8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): June 15, 2004

MARATHON OIL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	1-5153	25-0996816
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

5555 San Felipe Road, Houston, Texas	77056-2723
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (713) 629-6600

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Item 5. Other Events.

Effective with the first quarter of 2004, Marathon Oil Corporation (“Marathon”) realigned its segment reporting to reflect a new business segment, Integrated Gas. This segment includes Marathon’s Alaska liquefied natural gas operations, Equatorial Guinea methanol operations, and certain other natural gas marketing and transportation activities, along with expenses related to the continued development of an integrated gas business. These activities were previously reported in the Other Energy Related Businesses (“OERB”) segment, which has been eliminated. Crude oil marketing and transportation activities and costs associated with a gas-to-liquids demonstration plant, previously reported in OERB, are now reported in the Exploration and Production segment. Refined product transportation activities not included in Marathon Ashland Petroleum LLC, also previously reported in OERB, are now reported in the Refining, Marketing and Transportation segment. In order to present corresponding segment information for earlier periods on a comparative basis, Marathon is filing Management’s Discussion and Analysis of Financial Condition and Results of Operations and audited Financial Statements and Notes to conform Footnote 8 “Segment Information” to the new reportable segment composition for the years ended December 31, 2003, 2002 and 2001.

In addition, filed herewith are supplemental schedules containing selected quarterly and full year segment and other statistical information for the year 2003.

Item 7. Financial Statements and Exhibits.

(c) Exhibits.

23.	Consent of PricewaterhouseCoopers LLP.
99.1	Marathon Oil Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operations and Consolidated Financial Statements and Notes for the years ended December 31, 2003, 2002 and 2001.
99.2	Marathon Oil Corporation Supplemental Statistics for the quarters ended March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003, and for the year ended December 31, 2003.

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SIGNATURE

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

	MARATHON OIL CORPORATION
Date: June 15, 2004	By:	/s/ A.G. Adkins
		A.G. Adkins Vice President-Accounting and Controller

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EXHIBIT INDEX

Number	Exhibit
23.	Consent of PricewaterhouseCoopers LLP.
99.1	Marathon Oil Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operations and Consolidated Financial Statements and Notes for the years ended December 31, 2003, 2002 and 2001.
99.2	Marathon Oil Corporation Supplemental Statistics for the quarters ended March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003, and for the year ended December 31, 2003.

EX-23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements listed below of Marathon Oil Corporation of our report dated February 25, 2004, except as to Note 8 which is as of May 26, 2004, relating to the financial statements, which appears in Marathon Oil Corporation’s Current Report on Form 8-K dated June 15, 2004:

On Form S-3:		Relating to:
File No.	33-57997	Dividend Reinvestment Plan
	333-88947	Dividend Reinvestment and Direct Stock Purchase Plan
	333-99223	Marathon Oil Corporation Debt Securities, Common Stock, Preferred Stock, Warrants, Stock Purchase Contracts/Units and Preferred Securities
	333-99223-01	Marathon Financing Trust I
	333-99223-02	Marathon Financing Trust II
On Form S-8:		Relating to:
File No.	33-41864	1990 Stock Plan
	33-56828	Marathon Oil Company Thrift Plan
	333-29699	1990 Stock Plan
	333-29709	Marathon Oil Company Thrift Plan
	333-52751	1990 Stock Plan
	333-86847	1990 Stock Plan
	333-104910	Marathon Oil Corporation 2003 Incentive Compensation Plan

PricewaterhouseCoopers LLP

Houston, Texas

June 15, 2004

EX-99.1

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Marathon Oil Corporation (“Marathon”) is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through its 62 percent owned subsidiary, Marathon Ashland Petroleum LLC (“MAP”); and integrated gas. The Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Items 1. and 2. Business and Properties, Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data.

Certain sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements concerning trends or events potentially affecting the businesses of Marathon. These statements typically contain words such as “anticipates,” “believes,” “estimates,” “expects,” “targets”, “plan,” “project,” “could,” “may,” “should,” “would” or similar words indicating that future outcomes are uncertain. In accordance with “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, which could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Unless specifically noted, amounts for MAP do not reflect any reduction for the 38 percent interest held by Ashland Inc. (“Ashland”).

Overview

Marathon’s overall operating results depend on the profitability of its exploration and production (“E&P”) and refining, marketing and transportation (“RM&T”) segments.

Exploration and Production

E&P segment revenues correlate closely with prevailing prices for crude oil and natural gas. The increase in Marathon’s E&P segment revenues during 2003 tracked the increase in prices for these commodities. The robust prices for crude oil during 2003 were caused in part by increased demand in strengthening economies, particularly in the United States and the Far East, reduced crude oil inventories, as well as civil and political unrest and military actions in various oil exporting countries. The average spot price during 2003 for West Texas Intermediate (WTI), a benchmark crude oil, was $31.06 per barrel – up from an average of $26.16 in 2002 – and ended the year at $32.47.

Natural gas prices were significantly higher in 2003 as compared to 2002. A significant portion of Marathon’s United States lower 48 natural gas production is sold at bid week prices, making this indicator particularly important. The average quarterly bid week prices for 2003 were $6.58, $5.40, $4.97 and $4.58, respectively for the first to fourth quarter. Natural gas prices in Alaska are largely contractual, while natural gas production there is seasonal in nature, trending down during the second and third quarters and increasing during the fourth and first quarters. The other major gas-producing region for Marathon is Europe, where a large portion of Marathon’s gas sales are at contractual prices, making them less subject to European price volatility.

For additional information on price risk management, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” on page 25.

E&P segment income during 2003 was impacted by slightly lower oil-equivalent production – down approximately 6 percent from 2002 levels. 2004 production is expected to decrease about 6 percent from 2003 levels mainly due to sales of non-core properties during 2003. Marathon estimates its 2004 production will average approximately 365,000 barrels of oil equivalent per day (“BOEPD”), excluding the impact of any additional acquisitions or dispositions. While production is expected to remain relatively flat through 2005, significant production growth is expected starting in 2006 from known projects in new core areas and recent exploration successes. Total production is anticipated to grow by more than 3 percent on an average annual basis between 2003 and 2008.

Projected production levels for liquid hydrocarbons and natural gas are based on a number of assumptions, including (among others) prices, supply and demand, regulatory constraints, reserve estimates, production decline rates for mature fields, reserve replacement rates, drilling rig availability and geological and operating considerations. These assumptions may prove to be inaccurate. Prices have historically been volatile and have frequently been driven by unpredictable changes in supply and demand resulting from fluctuations in economic activity and political developments in the world’s major oil and gas producing areas, including OPEC member

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countries. Any substantial decline in such prices could have a material adverse effect on Marathon’s results of operations. A decline in such prices could also adversely affect the quantity of liquid hydrocarbons and natural gas that can be economically produced and the amount of capital available for exploration and development.

E&P operations are subject to various hazards, including acts of war or terrorist acts and the governmental or military response thereto, explosions, fires and uncontrollable flows of oil and gas. Offshore production and marine operations in areas such as the Gulf of Mexico, the North Sea, the U.K. Atlantic Margin, the Celtic Sea, offshore Nova Scotia and offshore West Africa are also subject to severe weather conditions such as hurricanes or violent storms or other hazards. Development of new production properties in countries outside the United States may require protracted negotiations with host governments and are frequently subject to political considerations, such as tax regulations, which could adversely affect the economics of projects.

Refining, Marketing and Transportation

MAP refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States. RM&T segment income primarily reflects MAP’s income from operations which depends largely on the refining and wholesale marketing margin, refinery throughputs, retail marketing margins for gasoline, distillates and merchandise, and the profitability of its pipeline transportation operations.

The refining and wholesale marketing margin is the difference between the wholesale prices of refined products sold and the cost of crude oil and other feedstocks refined, the cost of purchased products and manufacturing costs. MAP is a purchaser of crude oil in order to satisfy throughput requirements of its refineries. As a result, its refining and wholesale marketing margin could be adversely affected by rising crude oil and other feedstock prices that are not recovered in the marketplace. The crack spread, which is a measure of the difference between spot market gasoline and distillate prices and spot market crude costs, is an industry indicator of refining margins. In addition to changes in the crack spread, MAP’s refining and wholesale marketing margin is impacted by the types of crude oil processed, the wholesale selling prices realized for all the products sold and the level of manufacturing costs. MAP processes significant amounts of sour crude oil which enhances its competitive position in the industry as sour crude oil typically can be purchased at a discount to sweet crude oil. As crude oil production increases in the coming years, heavy, sour crude oil production growth is expected to outpace sweet crude oil production growth , which may translate into higher sour crude oil discounts going forward. Over the last three years, approximately 60% of the crude oil throughput at MAP’s refineries has been sour crude oil. Sales of asphalt increase during the highway construction season in MAP’s market area which is primarily in the second and third calendar quarters. The selling price of asphalt is dependant on the cost of crude oil, the price of alternative paving materials and the level of construction activity in both the private and public sectors. Changes in manufacturing costs from period to period are primarily dependant on the level of maintenance activities at the refineries and the price of purchased natural gas. The refining and wholesale marketing margin has been historically volatile and varies with the level of economic activity in the various marketing areas, the regulatory climate, logistical capabilities and the available supply of refined products and raw materials.

For additional information on price risk management, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” on page 25.

Additionally, the retail marketing gasoline and distillate margin, the difference between the ultimate price paid by consumers and the wholesale cost of the refined products, including secondary transportation, plays an important part in downstream profitability. Retail gasoline and distillate margins have been historically volatile, but tend to be countercyclical to the refining and wholesale marketing margin. Factors affecting the retail gasoline and distillate margin include competition, seasonal demand fluctuations, the available wholesale supply, the level of economic activity in the marketing areas and weather situations that impact driving conditions. Gross margins on merchandise sold at retail outlets tend to be less volatile than the gross margin from the retail sale of gasoline and diesel fuel. Factors affecting the gross margin on retail merchandise sales include consumer demand for merchandise items, the impact of competition and the level of economic activity in the marketing areas. The profitability of MAP’s pipeline transportation operations is primarily dependant on the volumes shipped through the pipelines. The volume of crude oil that MAP transports is directly affected by the supply of, and refiner demand for, crude oil in the markets served directly by MAP’s crude oil pipelines. Key factors in this supply and demand balance are the production levels of crude oil by producers, the availability and cost of alternative transportation modes, and the refinery and transportation system maintenance levels. The throughput of the refined products that MAP transports is directly affected by the production level of, and user demand for, refined products in the markets served by MAP’s refined product pipelines. In most of MAP’s markets, demand for gasoline peaks during

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the summer driving season, which extends from May through September, and declines during the fall and winter months. The seasonal pattern for distillates is the reverse of this, helping to level overall movements on an annual basis. As with crude, other transportation alternatives and maintenance levels influence refined product movements.

Environmental regulations, particularly the 1990 amendments to the Clean Air Act, have imposed (and are expected to continue to impose) increasingly stringent and costly requirements on refining and marketing operations that may have an adverse effect on margins and financial condition. Refining, marketing and transportation operations are subject to business interruptions due to unforeseen events such as explosions, fires, crude oil or refined product spills, inclement weather or labor disputes. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions.

Integrated Gas

Marathon operates other businesses that market and transport its own and third-party natural gas and products manufactured from natural gas, such as liquefied natural gas (“LNG”) and methanol, primarily in the United States, Europe and West Africa. The profitability of these operations depends largely on commodity prices, volume deliveries, margins on resale gas, and demand. Methanol spot pricing is very volatile largely because global methanol demand is only 30 millions tons and any one major unplanned shutdown or new addition can have a significant impact on the supply-demand balance. Integrated gas (“IG”) operations could be impacted by unforeseen events such as explosions, fires, product spills, inclement weather or availability of LNG vessels. IG operations are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions.

Management’s Discussion and Analysis of Critical Accounting Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year end and the reported amounts of revenues and expenses during the year. Actual results could differ from the estimates and assumptions used.

Certain accounting estimates are considered to be critical if a) the nature of the estimates and assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and b) the impact of the estimates and assumptions on financial condition or operating performance is material.

Estimated Net Recoverable Quantities of Oil and Gas

Marathon uses the successful efforts method of accounting for its oil and gas producing activities. The successful efforts method inherently relies upon the estimation of proved reserves, both developed and undeveloped. The existence and the estimated amount of proved reserves affect, among other things, whether or not certain costs are capitalized or expensed, the amount and timing of costs depleted or amortized into income and the presentation of supplemental information on oil and gas producing activities. Both the expected future cash flows to be generated by oil and gas producing properties and the expected future taxable income available to realize the value of deferred tax assets, which are discussed further below, rely in part on estimates of net recoverable quantities of oil and gas.

Marathon’s estimation of net recoverable quantities of oil and gas is a highly technical process performed primarily by in-house reservoir engineers and geoscience professionals. During 2003, approximately 35 percent of Marathon’s total proved reserves were prepared, reviewed or validated by third-party petroleum engineering consultants. The results of these third-party reviews were consistent with Marathon’s proved reserve estimates.

