	2)		Midstream—This segment gathers, processes and markets natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, primarily in the United States and Trinidad. The Midstream segment primarily consists of our 50 percent equity investment in DCP Midstream.
	3)		R&M—This segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia. At September 30, 2007, we owned or had an interest in 12 refineries in the United States, one in the United Kingdom, one in Ireland, two in Germany, and one in Malaysia. The R&M segment’s U.S. and international operations are disclosed separately for reporting purposes.
	4)		LUKOIL Investment—This segment represents our investment in the ordinary shares of LUKOIL, an international, integrated oil and gas company headquartered in Russia. At September 30, 2007, our ownership interest was 20 percent, based on issued shares, and 20.5 percent, based on estimated shares outstanding.
	5)		Chemicals—This segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Chemicals segment consists of our 50 percent equity investment in CPChem.
	6)		Emerging Businesses—The Emerging Businesses segment represents our investment in new technologies or businesses outside our normal scope of operations. Activities within this segment are currently focused on power generation and other items, such as carbon-to-liquids, technology solutions, and alternative energy and programs, such as advanced hydrocarbon processes, energy conversion technologies, new petroleum-based products, and renewable fuels.

Corporate and Other includes general corporate overhead, most interest income and expense, restructuring charges, and various other corporate activities. Corporate assets include all cash and cash equivalents.

We evaluate performance and allocate resources based on net income. Intersegment sales are at prices that approximate market.

See Note 2—Changes in Accounting Principles, for information affecting the comparability of sales and other operating revenues presented in the following tables of our segment disclosures.

Analysis of Results by Operating Segment

		Millions of Dollars
		Three Months Ended								Nine Months Ended
		September 30								September 30
		2007				2006				2007				2006
Sales and Other Operating Revenues
E&P
United States		$	9,416				9,040				27,153				27,157
International			5,559				6,552				17,052				21,076
Intersegment eliminations—U.S.			(1,612	)			(1,564	)			(4,264	)			(4,286	)
Intersegment eliminations—international			(1,927	)			(1,869	)			(4,844	)			(5,244	)
E&P			11,436				12,159				35,097				38,703
Midstream
Total sales			1,182				1,012				3,396				3,212
Intersegment eliminations			(39	)			(265	)			(143	)			(796	)
Midstream			1,143				747				3,253				2,416
R&M
United States			24,369				25,240				69,022				73,681
International			9,178				10,107				27,606				27,819
Intersegment eliminations—U.S.			(113	)			(211	)			(376	)			(612	)
Intersegment eliminations—international			(2	)			(5	)			(7	)			(14	)
R&M			33,432				35,131				96,245				100,874
LUKOIL Investment			—				—				—				—
Chemicals			2				3				8				10
Emerging Businesses
Total sales			150				167				450				483
Intersegment eliminations			(105	)			(133	)			(310	)			(361	)
Emerging Businesses			45				34				140				122
Corporate and Other			4				2				9				6
Consolidated sales and other operating revenues		$	46,062				48,076				134,752				142,131
Net Income (Loss)
E&P
United States		$	1,225				995				3,196				3,476
International			857				909				(1,189	)			4,285
Total E&P			2,082				1,904				2,007				7,761
Midstream			104				169				291				387
R&M
United States			873				1,444				3,648				3,174
International			434				20				1,153				388
Total R&M			1,307				1,464				4,801				3,562
LUKOIL Investment			387				487				1,169				1,123
Chemicals			110				142				260				394
Emerging Businesses			3				11				(10	)			7
Corporate and Other			(320	)			(301	)			(998	)			(881	)
Consolidated net income		$	3,673				3,876				7,520				12,353

		Millions of Dollars
		September 30				December 31
		2007				2006
Total Assets
E&P
United States		$	34,550				35,523
International			56,414				48,143
Goodwill			25,617				27,712
Total E&P			116,581				111,378
Midstream			2,026				2,045
R&M
United States			24,737				22,936
International			9,225				9,135
Goodwill			3,757				3,776
Total R&M			37,719				35,847
LUKOIL Investment			10,622				9,564
Chemicals			2,331				2,379
Emerging Businesses			1,104				977
Corporate and Other			3,044				2,591
Consolidated total assets		$	173,427				164,781

Note 21—Income Taxes

Our effective tax rate for the third quarter and first nine months of 2007 was 42 percent and 53 percent, respectively, compared with 51 percent and 45 percent for the same two periods of 2006. The change in the effective tax rate for the third quarter of 2007, versus the third quarter of 2006, was primarily due to a tax rate increase enacted in the United Kingdom in the third quarter of 2006, the effect of our asset rationalization efforts, and a tax rate decrease enacted in Germany in the third quarter of 2007. The change in the effective rate for the nine months of 2007, compared with the same period of 2006, was primarily due to the impact of the expropriation of our oil interests in Venezuela in the second quarter of 2007 (see Note 10—Impairments, for additional information). This impact was partially offset by a higher proportion of income in higher-tax-rate jurisdictions for the first nine months of 2006. The effective tax rate in excess of the domestic federal statutory rate of 35 percent was primarily due to the impact of foreign taxes.