Proved reserves are the estimated quantities of oil and gas that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Estimates of proved reserves are subject to change, either positively and negatively, as additional information becomes available and as contractual, economic and political conditions change. During 2003, net revisions of previous estimates increased total proved reserves by 40 million BOE as a result of 97 million BOE in positive revisions which were partially offset by 57 million BOE in negative revisions.

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Proved developed reserves represented 70 percent of total proved reserves as of December 31, 2003, as compared to 78 percent as of December 31, 2002. The decrease primarily reflects the disposition of the Yates field. Of the just over 300 mmboe of proved undeveloped reserves at year-end 2003, only 10 percent have been included as proved reserves for more than two years.

Costs incurred for the periods ended December 31, 2003, 2002, and 2001 relating to the development of proved undeveloped oil and gas reserves, including Marathon’s proportionate share of equity investees’ costs incurred, were $780 million, $404 million, and $365 million. As of December 31, 2003, estimated future development costs relating to the development of proved undeveloped oil and gas reserves for the years 2004 through 2006 are projected to be $324 million, $149 million, and $126 million.

Expected Future Cash Flows Generated by Certain Oil and Gas Producing Properties

Marathon must estimate the expected future cash flows to be generated by its oil and gas producing properties to evaluate the possible need to impair the carrying value of those properties. For purposes of impairment evaluation, long-lived assets must be grouped at the lowest level for which independent cash flows can be identified, which is called an “asset group”. An impairment of any one of Marathon’s five largest producing property asset groups could have a material impact on the presentation of financial condition, changes in financial condition or results of operations. Those asset groups – the Alba field offshore Equatorial Guinea, the coal bed natural gas properties of the Powder River Basin, the Brae Area Complex offshore the United Kingdom, Petronius development in the Gulf of Mexico, and Potanay field in the Russian Federation – comprise approximately 49 percent of Marathon’s total proved oil and gas reserves. The expected future cash flows from these asset groups require assumptions about matters such as the prevailing level of future oil and gas prices, estimated recoverable quantities of oil and gas, expected field performance and the political environment in the host country.

Long-lived asset groups held and used in operations must be impaired when the carrying value is not recoverable and exceeds the fair value. Recoverability of the carrying values is determined by comparison with the undiscounted expected future cash flows to be generated by those groups. As of December 31, 2003, no impairment in the value of the Alba field, Powder River Basin, Brae Area Complex, Petronius development or the Potanay field was indicated.

Expected Future Taxable Income

Marathon must estimate its expected future taxable income to assess the realizability of its deferred income tax assets. As of December 31, 2003, Marathon reported net deferred tax assets of $1.155 billion, which represented gross assets of $1.731 billion net of valuation allowances of $576 million.

Numerous assumptions are inherent in the estimation of future taxable income, including assumptions about matters that are dependent on future events, such as future operating conditions (particularly as related to prevailing oil and gas prices) and future financial conditions. The estimates and assumptions used in determining future taxable income are consistent with those used in Marathon’s internal budgets, forecasts and strategic plans.

In determining its overall estimated future taxable income for purposes of assessing the need for additional valuation allowances, Marathon considers proved and risk-adjusted probable and possible reserves related to its existing producing properties, as well as estimated quantities of oil and gas related to undeveloped discoveries if, in the judgment of Marathon management, it is likely that development plans will be approved in the foreseeable future. In assessing the propriety of releasing an existing valuation allowance, Marathon considers the preponderance of evidence concerning the realization of the impaired deferred tax asset.

Additionally, Marathon must consider any prudent and feasible tax planning strategies that might minimize the amount of deferred tax liabilities recognized or the amount of any valuation allowance recognized against deferred tax assets, if management has the ability to implement these strategies and the expectation of implementing these strategies if the forecasted conditions actually occurred. The principal tax planning strategy available to Marathon relates to the permanent reinvestment of the earnings of foreign subsidiaries. Assumptions related to the permanent reinvestment of the earnings of foreign subsidiaries are reconsidered annually to give effect to changes in Marathon’s portfolio of producing properties and in its tax profile.

Marathon’s deferred tax assets include $450 million relating to Norwegian net operating loss carryforwards (“NOLs”). Marathon has established a valuation allowance of $420 million against these NOLs. Currently, Marathon generates income from the Heimdal and Vale fields in the Norwegian North Sea. Marathon acquired

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additional interests in Norway in each of the last three years. These interests currently have no proved reserves and generate no income, although some interests hold undeveloped discoveries. To the extent that these interests demonstrate the capability to generate future taxable income, Marathon may be able to release some or all of its $420 million valuation allowance in future periods.

Net Realizable Value of Receivables from United States Steel

As described further in “Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity – Obligations Associated with the Separation of United States Steel” on page 17, Marathon remains obligated (primarily or contingently) for certain debt and other financial arrangements for which United States Steel has assumed responsibility for repayment under the terms of the Separation. As of December 31, 2003, Marathon has reported receivables from United States Steel of $613 million, representing the amount of principal and accrued interest on Marathon debt for which United States Steel has assumed responsibility for repayment. Marathon must assess the realizability of these receivables, based on its expectations of United States Steel’s ability to satisfy its obligations. To make this assessment, Marathon must rely on public information about United States Steel. As of December 31, 2003, Marathon has judged the entire receivable to be realizable.

Marathon may continue to be exposed to the risk of nonpayment by United States Steel on a significant portion of this receivable until December 31, 2011. Of the $613 million, $469 million, or 77 percent, relates to industrial revenue bonds that are due in 2011 or later. The Financial Matters Agreement between Marathon and United States Steel provides that, on or before the tenth anniversary of the Separation, which is December 31, 2011, United States Steel will provide for Marathon’s discharge from any remaining liability under any of the assumed industrial revenue bonds.

As of December 31, 2003, Marathon’s cash-adjusted debt-to-capital ratio (which includes debt for which United States Steel has assumed responsibility for repayment) was 33 percent. The assessment of Marathon’s liquidity and capital resources may be impacted by expectations concerning United States Steel’s ability to satisfy its obligations.

If the debt for which United States Steel has assumed responsibility for repayment were excluded from the computation, Marathon’s cash-adjusted debt-to-capital ratio as of December 31, 2003 would have been approximately 28 percent. On the other hand, if the receivable from United States Steel had been written off as unrealizable, the cash-adjusted debt-to-capital ratio as of December 31, 2003 would have been approximately 34 percent. (If United States Steel were unable to satisfy its obligations, other adjustments in addition to the write-off of the receivable may be necessary.)

Net Realizable Value of Inventories

Generally accepted accounting principles require that inventories be carried at lower of cost or market. Accordingly, when the cost basis of Marathon’s inventories of liquid hydrocarbons and refined petroleum products exceed market value, Marathon establishes an inventory market valuation (“IMV”) reserve to reduce the cost basis of its inventories to net realizable value. Adjustments to the IMV reserve result in noncash charges or credits to income from operations.

When Marathon Oil Company was acquired in March 1982, prices of liquid hydrocarbons and refined petroleum products were at historically high levels. In applying the purchase method of accounting, inventories of liquid hydrocarbons and refined petroleum products were revalued by reference to current prices at the time of acquisition. This became the new LIFO cost basis of the inventories.

When Marathon acquired the crude oil and refined petroleum product inventories associated with Ashland’s RM&T operations on January 1, 1998, Marathon established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded was also lowered.

Since the prices of liquid hydrocarbons and refined petroleum products do not correlate perfectly, there is no absolute price threshold below which an IMV adjustment will be recognized. However, generally, Marathon will establish an IMV reserve when crude oil prices fall below $20 per barrel. As of December 31, 2003, with the WTI spot price at $32.47 per barrel, no IMV reserve was needed.

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Contingent Liabilities

Marathon accrues contingent liabilities for income and other tax deficiencies, environmental remediation, product liability claims and litigation claims when such contingencies are probable and estimable. Marathon’s in-house legal counsel regularly assesses these contingent liabilities. In certain circumstances, outside legal counsel is utilized. For additional information on contingent liabilities, see “Management’s Discussion and Analysis of Environmental Matters, Litigation and Contingencies” on page 19.

Pensions and Other Postretirement Benefit Obligations

Accounting for these benefit obligations involves assumptions related to:

• discount rate for measuring the present value of future plan obligations

• expected long-term rates of return on plan assets

• rate of future increases in compensation levels

• health care cost projections

Marathon develops its demographics and utilizes the work of outside actuaries to assist in the measurement of these obligations. In determining the discount rate, Marathon reviews market yields on high-quality corporate debt. The asset rate of return assumption considers the asset mix of the plans, targeted at 75% equity securities and 25% debt securities, past performance and other factors. Compensation increase assumptions are based on historical experience and anticipated future management actions. Marathon reviews actual recent cost trends and projected future trends in establishing health care cost trend rates.

Of the assumptions used to measure the December 31, 2003 obligations and estimated 2004 net periodic benefit cost, the discount rate has the most significant effect on the periodic benefit costs reported for the plans. A .25% basis point decrease in the discount rate of 6.25% for domestic and 5.40% for international would increase pension and other postretirement plan expense by approximately $12 million and $3 million, respectively.

Estimated Fair Value of Asset Retirement Obligations

The fair value of an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. For Marathon, asset retirement obligations primarily relate to the abandonment of oil and gas producing facilities. Asset retirement obligations include costs to dismantle and relocate or dispose of production platforms, gathering systems, wells and related structures and restoration costs of land and seabed. Estimates of these costs are developed for each property based upon the type of production structure, depth of water, reservoir characteristics, depth of the reservoir, market demand for equipment, currently available procedures and consultations with construction and engineering professionals. Because these costs typically extend many years into the future, estimating these future costs is difficult and requires management to make estimates and judgments that are subject to future revisions based upon numerous factors, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates, the credit-adjusted risk-free interest rate, changing technology and the political and regulatory environment.

Marathon’s estimation of asset retirement obligations and retirement dates is primarily performed by in-house engineers in consultation with in-house legal and environmental experts. Due to the inherent uncertainties in asset retirement obligations and retirement dates, these estimates are subject to potentially substantial changes, either positively or negatively, as additional information becomes available and as contractual, legal, environmental, economic and technological conditions change.

While assets such as refineries, crude oil and product pipelines, and marketing assets have asset retirement obligations, certain of those obligations are not recognized since the fair value cannot be estimated due to the uncertainty of the settlement date of the obligation.

Marathon’s estimates of the ultimate asset retirement obligations are based on estimates in current dollars, inflated to the estimated date of retirement by an annual inflation factor. Sensitivity analysis of the incremental effects of a hypothetical 1% increase in the inflation rate would have resulted in an approximately $28 million increase in the fair value of the asset retirement obligations at December 31, 2003, and an approximately $5 million decrease in 2003 income from operations.

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Estimated Fair Value of Non-Exchange Traded Derivative Contracts

Marathon fairly values all derivative instruments. Derivative instruments are used to manage risk throughout Marathon’s different businesses. These risks relate to commodities, interest rates and to a lesser extent our exposure to foreign currency fluctuations. Marathon uses derivative instruments that are exchange traded and non-exchange traded. Non-exchange traded instruments are referred to as over-the-counter (“OTC”) instruments.

The fair value of exchange traded instruments is based on existing market quotes derived from major exchanges such as the New York Merchantile Exchange. The fair value for OTC instruments such as options and swap agreements is developed through the use of option-pricing models or third party market quotes. The option-pricing models incorporate assumptions related to market volatility, current market price, strike price, interest rates and time value. Marathon utilizes purchased software option-pricing tools, similar to the Black-Scholes model, to fairly value its options related to commodity-based risks. OTC swap agreements are used to manage our exposure to interest rates. Marathon obtains third party dealer quotes to mark-to-market these financial instruments. In addition, Marathon has developed an internal pricing model which takes into consideration the specific contract terms and the forward market for interest rates. This tool is used to test the reasonableness of the third party dealer quotes associated with the OTC swap agreements.

Marathon also fairly values two natural gas long term delivery commitment contracts in the United Kingdom that are accounted for as derivative instruments and recognizes the change in fair value of those contracts on a quarterly basis within income from operations. The fair value is derived from published market data such as the Heren Report that captures the market-based natural gas activity in the United Kingdom. Currently, an 18 month forward pricing curve is utilized as this represents approximately 90% of the market liquidity in that region.

For additional information on market risk sensitivity, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” on page 25.

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Management’s Discussion and Analysis of Income and Operations

Revenues for each of the last three years are summarized in the following table:

(In millions)	2003			2002			2001
E&P	$	4,811		$	4,477		$	4,874
RM&T		34,514			26,399			27,247
IG		2,248			1,217			1,290
Segment revenues		41,573			32,093			33,411
Elimination of intersegment revenues		(610	)		(798	)		(585	)
Elimination of sales to United States Steel		–			–			(30	)
Total revenues	$	40,963		$	31,295		$	32,796
Items included in both revenues and costs and expenses:
Consumer excise taxes on petroleum products and merchandise	$	4,285		$	4,250		$	4,404
Matching crude oil and refined product buy/sell transactions settled in cash:
E&P	$	222		$	289		$	454
RM&T		6,936			4,191			3,797
Total buy/sell transactions	$	7,158		$	4,480		$	4,251

E&P segment revenues increased by $334 million in 2003 from 2002 and decreased by $397 million in 2002 from 2001. The 2003 increase was primarily due to higher worldwide natural gas and liquid hydrocarbon prices and increased crude oil marketing activities. This increase was partially offset by lower liquid hydrocarbon and natural gas volumes. The decrease in 2002 was primarily due to lower worldwide natural gas prices and lower liquid hydrocarbon and natural gas volumes, partially offset by higher worldwide liquid hydrocarbon prices and increased crude oil marketing activities. Derivative gains (losses) totaled $(176) million in 2003, compared to $52 million in 2002 and $85 million in 2001. Derivatives included losses of $66 million in 2003, compared to gains of $18 million in 2002, related to long-term gas contracts in the United Kingdom that are accounted for as derivative instruments and marked-to-market.