Effective January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” See Note 2—Changes in Accounting Principles, for additional information about the adoption of this Interpretation.

Unrecognized tax benefits increased to $1,120 million at September 30, 2007, mainly due to increases occurring in the second quarter related to tax positions taken during the current year. Included in this balance is $676 million which, if recognized, would affect our effective tax rate.

We and our subsidiaries file tax returns in the U.S. Federal jurisdiction and in many foreign and state jurisdictions. Audits in major jurisdictions, including the United States, Canada, Norway and the United Kingdom, are generally complete through 2001. Issues in dispute for audited years and audits for subsequent years are ongoing and in various stages of completion in the many jurisdictions in which we operate around the world. As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period. It is reasonably possible that such changes could be significant when compared to our total unrecognized tax benefits, but the amount of change is not estimable.

Note 22—New Accounting Standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. We use fair value measurements to measure, among other items, purchased assets and investments, leases, derivative contracts and financial guarantees. We also use them to assess impairment of properties, plants and equipment, intangible assets and goodwill. The Statement does not apply to share-based payment transactions and inventory pricing. We plan to adopt this Statement effective January 1, 2008. We continue to evaluate the Statement, but we do not expect any significant impact to our consolidated financial statements, other than additional disclosures.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” This Statement permits an entity to choose to measure financial instruments and certain other items similar to financial instruments at fair value, with all subsequent changes in fair value for the financial instrument reported in earnings. By electing the fair value option in conjunction with a derivative, an entity can achieve an accounting result similar to a fair-value hedge without having to comply with complex hedge accounting rules. We plan to adopt this Statement effective January 1, 2008, and do not expect any significant impact to our consolidated financial statements.

Supplementary Information—Condensed Consolidating Financial Information

We have various cross guarantees among ConocoPhillips, ConocoPhillips Company, ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II, with respect to publicly held debt securities. ConocoPhillips Company is wholly owned by ConocoPhillips. ConocoPhillips Australia Funding Company is an indirect, wholly owned subsidiary of ConocoPhillips Company. ConocoPhillips Canada Funding Company I and ConocoPhillips Canada Funding Company II are indirect, wholly owned subsidiaries of ConocoPhillips. ConocoPhillips and ConocoPhillips Company have fully and unconditionally guaranteed the payment obligations of ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II, with respect to their publicly held debt securities. Similarly, ConocoPhillips has fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities. In addition, ConocoPhillips Company has fully and unconditionally guaranteed the payment obligations of ConocoPhillips with respect to its publicly held debt securities. All guarantees are joint and several. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:

	•		ConocoPhillips, ConocoPhillips Company, ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
	•		All other non-guarantor subsidiaries of ConocoPhillips.
	•		The consolidating adjustments necessary to present ConocoPhillips’ results on a consolidated basis.

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes. Certain prior year amounts have been reclassified to conform to current period presentation.

		Millions of Dollars
		Three Months Ended September 30, 2007
										ConocoPhillips
										Australia				ConocoPhillips				ConocoPhillips
						ConocoPhillips				Funding				Canada Funding				Canada Funding				All Other				Consolidating				Total
		ConocoPhillips				Company				Company				Company I				Company II				Subsidiaries				Adjustments				Consolidated
Income Statement
Revenues and Other Income
Sales and other operating revenues		$	—				30,130				—				—				—				15,932				—				46,062
Equity in earnings of affiliates			3,731				3,227				—				—				—				602				(6,246	)			1,314
Other income			—				(74	)			—				—				—				631				—				557
Intercompany revenues			1				814				30				21				13				4,648				(5,527	)			—
Total Revenues and Other Income			3,732				34,097				30				21				13				21,813				(11,773	)			47,933
Costs and Expenses
Purchased crude oil, natural gas and products			—				26,477				—				—				—				9,211				(4,826	)			30,862
Production and operating expenses			—				1,054				—				—				—				1,588				(22	)			2,620
Selling, general and administrative expenses			4				365				—				—				—				212				(12	)			569
Exploration expenses			—				29				—				—				—				189				—				218
Depreciation, depletion and amortization			—				388				—				—				—				1,664				—				2,052
Impairment—expropriated assets			—				—				—				—				—				—				—				—
Impairments			—				16				—				—				—				172				—				188
Taxes other than income taxes			—				1,363				—				—				—				3,291				(71	)			4,583
Accretion on discounted liabilities			—				12				—				—				—				69				—				81
Interest and debt expense			85				236				28				20				14				604				(596	)			391
Foreign currency transaction (gains) losses			—				6				—				83				44				(153	)			—				(20	)
Minority interests			—				—				—				—				—				25				—				25
Total Costs and Expenses			89				29,946				28				103				58				16,872				(5,527	)			41,569
Income (loss) before income taxes			3,643				4,151				2				(82	)			(45	)			4,941				(6,246	)			6,364
Provision for income taxes			(30	)			581				—				11				6				2,123				—				2,691
Net Income (Loss)		$	3,673				3,570				2				(93	)			(51	)			2,818				(6,246	)			3,673