RM&T segment revenues increased by $8.115 billion in 2003 from 2002 and decreased by $848 million in 2002 from 2001. The 2003 increase primarily reflected higher refined product selling prices and volumes and increased matching crude oil buy/sell transaction volumes and prices. The decrease in 2002 was primarily due to lower refined product prices.

IG segment revenues increased by $1.031 billion in 2003 from 2002 and decreased by $73 million in 2002 from 2001. The increase in 2003 is a result of higher natural gas and liquid hydrocarbon prices and increased natural gas marketing activity. The decrease in 2002 was primarily due to lower natural gas prices, partially offset by a favorable effect from increased natural gas marketing activity. Derivative gains (losses) totaled $19 million in 2003, compared to $(8) million in 2002 and $(29) million in 2001.

For additional information on segment results, see discussion on income from operations on page 10.

Income from equity method investments decreased by $108 million in 2003 and increased by $19 million in 2002 from 2001. The decrease in 2003 is due to a $124 million loss on the dissolution of MKM Partners L.P., partially offset by increased earnings of other equity method investments due to higher natural gas and liquid hydrocarbons prices. For further discussion of the dissolution of MKM Partners L.P., see Note 13 to the Consolidated Financial Statements. The increase in 2002 is primarily the result of increased earnings in other equity method investments due to higher liquid hydrocarbons prices.

Net gains on disposal of assets increased by $99 million in 2003 from 2002 and $23 million in 2002 from 2001. During 2003, Marathon sold its interest in CLAM Petroleum B.V., interests in several pipeline companies, Yates field and gathering system, SSA stores primarily in Florida, South Carolina, North Carolina and Georgia, and certain fields in the Big Horn Basin of Wyoming. Results from 2002 include the sale of various SSA stores and the sale of San Juan Basin assets. Results from 2001 include the sale of various SSA stores and various domestic producing properties.

Gain (loss) on ownership change in MAP reflects the effects of contributions to MAP of certain environmental capital expenditures and leased property acquisitions funded by Marathon and Ashland. In accordance with MAP’s limited liability company agreement, in certain instances, environmental capital

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expenditures and acquisitions of leased properties are funded by the original contributor of the assets, but no change in ownership interest may result from these contributions. An excess of Ashland funded improvements over Marathon funded improvements results in a net gain and an excess of Marathon funded improvements over Ashland funded improvements results in a net loss.

Cost of revenues increased by $8.718 billion in 2003 from 2002 and $367 million in 2002 from 2001. The increases in the IG segment were primarily a result of higher natural gas costs. The increases in the RM&T segment primarily reflected higher acquisition costs for crude oil, refined products, refinery charge and blend feedstocks and increased manufacturing expenses.

Selling, general and administrative expenses increased by $107 million in 2003 from 2002 and $125 million in 2002 from 2001. The increase in 2003 was primarily a result of increased employee benefits (caused by increased pension expense resulting from changes in actuarial assumptions and a decrease in realized returns on plan assets) and other employee related costs. Also, Marathon changed assumptions in the health care cost trend rate from 7.5% to 10%, resulting in higher retiree health care costs. Additionally, during 2003, Marathon recorded a charge of $24 million related to organizational and business process changes. The increase in 2002 primarily reflected increased employee related costs.

Inventory market valuation reserve is established to reduce the cost basis of inventories to current market value. The 2002 results of operations include credits to income from operations of $71 million, reversing the IMV reserve at December 31, 2001. For additional information on this adjustment, see “Management’s Discussion and Analysis of Critical Accounting Estimates – Net Realizable Value of Inventories” on page 5.

Net interest and other financial costs decreased by $82 million in 2003 from 2002, following an increase of $96 million in 2002 from 2001. The decrease in 2003 is primarily due to an increase in capitalized interest related to increased long-term construction projects, the favorable effect of interest rate swaps, the favorable effect of interest on tax deficiencies and increased interest income on investments. The increase in 2002 was primarily due to higher average debt levels resulting from acquisitions and the Separation. Additionally, included in net interest and other financing costs are foreign currency gains of $13 million and $8 million for 2003 and 2002 and losses of $5 million for 2001.

Loss from early extinguishment of debt in 2002 was attributable to the retirement of $337 million aggregate principal amount of debt, resulting in a loss of $53 million. As a result of the adoption of Statement of Financial Accounting Standards No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS No. 145”), the loss from early extinguishment of debt that was previously reported as an extraordinary item (net of taxes of $20 million) has been reclassified into income before income taxes. The adoption of SFAS No. 145 had no impact on net income for 2002.

Minority interest in income of MAP, which represents Ashland’s 38 percent ownership interest, increased by $129 million in 2003 from 2002, following a decrease of $531 million in 2002 from 2001. MAP income was higher in 2003 compared to 2002 as discussed below in the RM&T segment. MAP income was significantly lower in 2002 compared to 2001 as discussed below in the RM&T segment.

Provision for income taxes increased by $215 million in 2003 from 2002, following a decrease of $458 million in 2002 from 2001, primarily due to $720 million increase and $1.356 billion decrease in income before income taxes. The effective tax rate for 2003 was 36.6% compared to 42.1% and 37.1% for 2002 and 2001. The higher rate in 2002 was due to the United Kingdom enactment of a supplementary 10 percent tax on profits from the North Sea oil and gas production, retroactively effective to April 17, 2002. In 2002, Marathon recognized a one-time noncash deferred tax adjustment of $61 million as a result of the rate increase.

The following is an analysis of the effective tax rate for the periods presented:

	2003		2002		2001
Statutory tax rate	35.0	%	35.0	%	35.0	%
Effects of foreign operations (a)	(0.4	)	5.6		(0.7	)
State and local income taxes after federal income tax effects	2.2		3.9		3.0
Other federal tax effects	(0.2	)	(2.4	)	(0.2	)
Effective tax rate	36.6	%	42.1	%	37.1	%

^(a) The deferred tax effect related to the enactment of a supplemental tax in the U.K. increased the effective tax rate 7.0 percent in 2002.

9

Discontinued operations in 2003 primarily relates to Marathon’s E&P operations in western Canada, which were sold in 2003 for a gain of $278 million, including a tax benefit of $8 million. Also, included in 2003 results is an $8 million adjustment to a tax liability due to United States Steel Corporation. Results for 2002 and 2001 have been restated to reflect the western Canadian operations as discontinued. Results for 2001 also include the net loss attributed to Steel Stock, adjusted for certain corporate administrative expenses and interest expense (net of income tax effects), and the loss on disposition of United States Steel Corporation, which is the excess of the net investment in United States Steel over the aggregate fair market value of the outstanding shares of the Steel Stock at the time of the Separation.

Cumulative effect of changes in accounting principles of $4 million, net of a tax provision of $4 million, in 2003 represents the adoption of Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations” (“SFAS No. 143”), in which Marathon recognized in income the cumulative effect of recording the fair value of asset retirement obligations. The $13 million gain, net of a tax provision of $7 million, in 2002 represents the adoption of subsequently issued interpretations by the Financial Accounting Standards Board (“FASB”) of Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) in which Marathon must recognize in income the effect of changes in the fair value of two long-term natural gas sales contracts in the United Kingdom. The $8 million loss, net of a tax benefit of $5 million, in 2001 was an unfavorable transition adjustment related to the initial adoption of SFAS No. 133.

Net income increased by $805 million in 2003 from 2002 and by $359 million in 2002 from 2001, primarily reflecting the factors discussed above.

Income from operations for each of the last three years is summarized in the following table:

(In millions)	2003			2002			2001
E&P
Domestic	$	1,155		$	726		$	1,150
International		359			351			229
E&P segment income		1,514			1,077			1,379
RM&T		819			372			1,927
IG		(3	)		23			21
Segment income		2,330			1,472			3,327
Items not allocated to segments:
Administrative expenses(a)		(203	)		(194	)		(187	)
Business transformation costs(b)		(24	)		–			–
Inventory market valuation adjustments(c)		–			71			(71	)
Gain (loss) on ownership change in MAP		(1	)		12			(6	)
Gain on offshore lease resolution with U.S. Government		–			–			59
Gain on asset dispositions(d)		106			24			–
Loss on dissolution of MKM Partners L.P.(e)		(124	)		–			–
Contract settlement(f)		–			(15	)		–
Separation costs(g)		–			–			(14	)
Total income from operations	$	2,084		$	1,370		$	3,108

^(a) Includes administrative expenses related to Steel Stock of $25 million for 2001.

^(b) See Note 11 to the Consolidated Financial Statements for a discussion of business transformation costs.

^(c) The IMV reserve reflects the extent to which the recorded LIFO cost basis of inventories of liquid hydrocarbons and refined petroleum products exceeds net realizable value.

^(d) The net gain in 2003 represents a gain on the disposition of interest in CLAM Petroleum B.V. and certain fields in the Big Horn Basin of Wyoming and SSA stores in Florida, North Carolina, South Carolina and Georgia. In 2002, represents gain on exchange of certain oil and gas properties with XTO Energy, Inc.

^(e) See Note 13 to the Consolidated Financial Statements for a discussion of the dissolution of MKM Partners L.P.

^(f) In 2002 represents a settlement arising from the cancellation of the Cajun Express rig contract on July 5, 2001.

^(g) Represents costs related to the Separation from United States Steel.

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Average Volumes and Selling Prices

(Dollars in millions, except as noted)	2003		2002		2001
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (mbpd)(a)(b)
United States		106.5		116.0		126.3
Equity Investee (MKM)		4.4		8.5		9.4
Total United States		110.9		124.5		135.7
Europe		41.5		51.9		46.2
Other International		10.0		1.0		–
West Africa		27.1		25.3		16.0
Equity Investee(c)		1.2		–		.1
Total International(d)		79.8		78.2		62.3
Worldwide continuing operations		190.7		202.7		198.0
Discontinued operations		3.1		4.4		11.0
Worldwide		193.8		207.1		209.0
Net Natural Gas Production (mmcfd)(b)(e)
United States		731.6		744.8		793.1
Europe		285.9		303.5		326.4
West Africa		65.9		53.3		–
Equity Investee (CLAM)		12.4		24.8		30.7
Total International		364.2		381.6		357.1
Worldwide continuing operations		1,095.8		1,126.4		1150.2
Discontinued operations		74.1		103.9		122.8
Worldwide		1,169.9		1,230.3		1273.0
Total production (mboepd)		388.8		412.2		421.2
Average Sales Prices (excluding derivative gains and losses)
Liquid Hydrocarbons ($ per bbl)(a)
United States	$	26.92	$	22.18	$	20.62
Equity Investee (MKM)		29.45		24.65		23.37
Total United States		27.02		22.35		20.81
Europe		28.50		24.40		23.49
Other International		18.33		26.98		–
West Africa		26.29		22.62		24.36
Equity investee(c)		13.72		15.87		28.28
Total International		26.24		23.85		23.74
Worldwide continuing operations		26.70		22.93		21.73
Discontinued operations		28.96		23.29		21.26
Worldwide	$	26.73	$	22.94	$	21.71
Natural Gas ($ per mcf)
United States	$	4.53	$	2.87	$	3.69
Europe		3.35		2.67		2.78
West Africa		.25		.24		–
Equity Investee (CLAM)		3.69		3.05		3.38
Total International		2.80		2.35		2.83
Worldwide continuing operations		3.95		2.70		3.42
Discontinued operations		5.43		3.30		4.17
Worldwide	$	4.05	$	2.75	$	3.49
MAP:
Refined Products Sales Volumes (mbpd)(f)		1,357.0		1,318.4		1,304.4
Matching buy/sell volumes included in refined product sales volumes (mbpd)		64.0		70.7		45.0
Refining and Wholesale Marketing Margin(g)(h)	$	0.0601	$	0.0387	$	0.1167

^(a) Includes crude oil, condensate and natural gas liquids.

^(b) Amounts reflect production after royalties, excluding the U.K., Ireland and the Netherlands where amounts are before royalties.

^(c) Includes activity from CLAM and Chernogorskoye.

^(d) Represents equity tanker liftings and direct deliveries.

^(e) Includes gas acquired for injection and subsequent resale of 23.4, 4.4 and 8.1 mmcfd in 2003, 2002 and 2001, respectively.

^(f) Total average daily volumes of all refined product sales to MAP’s wholesale, branded and retail (SSA) customers.

^(g) Per gallon

^(h) Sales revenue less cost of refinery inputs, purchased products and manufacturing expenses, including depreciation.

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Domestic E&P income increased by $429 million in 2003 from 2002 following a decrease of $424 million in 2002 from 2001. The increase in 2003 was primarily due to higher natural gas and liquid hydrocarbon prices, lower dry well expense and a $25 million favorable contract settlement, partially offset by lower liquid hydrocarbon and natural gas volumes and derivative losses. The decrease in 2002 was primarily due to lower natural gas prices, lower volumes, lower derivative gains and higher dry well expense, partially offset by higher liquid hydrocarbon prices. Derivative gains (losses) totaled $(91) million in 2003, compared to $32 million in 2002 and $85 million in 2001.

Marathon’s domestic average liquid hydrocarbons price excluding derivative activity was $27.02 per barrel (“bbl”) in 2003, compared with $22.35 per bbl in 2002 and $20.81 per bbl in 2001. Average gas prices were $4.53 per thousand cubic feet (“mcf”) excluding derivative activity in 2003, compared with $2.87 per mcf in 2002 and $3.69 per mcf in 2001.

Domestic net liquid hydrocarbons production decreased 11 percent to 111 thousand barrels per day (“mbpd”) in 2003, as a result of natural declines mainly in the Gulf of Mexico and dispositions. Net natural gas production averaged 732 million cubic feet per day (“mmcfd”), down 2 percent from 2002.

Domestic net liquid hydrocarbons production decreased 8 percent to 125 mbpd in 2002, as a result of natural declines principally in the Gulf of Mexico and dispositions. Net natural gas production averaged 745 mmcfd, down 6 percent from 2001.

International E&P income increased by $8 million in 2003 from 2002 and $122 million in 2002 from 2001. The increase in 2003 was a result of higher natural gas and liquid hydrocarbon prices and higher liquid hydrocarbon volumes partially offset by lower natural gas volumes and derivative losses. The increase in 2002 was a result of higher production volumes and higher derivative gains partially offset by lower natural gas prices. Derivative gains (losses) totaled $(85) million in 2003, compared to $20 million in 2002 and $ – million in 2001. Derivatives included losses of $66 million in 2003, compared to gains of $18 million in 2002, related to long-term gas contracts in the United Kingdom that are accounted for as derivative instruments and marked-to-market.

Marathon’s international average liquid hydrocarbons price excluding derivative activity was $26.24 per bbl in 2003, compared with $23.85 per bbl and $23.74 per bbl in 2002 and 2001. Average gas prices were $2.80 per mcf excluding derivative activity in 2003, compared with $2.35 per mcf and $2.83 per mcf in 2002 and 2001.

International net liquid hydrocarbons production increased 2 percent to 80 mbpd in 2003 primarily due to the acquisition of KMOC, partially offset by lower production in the U.K. Net natural gas production averaged 364 mmcfd, down 5 percent from 2002, primarily from lower production in Ireland and the disposition of Marathon’s interest in CLAM Petroleum B.V. This decrease was partially offset by increased production in Equatorial Guinea.

International net liquid hydrocarbons production increased 26 percent to 78 mbpd in 2002 primarily due to the acquisition of interests in Equatorial Guinea and increased production in the U.K. Net natural gas production averaged 382 mmcfd, up 7 percent from 2001, primarily due to higher production in Equatorial Guinea partially offset by lower production in the U.K.

RM&T segment income increased by $447 million in 2003 from 2002 following a decrease of $1.555 billion in 2002 from 2001. The 2003 increase was primarily due to an improved refining and wholesale marketing margin, as well as a higher gasoline and distillate retail gross margin partially offset by higher administrative expenses. The refining and wholesale marketing margin in 2003 averaged 6.0 cents per gallon, versus 2002 level of 3.9 cents. The gasoline and distillate gross margin for its retail business, was 12.3 cents per gallon in 2003, as compared to 10.1 cents per gallon in 2002. The higher administrative expenses were due primarily to higher employee related costs. In 2002, the refining and wholesale marketing margin was severely compressed as crude oil costs increased while average refined product prices decreased. The refining and wholesale marketing margin in 2002 averaged 3.9 cents per gallon, versus 2001 level of 11.7 cents.

Derivative losses, which are included in the refining and wholesale marketing margin, were $162 million in 2003 as compared to losses of $124 million and gains of $210 million in 2002 and 2001. These derivative losses were generally incurred to mitigate the price risk of certain crude oil and other feedstock purchases and to protect carrying values of excess inventories.

Gains on the sale of SSA stores included in segment income were $8 million, $37 million, and $23 million for 2003, 2002, and 2001.

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IG segment income decreased by $26 million in 2003 from 2002 and increased by $2 million in 2002 from 2001. The 2003 results include earnings of $30 million from Marathon’s equity investment in the Equatorial Guinea methanol plant, which were offset by an impairment charge of $22 million on an equity method investment, a loss of $17 million on the termination of two tanker operating leases and higher expenses related to the development of an integrated gas business. The increase in 2002 reflected a favorable effect of $26 million from increased margins in gas marketing activities and mark-to-market valuation changes in associated derivatives and earnings of $11 million from Marathon’s equity investment in the Equatorial Guinea methanol plant, partially offset by predevelopment costs associated with emerging integrated gas projects.

Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity

Financial Condition

Current assets increased $1.561 billion from year-end 2002, primarily due to an increase in cash and cash equivalents and receivables. The increase in cash and cash equivalents was mainly due to approximately $1.256 billion in non-core asset sales in 2003. The increase in receivables was mainly due to higher year-end commodity prices.

Current liabilities increased $548 million from year-end 2002, primarily due to an increase in accounts payable, long-term debt due within one year and payroll and benefits payable, partially offset by a decrease in accrued taxes and interest. The increase in accounts payable was due to higher priced year-end crude purchases at MAP. The increase in payroll and benefits payable is primarily due to liabilities related to equity based compensation as a result of an increase in Marathon’s stock price.

Investments and long-term receivables decreased $311 million from year-end 2002, primarily due to the dissolution of MKM Partners L.P. and the sale of interest in CLAM Petroleum B.V. in 2003.

Net property, plant and equipment increased $440 million from year-end 2002. The increase in E&P international is due to the construction of the Alba field Phase 2A expansion project in Equatorial Guinea and the acquisition of KMOC, partially offset by the disposition of properties in western Canada. The increase in RM&T is primarily due to the Catlettsburg, Kentucky refinery repositioning project and construction of the Cardinal Products Pipeline, partially offset by sales of SSA stores. The increase in IG is primarily due to the purchase of a 30% interest in two LNG tankers which Marathon previously leased and project development costs associated with Phase 3 in Equatorial Guinea. Net property, plant and equipment for each of the last two years is summarized in the following table:

(In millions)	2003		2002
E&P
Domestic	$	2,636	$	2,757
International		3,351		3,186
Total E&P		5,987		5,943
RM&T		4,492		4,234
IG		153		30
Corporate		198		183
Total	$	10,830	$	10,390

Goodwill decreased $18 million from year-end 2002, primarily due to the disposition of properties in western Canada.

Long-term debt at December 31, 2003 was $4.085 billion, a decrease of $325 million from year-end 2002. See “Liquidity and Capital Resources” on page 15, for further discussions.

Asset retirement obligations increased $167 million from year-end 2002 primarily due to the adoption of SFAS No. 143 on January 1, 2003 and the acquisition of KMOC, partially offset by disposition of properties in western Canada.

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Cash Flows

Net cash provided from operating activities (for continuing operations) totaled $2.678 billion in 2003, compared with $2.336 billion in 2002 and $2.749 billion in 2001. The increase in 2003 mainly reflects the effects of higher worldwide natural gas and liquid hydrocarbons prices and a higher refining and wholesale marketing margin. Additionally in 2003, MAP made cash contributions to its pension plans of $89 million. The decrease in 2002 mainly reflects the effects of lower refined product margins and lower prices for natural gas.

Net cash provided from operating activities (for discontinued operations) totaled $83 million in 2003, compared with $69 million in 2002 and $887 million in 2001. This is primarily related to Marathon’s E&P operations in western Canada sold in 2003. Also included in 2001 is the business of United States Steel.

Capital expenditures for each of the last three years are summarized in the following table:

(In millions)	2003		2002		2001
E&P(a)
Domestic	$	344	$	417	$	540
International		629		403		294
Total E&P		973		820		834
RM&T		772		621		591
IG		131		48		1
Corporate		16		31		107
Total	$	1,892	$	1,520	$	1,533

^(a) Amounts exclude the acquisitions of KMOC in 2003, the Equatorial Guinea interests in 2002 and Pennaco in 2001.

Capital expenditures in 2003 totaled $1.892 billion compared with $1.520 billion and $1.533 billion in 2002 and 2001, excluding the acquisitions of KMOC in 2003, Equatorial Guinea interests in 2002 and Pennaco in 2001. The $372 million increase in 2003 mainly reflected increased spending in the RM&T segment at the Catlettsburg refinery and on the Cardinal Products Pipeline and in the E&P segment in West Africa and Norway. The increase in IG is due to the purchase of 30% interest in two LNG tankers which Marathon previously leased and project development costs associated with Phase 3 in Equatorial Guinea. The $13 million decrease in 2002 mainly reflected decreased spending in the E&P segment offset by increased spending in the RM&T segment. The decrease in the E&P segment was primarily due to the drilling of fewer gas wells in the United States in 2002 partially offset by higher capital expenditures for completion of a pipeline in Gabon, for a pipeline construction contract in Ireland and for development expenditures in Equatorial Guinea. The increase in the RM&T segment in 2002 was attributable to increased spending on the multi-year integrated investment program at MAP’s Catlettsburg refinery and construction of the Cardinal Products Pipeline in 2002, partially offset by lower capital expenditures for SSA retail outlets and completion of the Garyville coker construction in 2001. The decrease in corporate in 2002 was primarily due to the implementation of SAP financial and operations software in 2001.

Acquisitions included cash payments of $252 million in 2003 for the acquisition of KMOC, $1.160 billion in 2002 for the acquisitions of Equatorial Guinea interests and $506 million in 2001 for the acquisition of Pennaco. For further discussion of acquisitions, see Note 5 to the Consolidated Financial Statements.

Cash from disposal of assets was $1.256 billion, including the disposal of discontinued operations, in 2003, compared with $146 million in 2002 and $83 million in 2001. In 2003, proceeds were primarily from the disposition of Marathon’s E&P properties in western Canada, Yates field and gathering system, interest in CLAM Petroleum B.V., SSA stores, interest in several pipeline companies and certain fields in the Big Horn Basin of Wyoming. In 2002, proceeds were primarily from the disposition of various SSA stores and the sale of San Juan Basin assets. In 2001, proceeds were primarily from the sale of certain Canadian assets, SSA stores, and various domestic producing properties.

Net cash used in financing activities totaled $888 million in 2003, compared with net cash provided of $88 million in 2002 and net cash used of $1.290 billion in 2001. The decrease was due to activity in 2002 primarily associated with financing the acquisitions of Equatorial Guinea interests of $1.160 billion. This was partially offset by the $295 million repayment of preferred securities in 2002 that became redeemable or were converted to a right to receive cash upon the Separation. In early January 2002, Marathon paid $185 million to retire the 6.75% Convertible Quarterly Income Preferred Securities and $110 million to retire the 6.50% Cumulative Convertible Preferred Stock. Additionally, distributions to the minority shareholder of MAP were $262 million in 2003,

14

compared to $176 million and $577 million in 2002 and 2001. The cash used in 2001 primarily reflects distributions to the minority shareholder of MAP, dividends paid and the redemption of the 8.75 percent Cumulative Monthly Income Preferred Shares.

Derivative Instruments

See “Quantitative and Qualitative Disclosures About Market Risk” on page 25, for a discussion of derivative instruments and associated market risk.

Dividends to Stockholders

On January 25, 2004, the Marathon Board of Directors declared a dividend of 25 cents per share on Marathon’s common stock, payable March 10, 2004, to stockholders of record at the close of business on February 18, 2004.

Liquidity and Capital Resources

Marathon’s main sources of liquidity and capital resources are internally generated cash flow from operations, committed and uncommitted credit facilities, and access to both the debt and equity capital markets. Marathon’s ability to access the debt capital market is supported by its investment grade credit ratings. Because of the liquidity and capital resource alternatives available to Marathon, including internally generated cash flow, Marathon’s management believes that its short-term and long-term liquidity is adequate to fund operations, including its capital spending program, repayment of debt maturities for the years 2004, 2005, and 2006, and any amounts that may ultimately be paid in connection with contingencies.

Marathon’s senior unsecured debt is currently rated investment grade by Standard and Poor’s Corporation, Moody’s Investor Services, Inc. and Fitch Ratings with ratings of BBB+, Baa1, and BBB+, respectively.

Marathon has a committed $1.354 billion long-term revolving credit facility that terminates in November 2005 and a committed $575 million 364-day revolving credit facility that terminates in November 2004. At December 31, 2003, there were no borrowings against these facilities. At December 31, 2003, Marathon had no commercial paper outstanding under the U.S. commercial paper program that is backed by the long-term revolving credit facility. Additionally, Marathon has other uncommitted short-term lines of credit totaling $200 million, of which no amounts were drawn at December 31, 2003.

MAP has a $190 million revolving credit agreement with Ashland that expires in March 2004 and is expected to be renewed until March 2005. As of December 31, 2003, MAP did not have any borrowings against this facility.

In 2002, Marathon filed a new universal shelf registration statement with the Securities and Exchange Commission registering $2.7 billion aggregate amount of common stock, preferred stock and other equity securities, debt securities, trust preferred securities and/or other securities, including securities convertible into or exchangeable for other equity or debt securities. As of December 31, 2003, no securities had been offered under this shelf registration statement.

Marathon held cash and cash equivalents of $1.396 billion at December 31, 2003, compared to $488 million at December 31, 2002. The increase primarily reflects proceeds from asset sales in the fourth quarter of 2003. Marathon expects to utilize a substantial portion of this cash to fund operations, including its capital and investment program, and to repay debt in 2004.

Marathon’s cash-adjusted debt-to-capital ratio (total-debt-minus-cash to total-debt-plus-equity-minus-cash) was 33 percent at December 31, 2003, compared to 45 percent at year-end 2002. This includes approximately $605 million of debt that is serviced by United States Steel.

15

The table below provides aggregated information on Marathon’s obligations to make future payments under existing contracts as of December 31, 2003:

Summary of Contractual Cash Obligations

(Dollars in millions)	Total		2004		2005- 2006		2007- 2008		Later Years
Short and long-term debt (a)	$	4,181	$	258	$	308	$	850	$	2,765
Sale-leaseback financing (includes imputed interest) (a)		107		11		22		31		43
Capital lease obligations (a)		155		18		24		29		84
Operating lease obligations (a)		378		89		127		52		110
Operating lease obligations under sublease (a)		77		19		20		17		21
Purchase obligations:
Crude, refinery feedstock and refined products contracts (b)		7,743		5,874		1,856		13		—
Transportation and related contracts		1,071		138		407		147		379
Contracts to acquire property, plant and equipment		565		486		72		3		4
LNG facility operating costs (c)		230		14		27		27		162
Service and materials contracts (d)		188		89		56		23		20
Unconditional purchase obligations (e)		67		5		11		11		40
Commitments for oil and gas exploration (non-capital) (f)		32		8		24		—		—
Total purchase obligations		9,896		6,614		2,453		224		605
Other long-term liabilities reflected on the Consolidated Balance Sheet:
Accrued LNG facility operating costs (c)		22		3		5		5		9
Employee benefit obligations (g)		2,082		152		338		379		1,213
Total other long-term liabilities		2,104		155		343		384		1,222
Total contractual cash obligations(h)	$	16,898	$	7,164	$	3,297	$	1,587	$	4,850

^(a) Upon the Separation, United States Steel assumed certain debt and lease obligations. Such amounts have been included in the above table to reflect the fact that Marathon remains primarily liable.

^(b) The majority of 2004’s contractual obligations to purchase crude oil, refinery feedstock and refined products relate to contracts to be satisfied within the first 180 days of the year.

^(c) Marathon has acquired the right to deliver to the Elba Island LNG re-gasification terminal 58 bcf of natural gas per year. The agreement’s primary term ends in 2021. Pursuant to this agreement, Marathon has also bound itself to a commitment to pay for a portion of the operating costs of the LNG re-gasification terminal.

^(d) Services and materials contracts include contracts to purchase services such as utilities, supplies and various other maintenance and operating services.

^(e) Marathon is a party to a long-term transportation services agreement with Alliance Pipeline. This agreement is used by Alliance Pipeline to secure its financing. This arrangement represents an indirect guarantee of indebtedness. Therefore, this amount has also been disclosed as a guarantee. See Note 28 to the consolidated financial statements for a complete discussion of Marathon’s guarantee.

^(f) Commitments for oil and gas exploration (non-capital) include estimated costs within contractually obligated exploratory work programs that are subject to immediate expense, such as geological and geophysical costs.

^(g) Marathon has employee benefit obligations consisting of pensions and other post retirement benefits including medical and life insurance. Marathon has estimated projected funding through 2013 with the exception of the pension plan for employees in Ireland where only 2004 information was included.

^(h) Includes $733 million of contractual cash obligations that have been assumed by United States Steel. For additional information, see “Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity – Obligations Associated with the Separation of United States Steel – Summary of Contractual Cash Obligations Assumed by United States Steel” on page 17.

Contractual cash obligations for which the ultimate settlement amounts are not fixed and determinable have been excluded from the above table. These include derivative contracts that are sensitive to future changes in commodity prices and other factors.

Marathon management’s opinion concerning liquidity and Marathon’s ability to avail itself in the future of the financing options mentioned in the above forward-looking statements are based on currently available information. To the extent that this information proves to be inaccurate, future availability of financing may be adversely affected. Factors that affect the availability of financing include the performance of Marathon (as measured by various factors including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance, the global financial climate, and, in particular, with respect to borrowings, the levels of Marathon’s outstanding debt and credit ratings by rating agencies.

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Off Balance Sheet Arrangements

Off-balance sheet arrangements comprise those arrangements that may potentially impact Marathon’s liquidity, capital resources and results of operations, even though such arrangements are not recorded as liabilities under generally accepted accounting principles. Although off-balance sheet arrangements serve a variety of Marathon’s business purposes, Marathon is not dependent on these arrangements to maintain its liquidity and capital resources; nor is management aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse effect on liquidity and capital resources.

Marathon has provided various forms of guarantees to unconsolidated affiliates, United States Steel and certain lease contracts. These arrangements are described in Note 28 to the Consolidated Financial Statements.

Marathon is a party to agreements that would require Marathon to purchase, under certain circumstances, the interests in MAP and in Pilot Travel Centers LLC (“PTC”) not currently owned. These put/call agreements are described in Note 28 to the Consolidated Financial Statements.

Nonrecourse Indebtedness of Investees

Certain equity investees of Marathon have incurred indebtedness that Marathon does not support through guarantees or otherwise. If Marathon were obligated to share in this debt on a pro rata basis, its share would have been approximately $307 million as of December 31, 2003. Of this amount, $173 million relates to PTC. If any of these equity investees default, Marathon has no obligation to support the debt. Marathon’s partner in PTC has guaranteed $157 million of the total PTC debt.

Obligations Associated with the Separation of United States Steel

On December 31, 2001, Marathon disposed of its steel business through a tax-free distribution of the common stock of its wholly owned subsidiary United States Steel to holders of its USX—U. S. Steel Group class of common stock (“Steel Stock”) in exchange for all outstanding shares of Steel Stock on a one-for-one basis (the “Separation”).

Marathon remains obligated (primarily or contingently) for certain debt and other financial arrangements for which United States Steel has assumed responsibility for repayment under the terms of the Separation. United States Steel’s obligations to Marathon are general unsecured obligations that rank equal to United States Steel’s accounts payable and other general unsecured obligations. If United States Steel fails to satisfy these obligations, Marathon would become responsible for repayment. Under the Financial Matters Agreement, United States Steel has all of the existing contractual rights under the leases assumed from Marathon, including all rights related to purchase options, prepayments or the grant or release of security interests. However, United States Steel has no right to increase amounts due under or lengthen the term of any of the assumed leases, other than extensions set forth in the terms of any of the assumed leases.

As of December 31, 2003, Marathon has identified the following obligations totaling $699 million that have been assumed by United States Steel:

• $470 million of industrial revenue bonds related to environmental improvement projects for current and former United States Steel facilities, with maturities ranging from 2009 through 2033. Accrued interest payable on these bonds was $8 million at December 31, 2003.

• $76 million of sale-leaseback financing under a lease for equipment at United States Steel’s Fairfield Works, with a term extending to 2012, subject to extensions. There was no accrued interest payable on this financing at December 31, 2003.

• $59 million of obligations under a lease for equipment at United States Steel’s Clairton cokemaking facility, with a term extending to 2012, subject to extensions. There was no accrued interest payable on this financing at December 31, 2003.

• $72 million of operating lease obligations, of which $54 million was in turn assumed by purchasers of major equipment used in plants and operations divested by United States Steel.

• A guarantee of United States Steel’s $14 million contingent obligation to repay certain distributions from its 50 percent owned joint venture PRO-TEC Coating Company.

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• A guarantee of all obligations of United States Steel as general partner of Clairton 1314B Partnership, L.P. to the limited partners. United States Steel has reported that it currently has no unpaid outstanding obligations to the limited partners. For further discussion of the Clairton 1314B guarantee, see Note 3 to the Consolidated Financial Statements.

Of the total $699 million, obligations of $613 million and corresponding receivables from United States Steel were recorded on Marathon’s consolidated balance sheet (current portion—$20 million; long-term portion—$593 million). The remaining $86 million was related to off-balance sheet arrangements and contingent liabilities of United States Steel.

The table below provides aggregated information on the portion of Marathon’s obligations to make future payments under existing contracts that have been assumed by United States Steel as of December 31, 2003:

Summary of Contractual Cash Obligations Assumed by United States Steel

(Dollars in millions)	Total		2004		2005- 2006		2007- 2008		Later Years
Contractual obligations assumed by United States Steel
Long-term debt	$	470	$	–	$	–	$	–	$	470
Sale-leaseback financing (includes imputed interest)		107		11		22		31		43
Capital lease obligations		84		13		13		19		39
Operating lease obligations		18		5		10		3		–
Operating lease obligations under sublease		54		12		11		10		21
Total contractual obligations assumed by United States Steel	$	733	$	41	$	56	$	63	$	573

Each of Marathon and United States Steel, as members of the same consolidated tax reporting group during taxable periods ended on or before December 31, 2001, is jointly and severally liable for the federal income tax liability of the entire consolidated tax reporting group for those periods. Marathon and United States Steel have entered into a tax sharing agreement that allocates tax liabilities relating to taxable periods ended on or before December 31, 2001. The agreement includes indemnification provisions to address the possibility that the taxing authorities may seek to collect a tax liability from one party where the tax sharing agreement allocates that liability to the other party. In 2003, in accordance with the terms of the tax sharing agreement, Marathon paid $16 million to United States Steel in connection with the settlement with the Internal Revenue Service of the consolidated federal income tax returns of USX Corporation for the years 1992 through 1994.

United States Steel reported in its Form 10-K for the year ended December 31, 2003, that it has significant restrictive covenants related to its indebtedness including cross-default and cross-acceleration clauses on selected debt that could have an adverse effect on its financial position and liquidity. However, United States Steel management believes that its liquidity will be adequate to satisfy its obligations for the foreseeable future. During periods of weakness in the manufacturing sector of the U.S. economy, United States Steel believes that it can maintain adequate liquidity through a combination of deferral of nonessential capital spending, sale of non-strategic assets and other cash conservation measures.

Transactions with Related Parties

Marathon owns a combined 63.3% working interest in the Alba field. Marathon owns a net 52.2% interest in an onshore liquefied petroleum gas processing plant through an equity method investee, Alba Plant LLC. Additionally, Marathon owns a 45% net interest in an onshore methanol production plant through an equity method investee, Atlantic Methanol Production Company LLC (“AMPCO”). Marathon sells its marketed natural gas from the Alba field to Alba Plant LLC and AMPCO. AMPCO uses the natural gas to manufacture methanol and sells the methanol through AMPCO Marketing LLC.

MAP’s related party sales to its 50% equity method investee, PTC, consists primarily of refined petroleum products which accounted for approximately 2% of its total sales revenue for 2003. PTC is the largest travel center network in the United States and operates 257 travel centers nationwide. MAP also sells refined petroleum products consisting mainly of petrochemicals, base lube oils, and asphalt to Ashland which owns a 38% interest in MAP. MAP’s sales to Ashland accounted for approximately 1% of its total sales revenue for 2003. Management believes that these transactions were conducted under terms comparable to those with unrelated parties.

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Management’s Discussion and Analysis of Environmental Matters, Litigation and Contingencies

Marathon has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of Marathon’s products and services, operating results will be adversely affected. Marathon believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business or the marine transportation of crude oil and refined products.

Marathon’s environmental expenditures for each of the last three years were^(a):

(In millions)	2003		2002		2001
Capital	$	331	$	128	$	90
Compliance
Operating & maintenance		243		205		213
Remediation(b)		44		45		22
Total	$	618	$	378	$	325

^(a) Amounts are determined based on American Petroleum Institute survey guidelines and include 100 percent of MAP.

^(b) These amounts include spending charged against remediation reserves, where permissible, but exclude noncash provisions recorded for environmental remediation.

Marathon’s environmental capital expenditures accounted for 17 percent of total capital expenditures in 2003, eight percent in 2002, and six percent in 2001.

Marathon accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required.

Marathon has been notified that it is a potentially responsible party (“PRP”) at nine waste sites under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) as of December 31, 2003. In addition, there are 4 sites where Marathon has received information requests or other indications that Marathon may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. At many of these sites, Marathon is one of a number of parties involved and the total cost of remediation, as well as Marathon’s share thereof, is frequently dependent upon the outcome of investigations and remedial studies.

There are also 125 additional sites, excluding retail marketing outlets, related to Marathon where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 16 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation.

New or expanded environmental requirements, which could increase Marathon’s environmental costs, may arise in the future. Marathon intends to comply with all legal requirements regarding the environment, but since not all of them are fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed.

Marathon’s environmental capital expenditures are expected to be approximately $415 million or 20% of capital expenditures in 2004. Predictions beyond 2004 can only be broad-based estimates, which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified projects, Marathon anticipates that environmental capital expenditures will be approximately $425 million in 2005; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed.

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New Tier 2 gasoline and on-road diesel fuel rules require substantially reduced sulfur levels for gasoline and diesel starting in 2004 and 2006, respectively. The combined capital costs to achieve compliance with the gasoline and diesel regulations could amount to approximately $900 million over the period between 2002 and 2006 and includes costs that could be incurred as part of other refinery upgrade projects. This is a forward-looking statement. Costs incurred through December 31, 2003, were approximately $205 million. Some factors (among others) that could potentially affect gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, completion of project detailed engineering, and project construction and logistical considerations.

MAP has had a pending enforcement matter with the Illinois Environmental Protection Agency and the Illinois Attorney General’s Office since 2002 concerning MAP’s self-reporting of possible emission exceedences and permitting issues related to storage tanks at its Robinson, Illinois refinery. MAP has had periodic discussions with Illinois officials regarding this matter and more discussions are anticipated in 2004.

During 2001, MAP entered into a New Source Review consent decree and settlement of alleged Clean Air Act (“CAA”) and other violations with the U. S. Environmental Protection Agency covering all of MAP’s refineries. The settlement committed MAP to specific control technologies and implementation schedules for environmental expenditures and improvements to MAP’s refineries over approximately an eight-year period. The total one-time expenditures for these environmental projects is approximately $330 million over the eight-year period, with about $170 million incurred through December 31, 2003. The impact of the settlement on ongoing operating expenses is expected to be immaterial. In addition, MAP has nearly completed certain agreed upon supplemental environmental projects as part of this settlement of an enforcement action for alleged CAA violations, at a cost of $9 million. MAP believes that this settlement will provide MAP with increased permitting and operating flexibility while achieving significant emission reductions.

Other Contingencies

Marathon is a defendant along with many other refining companies in over forty recently filed cases in thirteen states alleging methyl tertiary-butyl ether (MTBE) contamination in groundwater. The plaintiffs generally are water providers or governmental authorities and they allege that refiners, manufacturers and sellers of gasoline containing MTBE are liable for manufacturing a defective product and that owners and operators of retail gasoline sites have allowed MTBE to be discharged into the groundwater. Several of these lawsuits allege contamination that is outside of Marathon’s marketing area. A few of the cases seek approval as class actions. Many of the cases seek punitive damages or treble damages under a variety of statutes and theories. Marathon has stopped producing MTBE at its refineries. The potential impact of these recent cases and future potential similar cases is uncertain. Marathon intends to vigorously defend these cases.

Marathon is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to Marathon. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to Marathon. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.

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Outlook

Capital, Investment and Exploration Budget

Marathon’s has approved a capital, investment and exploration expenditure budget of approximately $2.26 billion for 2004. The primary focus of the 2004 budget is to find additional oil and gas reserves, develop existing fields, strengthen RM&T assets and continue implementation of the integrated gas strategy through Phase 3 in Equatorial Guinea. The budget includes worldwide production capital spending of $810 million primarily in Equatorial Guinea, Russia, Norway and the Gulf of Mexico. The worldwide exploration and exploitation budget of $302 million includes plans to drill 11 significant exploration wells in Angola, Equatorial Guinea, Norway, the Gulf of Mexico and Nova Scotia. Exploitation activities will focus on projects primarily in the United States. The budget includes $788 million for RM&T projects, primarily for refinery upgrade projects for the production of low sulfur gasoline and diesel fuel and the Detroit refinery expansion. The integrated gas budget of $263 million is primarily for the development of the LNG project on Bioko Island in Equatorial Guinea. The remaining $96 million balance is designated for corporate activities and capitalized interest.

Exploration and Production

The outlook regarding Marathon’s upstream revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world’s major oil and gas producing and consuming areas. Any significant decline in prices could have a material adverse effect on Marathon’s results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development.

Marathon estimates its 2004 and 2005 production will average 365,000 BOEPD, excluding the effect of any acquisitions or dispositions. Marathon replaced 124 percent of production, excluding dispositions, during 2003. Also during the year, the company divested non-core upstream assets with 274 million BOE of proved reserves. Excluding acquisitions and dispositions, Marathon replaced approximately 76 percent of production. At year end, Marathon had proved reserves of 1.042 billion BOE.

Exploration

Major exploration activities, which are currently underway or under evaluation, include:

• Angola, where Marathon recently participated in the drilling of the Venus exploration well on Block 31 and the Canela well on Block 32. Plans are to participate in two to four additional exploration wells in this area during 2004;

• Norway, where Marathon has interests in twelve licenses in the Norwegian sector of the North Sea and plans to drill two exploration wells during 2004, one of which is anticipated to be in the Alvheim area;

• Gulf of Mexico, where Marathon plans to participate in two deepwater and two shelf exploration wells during 2004;

• Equatorial Guinea, where Marathon is currently evaluating the results of recent drilling in the Deep Luba prospect, which will test for potential resources under the Alba field and plans to drill one or two additional exploration wells in 2004;

• Eastern Canada, where Marathon plans to drill one exploration well on the Annapolis lease during 2004.

Production

In Equatorial Guinea, Marathon’s Phase 2A expansion project came on-stream during the fourth quarter. This project began producing less than 15 months after its approval and less than two years since Marathon’s acquisition of its interests in Equatorial Guinea. By year-end 2003, gross condensate production had grown from 18,000 to 30,000 bpd. The Phase 2B LPG expansion project is on schedule with an expected start-up near the end of 2004. Full LPG production of 20,000 bpd gross (11,600 bpd net) is expected in early 2005. Phase 2A and Phase 2B full condensate production of 59,000 bpd gross (32,600 bpd net to Marathon) is expected in early 2005.

In Russia, Marathon’s acquisition of KMOC in 2003 resulted in additional proved reserves of approximately 95 million BOE. Current net daily production of 16,000 net bpd from these operations is expected to increase to more than 60,000 net bpd within five years.

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In Norway, Marathon is evaluating development options associated with the exploration success in Alvheim and Klegg. Marathon and its partners are evaluating several development scenarios for Alvheim, in which Marathon is operator and holds a 65 percent interest. Marathon expects to submit a development plan to the Norwegian authorities during the second quarter of 2004. Marathon holds a 47 percent interest in Klegg and expects a development plan to be approved in 2004. Production from these combined developments is expected to reach more than 50,000 net bpd during 2007. On February 23, 2004, Marathon and its Alvheim project partners announced the signing of a purchase and sale agreement to acquire a multipurpose shuttle tanker.

In the Gulf of Mexico, Marathon and its partners in the Neptune Unit are integrating the results of this discovery into field development studies and plan to spud another appraisal well on this discovery during the first quarter of 2004. Marathon holds a 30 percent interest in the Neptune Unit.

In December 2003, Marathon and its partners, in the Corrib project offshore Ireland, submitted a new planning application to construct an onshore gas terminal for the Corrib natural gas discovery. Final planning approval for the onshore terminal is expected by the end of 2004.

In Qatar, Marathon and three other companies are exploring the possibility of developing a portion of the North field offshore Qatar, including infrastructure for gas processing facilities and a GTL plant.

In Wyoming’s Powder River Basin, Marathon plans to drill approximately 400 coal bed natural gas wells in 2004.

The above discussion includes forward-looking statements with respect to the timing and levels of Marathon’s worldwide liquid hydrocarbon and natural gas production, the exploration drilling program, possible additional resources, the Phase 2B LNG expansion project, the possibility of an equipment purchase, and the expected date for final planning approval for an onshore terminal. Some factors that could potentially affect worldwide liquid hydrocarbon and natural gas production, the exploration drilling program and possible additional resources include acts of war or terrorist acts and the governmental or military response, pricing, supply and demand for petroleum products, amount of capital available for exploration and development, occurrence of acquisitions or dispositions of oil and gas properties, regulatory constraints, timing of commencing production from new wells, drilling rig availability, achieving definitive agreements among project participants, inability or delay in obtaining necessary government and third party approvals and permits, unforeseen hazards such as weather conditions and other geological, operating and economic considerations. Factors that could affect the Phase 2B LPG expansion project include unforeseen problems arising from construction and unforeseen hazards such as weather conditions. Factors affecting the possibility of the equipment purchase include the partners’ approval of the development of the Alvheim area and the subsequent approval of a plan of development and operation by the Norwegian authorities. The final planning approval for the onshore terminal is contingent upon governmental approval. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Refining, Marketing and Transportation

Marathon’s RM&T segment income is largely dependent upon the refining and wholesale marketing margin for refined products, the retail gross margin for gasoline and distillates, and the gross margin on retail merchandise sales. The refining and wholesale marketing margin reflects the difference between the wholesale selling prices of refined products and the cost of raw materials refined, purchased product costs and manufacturing expenses. Refining and wholesale marketing margins have been historically volatile and vary from the impact of competition and with the level of economic activity in the various marketing areas, the regulatory climate, the seasonal pattern of certain product sales, crude oil costs, manufacturing costs, the available supply of crude oil and refined products, and logistical constraints. The retail gross margin for gasoline and distillates reflects the difference between the retail selling prices of these products and their wholesale cost, including secondary transportation. Retail gasoline and distillate margins have also been historically volatile, but tend to be countercyclical to the refining and wholesale marketing margin. Factors affecting the retail gasoline and distillate margin include competition, seasonal demand fluctuations, the available wholesale supply, the level of economic activity in the marketing areas and weather situations that impact driving conditions. The gross margin on retail merchandise sales tends to be less volatile than the retail gasoline and distillate margin. Factors affecting the gross margin on retail merchandise sales include consumer demand for merchandise items, the impact of competition and the level of economic activity in the marketing area.

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MAP has completed the approximately $440 million multi-year Catlettsburg, Kentucky, refinery repositioning project. This major operations improvement project includes the deactivation of the existing, old fluid catalytic cracking unit (FCCU) and the conversion and expansion of the existing atmospheric residue catalytic cracking unit into an FCCU. This project is expected to increase the value of the refined products produced at Catlettsburg, improve cost efficiency and enable the refinery to meet new low sulfur gasoline standards. Project startup was in the first quarter of 2004.

MAP has commenced approximately $300 million in new capital projects for its 74,000 bpd Detroit, Michigan refinery. One of the projects, a $110 million expansion project, is expected to raise the crude oil capacity at the refinery by 35 percent to 100,000 bpd. Other projects are expected to enable the refinery to produce new clean fuels and further control regulated air emissions. Completion of the projects are scheduled for the fourth quarter of 2005. Marathon will loan MAP the funds necessary for these upgrade and expansion projects.

A MAP subsidiary, Ohio River Pipe Line LLC (“ORPL”), completed a 150-mile refined product pipeline from Kenova, West Virginia to Columbus, Ohio in late 2003. The pipeline is an interstate common carrier pipeline. The pipeline is known as Cardinal Products Pipeline and is expected to initially move about 36,000 bpd of refined petroleum into the central Ohio region. The pipeline, which has a capacity of up to 80,000 bpd, is expected to provide a stable, cost effective supply of gasoline, diesel and jet fuels to this market.

Overlapping planned maintenance projects, including investments in the “Tier 2” ultra-low sulfur gasoline production upgrades, will reduce MAP’s 935,000 bpd crude oil capacity such that it expects to process about 775,000 bpd of crude oil in the first quarter of 2004. MAP expects its average crude oil throughput for the total year 2004 to be at or above historical levels.

The above discussion includes forward-looking statements with respect to the Detroit capital projects and the Cardinal Products Pipeline system. Some factors that could affect the Detroit construction projects include availability of materials and labor, permitting approvals, unforeseen hazards such as weather conditions, and other risks customarily associated with construction projects. Factors that could impact the Cardinal Products Pipeline include the price of petroleum products and other supply issues. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Integrated Gas

Marathon continues to make progress on its Phase 3 expansion project in Equatorial Guinea. To commercialize the significant gas resources in Equatorial Guinea’s Alba field, Marathon, the Government of Equatorial Guinea and GEPetrol, the national oil company of Equatorial Guinea, have signed a heads of agreement on a package of fiscal terms and conditions for the development of the LNG project on Bioko Island. Marathon and GEPetrol plan to develop a 3.4 million metric tonnes per year LNG plant, with start up currently projected for late 2007. Marathon and GEPetrol have also signed a letter of understanding (LOU) with a subsidiary of BG Group plc (“BGML”) under which BGML would purchase the LNG plant’s production for a period of 17 years on an FOB Bioko Island basis with pricing linked principally to the Henry Hub index. The LNG would be targeted primarily to a receiving terminal in Lake Charles, Louisiana, where it would be regasified and delivered into the Gulf Coast natural gas pipeline grid. The provisions of the LOU are subject to a definitive purchase and sale agreement which the parties expect to finalize by the second quarter of 2004. Pending final approval of all commercial and governmental agreements, a final investment decision is expected to be concluded by second quarter 2004.

The above discussion contains forward-looking statements with respect to the estimated construction and startup dates of a LNG liquefaction plant and related facilities and the purchase of LNG by BGML. Factors that could affect the purchase of LNG by BGML and the estimated construction and startup dates of the LNG liquefaction plant and related facilities include, without limitation, the successful negotiation and execution of a definitive purchase and sale agreement for LNG supply, board approval of the transactions, approval of the LNG project by the Government of Equatorial Guinea, unforeseen difficulty in negotiation of definitive agreements among project participants, inability or delay in obtaining necessary government and third-party approvals, arranging sufficient financing, unanticipated changes in market demand or supply, competition with similar projects, environmental issues, availability or construction of sufficient LNG vessels, and unforeseen hazards such as weather conditions. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

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Corporate Matters

Marathon has announced organizational and business process changes to increase efficiency, profitability and shareholder value and to achieve projected annual pretax savings of more than $135 million, including $70 million related to MAP. It is anticipated that most of these changes will be completed during the first half 2004, and will result in pretax charges of approximately $75 million ($10 million of which is related to MAP), including benefit plan curtailment and settlement effects of $24 million. Approximately $24 million of the estimated $75 million charges has been recorded in 2003, with the remainder to be recognized when incurred during the first half 2004.

Marathon expects that pension and other postretirement plan expense in 2004 will increase approximately $65 million from 2003 levels, of which approximately $21 million relates to MAP. The total includes $34 million related to pension plan settlements as a result of the business transformation. MAP, and Marathon’s foreign subsidiaries expect to contribute approximately $93 million and $22 million to the funded pension plans in 2004.

The above discussion includes forward-looking statements with respect to projected annual cost savings from organizational and business process improvements, the projected completion time for implementation of the changes and pension and other postretirement plan expenses. Factors, but not necessarily all factors, that could adversely affect these expected results include possible delays in consolidating the U.S. production organization, future acquisitions or dispositions, technological developments, actions of government or other regulatory bodies in areas affected by these organizational changes, unforeseen hazards, regulatory impacts, and other economic or political considerations. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Accounting Standards Not Yet Adopted

An issue currently on the Emerging Issues Task Force (“EITF”) agenda, Issue No. 03-S “Applicability of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Oil and Gas Companies,” will address how oil and gas companies should classify the costs of acquiring contractual mineral interests in oil and gas properties on the balance sheet. The EITF is considering an alternative interpretation of Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets” that mineral or drilling rights or leases, concessions or other interests representing the right to extract oil or gas should be classified as intangible assets rather than oil and gas properties. Management believes that our current balance sheet classification for these costs is appropriate under generally accepted accounting principles. If a reclassification is ultimately required, the estimated amount of the leasehold acquisition costs to be reclassified would be $2.3 billion and $2.4 billion at December 31, 2003 and 2002. Should such a change be required, there would be no impact on our previously filed income statements (or reported net income), statements of cash flow or statements of stockholders’ equity for prior periods. Additional disclosures related to intangible assets would also be required.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Management Opinion Concerning Derivative Instruments

Management has authorized the use of futures, forwards, swaps and options to manage exposure to market fluctuations in commodity prices, interest rates, and foreign currency exchange rates.

Marathon uses commodity-based derivatives to manage price risk related to the purchase, production or sale of crude oil, natural gas, and refined products. To a lesser extent, Marathon is exposed to the risk of price fluctuations on natural gas liquids and on petroleum feedstocks used as raw materials.

Marathon’s strategy has generally been to obtain competitive prices for its products and allow operating results to reflect market price movements dictated by supply and demand. Marathon will use a variety of derivative instruments, including option combinations, as part of the overall risk management program to manage commodity price risk within its different businesses. As market conditions change, Marathon evaluates its risk management program and could enter into strategies that assume market risk whereby cash settlement of commodity-based derivatives will be based on market prices.

Marathon’s E&P segment primarily uses commodity derivative instruments to selectively lock in realized prices on portions of its future production when deemed advantageous to do so.

Marathon’s RM&T segment primarily uses commodity derivative instruments to mitigate the price risk of certain crude oil and other feedstock purchases, to protect carrying values of excess inventories, to protect margins on fixed-price sales of refined products and to lock-in the price spread between refined products and crude oil. MAP recently expanded its trading strategies (through the use of sold options) to take advantage of opportunities in the commodity markets.

Marathon’s IG segment is exposed to market risk associated with the purchase and subsequent resale of natural gas. Marathon uses commodity derivative instruments to mitigate the price risk on purchased volumes and anticipated sales volumes.

Marathon uses financial derivative instruments to manage interest rate and foreign currency exchange rate exposures. As Marathon enters into derivatives, assessments are made as to the qualification of each transaction for hedge accounting.

Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose Marathon to material risk. However, the use of derivative instruments could materially affect Marathon’s results of operations in particular quarterly or annual periods. Management believes that use of these instruments will not have a material adverse effect on financial position or liquidity.

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Commodity Price Risk

Sensitivity analyses of the incremental effects on income from operations (“IFO”) of hypothetical 10 percent and 25 percent changes in commodity prices for open derivative commodity instruments as of December 31, 2003 and December 31, 2002, are provided in the following table:^(a)

(In millions)
	Incremental Decrease in IFO Assuming a Hypothetical Price Change of(a)
	2003						2002
Derivative Commodity Instruments(b)(c)	10%			25%			10%			25%
Crude oil(d)	$	28.3	(e)	$	87.9	(e)	$	42.3	(e)	$	141.8	(e)
Natural gas(d)		29.1	(e)		73.5	(e)		39.5	(e)		120.3	(e)
Refined products(d)		3.6	(e)		9.1	(e)		1.5	(e)		6.5	(e)

^(a) Marathon remains at risk for possible changes in the market value of derivative instruments; however, such risk should be mitigated by price changes in the underlying hedged item. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect hypothetical 10% and 25% changes in closing commodity prices, excluding basis swaps, for each open contract position at December 31, 2003 and 2002. Marathon evaluates its portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Marathon is also exposed to credit risk in the event of nonperformance by counterparties. The creditworthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical. Changes to the portfolio after December 31, 2003, would cause future IFO effects to differ from those presented in the table.

^(b) Net open contracts for the combined E&P and IG segments varied throughout 2003, from a low of 24,375 contracts at October 8 to a high of 52,470 contracts at October 17, and averaged 37,068 for the year. The number of net open contracts for the RM&T segment varied throughout 2003, from a low of 30 contracts at July 19 to a high of 23,412 contracts at December 4, and averaged 9,850 for the year. The derivative commodity instruments used and hedging positions taken will vary and, because of these variations in the composition of the portfolio over time, the number of open contracts by itself cannot be used to predict future income effects.

^(c) The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only.

^(d) The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in IFO when applied to the derivative commodity instruments used to hedge that commodity.

^(e) Price increase.

E&P Segment

At December 31, 2003 the following commodity derivative contracts were outstanding. All contracts currently qualify for hedge accounting unless noted.

Contract Type(a)	Period	Daily Volume(b)	% of Estimated Production(b)		Average Price
Natural Gas
Option collars	January – December 2004	23 mmcfd	2	%	$7.15 - $4.25 mcf
Swaps	January – December 2004	50 mmcfd	5	%	$5.02 mcf
Crude Oil
Option collars	2004	44 mbpd	23	%	$29.67 - $24.26 bbl

^(a) These contracts may be subject to margin calls above certain limits established by counterparties.

^(b) Volumes and percentages are based on the estimated production on an annualized basis.

Derivative gains (losses) included in the E&P segment were $(176) million, $52 million and $85 million for 2003, 2002 and 2001. Losses of $66 million and gains of $18 million are included in segment results for 2003 and 2002, respectively, on long-term gas contracts in the United Kingdom that are accounted for as derivative instruments and marked-to-market. Additionally, losses of $8 million and gains of $23 million from discontinued cash flow hedges are included in segment results for 2003 and 2002. The discontinued cash flow hedge amounts were reclassified from accumulated other comprehensive income (loss) as it was no longer probable that the original forecasted transactions would occur.

26

RM&T Segment

Marathon’s RM&T operations primarily use derivative commodity instruments to mitigate the price risk of certain crude oil and other feedstock purchases, to protect carrying values of excess inventories, to protect margins on fixed price sales of refined products and to lock-in the price spread between refined products and crude oil. Derivative instruments are used to mitigate the price risk between the time foreign and domestic crude oil and other feedstock purchases for refinery supply are priced and when they are actually refined into salable petroleum products. In addition, natural gas options are in place to manage the price risk associated with approximately 60% of the anticipated natural gas purchases for refinery use through the first quarter of 2004 and 50% through the second quarter of 2004. Derivative commodity instruments are also used to protect the value of excess refined product, crude oil and LPG inventories. Derivatives are used to lock in margins associated with future fixed price sales of refined products to non-retail customers. Derivative commodity instruments are used to protect against decreases in the future crack spreads. Within a limited framework, derivative instruments are also used to take advantage of opportunities identified in the commodity markets. Derivative gains (losses) included in RM&T segment income for each of the last two years are summarized in the following table:

Strategy (In Millions)	2003			2002
Mitigate price risk	$	(112	)	$	(95	)
Protect carrying values of excess inventories		(57	)		(41	)
Protect margin on fixed price sales		5			11
Protect crack spread values		6			1
Trading activities		(4	)		–
Total net derivative losses	$	(162	)	$	(124	)

Generally, derivative losses occur when market prices increase, which are offset by gains on the underlying physical commodity transaction. Conversely, derivative gains occur when market prices decrease, which are offset by losses on the underlying physical commodity transaction.

IG Segment

Marathon has used derivative instruments to convert the fixed price of a long-term gas sales contract to market prices. The underlying physical contract is for a specified annual quantity of gas and matures in 2008. Similarly, Marathon will use derivative instruments to convert shorter term (typically less than a year) fixed price contracts to market prices in its ongoing purchase for resale activity; and to hedge purchased gas injected into storage for subsequent resale. Derivative gains (losses) included in IG segment income were $19 million, $(8) million and $(29) million for 2003, 2002 and 2001. IG’s trading activity gains (losses) of $(7) million, $4 million and $(1) million in 2003, 2002 and 2001 are included in the aforementioned amounts.

Other Commodity Risk

Marathon is subject to basis risk, caused by factors that affect the relationship between commodity futures prices reflected in derivative commodity instruments and the cash market price of the underlying commodity. Natural gas transaction prices are frequently based on industry reference prices that may vary from prices experienced in local markets. For example, New York Mercantile Exchange (“NYMEX”) contracts for natural gas are priced at Louisiana’s Henry Hub, while the underlying quantities of natural gas may be produced and sold in the western United States at prices that do not move in strict correlation with NYMEX prices. To the extent that commodity price changes in one region are not reflected in other regions, derivative commodity instruments may no longer provide the expected hedge, resulting in increased exposure to basis risk. These regional price differences could yield favorable or unfavorable results. OTC transactions are being used to manage exposure to a portion of basis risk.

Marathon is subject to liquidity risk, caused by timing delays in liquidating contract positions due to a potential inability to identify a counterparty willing to accept an offsetting position. Due to the large number of active participants, liquidity risk exposure is relatively low for exchange-traded transactions.

27

Interest Rate Risk

Marathon is subject to the effects of interest rate fluctuations affecting the fair value of certain financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10 percent decrease in interest rates is provided in the following table:

(In millions)
	December 31, 2003				December 31, 2002
Financial Instruments(a)	Fair Value(b)		Incremental Increase in Fair Value(c)		Fair Value(b)		Incremental Increase in Fair Value(c)
Financial assets:
Investments and long-term receivables	$	186	$	–	$	223	$	–
Interest rate swap agreements	$	4	$	16	$	12	$	8
Financial liabilities:
Long-term debt(d)(e)	$	4,740	$	176	$	5,008	$	194

^(a) Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table.

^(b) See Note 17 and 18 to the Consolidated Financial Statements for carrying value of instruments.

^(c) For long-term debt, this assumes a 10% decrease in the weighted average yield to maturity of Marathon’s long-term debt at December 31, 2003 and 2002. For interest rate swap agreements, this assumes a 10% decrease in the effective swap rate at December 31, 2003.

^(d) Includes amounts due within one year.

^(e) Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities.

At December 31, 2003 and 2002, Marathon’s portfolio of long-term debt was substantially comprised of fixed rate instruments. Therefore, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. This sensitivity is illustrated by the $176 million increase in the fair value of long-term debt assuming a hypothetical 10 percent decrease in interest rates. However, Marathon’s sensitivity to interest rate declines and corresponding increases in the fair value of its debt portfolio would unfavorably affect Marathon’s results and cash flows only to the extent that Marathon would elect to repurchase or otherwise retire all or a portion of its fixed-rate debt portfolio at prices above carrying value.

Marathon has initiated a program to manage its exposure to interest rate movements by utilizing financial derivative instruments. The primary objective of this program is to reduce Marathon’s overall cost of borrowing by managing the fixed and floating interest rate mix of the debt portfolio. Beginning in 2002, Marathon entered into several interest rate swap agreements, designated as fair value hedges, which effectively resulted in an exchange of existing obligations to pay fixed interest rates for obligations to pay floating rates. The following table summarizes, by individual debt instrument, the interest rate swap activity as of December 31, 2003:

Floating Rate to be Paid	Fixed Rate to be Received		Notional Amount ($Millions)		Swap Maturity	Fair Value ($Millions)
Six Month LIBOR +4.226%	6.650	%	$	300	2006	$	1
Six Month LIBOR +1.935%	5.375	%	$	450	2007	$	6
Six Month LIBOR +3.285%	6.850	%	$	400	2008	$	3
Six Month LIBOR +2.142%	6.125	%	$	200	2012	$	(6	)

28

Foreign Currency Exchange Rate Risk

Marathon has a program to manage its exposure to foreign currency exchange rates by utilizing forward contracts. The primary objective of this program is to reduce Marathon’s exposure to movements in the foreign currency markets by locking in foreign currency rates. As of December 31, 2003, Marathon had no open contracts.

Credit Risk

Marathon has significant credit risk exposure to United States Steel arising from the Separation. That exposure is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Obligations Associated with the Separation of United States Steel” on page 17.

Safe Harbor

Marathon’s quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management’s opinion about risks associated with the use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply of and demand for crude oil, natural gas, refined products and other feedstocks. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to Marathon’s hedging programs may differ materially from those discussed in the forward-looking statements.

29

Item 8. Consolidated Financial Statements and Supplementary Data

   MARATHON OIL CORPORATION  

Index to 2003 Consolidated Financial Statements and Supplementary Data
	Page
Management’s Report	F-1
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Statement of Income	F-2
Consolidated Balance Sheet	F-4
Consolidated Statement of Cash Flows	F-5
Consolidated Statement of Stockholders’ Equity	F-6
Notes to Consolidated Financial Statements	F-8

Management’s Report

The accompanying consolidated financial statements of Marathon Oil Corporation and its consolidated subsidiaries (Marathon) are the responsibility of management and have been prepared in conformity with accounting principles generally accepted in the United States of America. They necessarily include some amounts that are based on best judgments and estimates. The financial information displayed in other sections of this report is consistent with these financial statements.

Marathon seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization.

Marathon has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, Marathon’s independent auditors, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied.

The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of independent directors, regularly meets (jointly and separately) with the independent auditors, management and internal auditors to monitor the proper discharge by each of their responsibilities relative to internal accounting controls and the consolidated financial statements.

Clarence P. Cazalot, Jr.	Janet F. Clark	Albert G. Adkins
President and Chief Executive Officer	Senior Vice President and Chief Financial Officer	Vice President– Accounting and Controller

Report of Independent Registered Public Accounting Firm

To the Stockholders of Marathon Oil Corporation:

In our opinion, the accompanying consolidated financial statements appearing on pages F-2 through F-40 present fairly, in all material respects, the financial position of Marathon Oil Corporation and its subsidiaries (Marathon) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Marathon’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States), which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the financial statements, Marathon changed its methods of accounting for asset retirement costs, stock-based compensation and the effects of early extinguishment of debt in 2003.

As discussed in Note 2 to the financial statements, Marathon changed its method for accounting for certain long-term natural gas sales contracts in 2002.

As discussed in Note 3 to the financial statements, on December 31, 2001, Marathon distributed its steel business to the holders of USX-U.S. Steel Group common stock and has accounted for this business as a discontinued operation.

PricewaterhouseCoopers LLP

Houston, Texas

February 25, 2004, except for Note 8, as to which the date is May 26, 2004

F-1

Consolidated Statement of Income

(Dollars in millions)	2003			2002			2001
Revenues and other income:
Sales and other operating revenues (including consumer excise taxes)	$	40,042		$	30,426		$	32,349
Sales to related parties		921			869			447
Income from equity method investments		29			137			118
Net gains on disposal of assets		166			67			44
Gain (loss) on ownership change in Marathon Ashland Petroleum LLC		(1	)		12			(6	)
Other income		77			44			110
Total revenues and other income		41,234			31,555			33,062
Costs and expenses:
Cost of revenues (excludes items shown below)		32,109			23,391			23,024
Purchases from related parties		187			178			158
Consumer excise taxes		4,285			4,250			4,404
Depreciation, depletion and amortization		1,175			1,176			1,187
Selling, general and administrative expenses		946			839			714
Other taxes		299			255			269
Exploration expenses		149			167			127
Inventory market valuation charges (credits)		–			(71	)		71
Total costs and expenses		39,150			30,185			29,954
Income from operations		2,084			1,370			3,108
Net interest and other financing costs		186			268			172
Loss from early extinguishment of debt		–			53			–
Minority interest in income of Marathon Ashland Petroleum LLC		302			173			704
Income from continuing operations before income taxes		1,596			876			2,232
Provision for income taxes		584			369			827
Income from continuing operations		1,012			507			1,405
Discontinued operations		305			(4	)		(1,240	)
Income before cumulative effect of changes in accounting principles		1,317			503			165
Cumulative effect of changes in accounting principles		4			13			(8	)
Net income	$	1,321		$	516		$	157

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

F-2

Income Per Common Share

(Dollars in millions, except per share data)	2003		2002		2001
MARATHON COMMON STOCK
Income from continuing operations applicable to Common Stock	$	1,012	$	507	$	1,404
Net income applicable to Common Stock	$	1,321	$	516	$	377
Per Share Data
Basic and diluted:
Income from continuing operations	$	3.26	$	1.63	$	4.54
Net income	$	4.26	$	1.66	$	1.22
STEEL STOCK
Net loss applicable to Steel Stock	$	–	$	–	$	(243	)
Per Share Data
Basic:
Net loss	$	–	$	–	$	(2.73	)
Diluted:
Net loss	$	–	$	–	$	(2.74	)

See Note 7 for a description and computation of income per common share.

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

F-3

Consolidated Balance Sheet

(Dollars in millions)	December 31	2003			2002
Assets
Current assets:
Cash and cash equivalents		$	1,396		$	488
Receivables, less allowance for doubtful accounts of $5 and $6			2,463			1,807
Receivables from United States Steel			20			9
Receivables from related parties			47			38
Inventories			1,953			1,984
Other current assets			161			153
Total current assets			6,040			4,479
Investments and long-term receivables, less allowance for doubtful accounts of $10 and $14			1,323			1,634
Receivables from United States Steel			593			547
Property, plant and equipment – net			10,830			10,390
Prepaid pensions			181			201
Goodwill			256			274
Intangibles			118			119
Other noncurrent assets			141			168
Total assets		$	19,482		$	17,812
Liabilities
Current liabilities:
Accounts payable		$	3,352		$	2,841
Payables to United States Steel			4			28
Payables to related parties			17			16
Payroll and benefits payable			230			198
Accrued taxes			247			307
Accrued interest			85			108
Long-term debt due within one year			272			161
Total current liabilities			4,207			3,659
Long-term debt			4,085			4,410
Deferred income taxes			1,489			1,445
Employee benefit obligations			984			847
Asset retirement obligations			390			223
Payables to United States Steel			8			7
Deferred credits and other liabilities			233			168
Total liabilities			11,396			10,759
Minority interest in Marathon Ashland Petroleum LLC			2,011			1,971
Commitments and contingencies			–			–
Stockholders’ Equity
Common Stock issued – 312,165,978 shares at December 31, 2003 and 2002 (par value $1 per share, authorized 550,000,000 shares)			312			312
Common Stock held in treasury – 1,744,370 shares at December 31, 2003 and 2,292,986 shares at December 31, 2002			(46	)		(60	)
Additional paid-in capital			3,033			3,032
Retained earnings			2,897			1,874
Accumulated other comprehensive loss			(112	)		(69	)
Unearned compensation			(9	)		(7	)
Total stockholders’ equity			6,075			5,082
Total liabilities and stockholders’ equity		$	19,482		$	17,812

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

F-4

Consolidated Statement of Cash Flows

(Dollars in millions)	2003			2002			2001
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income	$	1,321		$	516		$	157
Adjustments to reconcile to net cash provided from operating activities:
Cumulative effect of changes in accounting principles		(4	)		(13	)		8
Loss (income) from discontinued operations		(305	)		4			1,240
Deferred income taxes		71			77			(147	)
Minority interest in income of Marathon Ashland Petroleum LLC		302			173			704
Loss from early extinguishment of debt		–			53			–
Depreciation, depletion and amortization		1,175			1,176			1,187
Pension and other postretirement benefits – net		68			87			33
Inventory market valuation charges (credits)		–			(71	)		71
Exploratory dry well costs		55			91			54
Net gains on disposal of assets		(166	)		(67	)		(44	)
Impairment of investments		129			–			–
Changes in: Current receivables		(671	)		(103	)		124
Inventories		33			(53	)		(68	)
Accounts payable and other current liabilities		496			614			(544	)
All other – net		174			(148	)		(26	)
Net cash provided from continuing operations		2,678			2,336			2,749
Net cash provided from discontinued operations		83			69			887
Net cash provided from operating activities		2,761			2,405			3,636
Investing activities:
Capital expenditures		(1,892	)		(1,520	)		(1,533	)
Acquisitions		(252	)		(1,160	)		(506	)
Disposal of discontinued operations		612			54			(147	)
Disposal of assets		644			146			83
Restricted cash – withdrawals		146			91			67
– deposits		(108	)		(123	)		(62	)
Investments – contributions		(34	)		(111	)		(8	)
– loans and advances		(91	)		–			(6	)
– returns and repayments		42			5			10
All other – net		(19	)		–			5
Investing activities of discontinued operations		(29	)		(48	)		(147	)
Net cash used in investing activities		(981	)		(2,666	)		(2,244	)
Financing activities:
Commercial paper and revolving credit arrangements – net		(131	)		(375	)		(51	)
Other debt – borrowings		–			1,828			537
– repayments		(208	)		(604	)		(646	)
Redemption of preferred stock of subsidiary		–			(185	)		(223	)
Preferred stock repurchased		–			(110	)		–
Treasury common stock – proceeds from issuances		17			2			12
– purchases		(6	)		(7	)		(1	)
Dividends paid – Common Stock		(298	)		(285	)		(284	)
– Steel Stock		–			–			(49	)
– Preferred stock		–			–			(8	)
Distributions to minority shareholder of Marathon Ashland Petroleum LLC		(262	)		(176	)		(577	)
Net cash provided from (used in) financing activities		(888	)		88			(1,290	)
Effect of exchange rate changes on cash:
Continuing operations		8			4			(3	)
Discontinued operations		8			–			(1	)
Net increase (decrease) in cash and cash equivalents		908			(169	)		98
Cash and cash equivalents at beginning of year		488			657			559
Cash and cash equivalents at end of year	$	1,396		$	488		$	657

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

F-5

Consolidated Statement of Stockholders’ Equity

	Dollars in millions									Shares in thousands
	2003			2002			2001			2003		2002		2001
Preferred stock:
6.50% Cumulative Convertible:
Balance at beginning of year	$	–		$	–		$	2		–		–		2,413
Repurchased		–			–			–		–		–		(9	)
Converted into Steel Stock		–			–			–		–		–		(1	)
Exchanged for debt		–			–			–		–		–		(195	)
Converted to right to receive cash at Separation		–			–			(2	)	–		–		(2,208	)
Balance at end of year	$	–		$	–		$	–		–		–		–
Common stocks:
Common Stock:
Balance at beginning of year	$	312		$	312		$	312		312,166		312,166		312,166
Balance at end of year	$	312		$	312		$	312		312,166		312,166		312,166
Steel Stock:
Balance at beginning of year	$	–		$	–		$	89		–		–		88,767
Issued for:
Employee stock plans		–			–			–		–		–		430
Conversion of preferred stock		–			–			–		–		–		1
Distributed to United States Steel shareholders		–			–			(89	)	–		–		(89,198	)
Balance at end of year	$	–		$	–		$	–		–		–		–
Securities exchangeable solely into Common Stock:
Balance at beginning of year	$	–		$	–		$	–		–		–		281
Exchanged for Common Stock		–			–			–		–		–		(281	)
Balance at end of year	$	–		$	–		$	–		–		–		–
Treasury common stocks, at cost:
Common Stock:
Balance at beginning of year	$	(60	)	$	(74	)	$	(104	)	(2,293	)	(2,771	)	(3,900	)
Repurchased		(6	)		(7	)		(1	)	(219	)	(297	)	(27	)
Reissued for:
Exchangeable Shares		–			–			7		–		–		281
Employee stock plans		20			19			24		768		727		875
Non-employee directors deferred compensation plan		–			2			–		–		48		–
Balance at end of year	$	(46	)	$	(60	)	$	(74	)	(1,744	)	(2,293	)	(2,771	)
Steel Stock:
Balance at beginning of year	$	–		$	–		$	–		–		–		–
Repurchased		–			–			–		–		–		(20	)
Reissued for employee stock plans		–			–			–		–		–		18
Distributed to United States Steel		–			–			–		–		–		2
Balance at end of year	$	–		$	–		$	–		–		–		–

(Table continued on next page)

F-6

	Stockholders’ Equity									Comprehensive Income
(Dollars in millions)	2003			2002			2001			2003			2002			2001
Additional paid-in capital:
Balance at beginning of year	$	3,032		$	3,035		$	4,676
Treasury Common Stock reissued		1			(3	)		4
Steel Stock issued		–			–			8
Steel Stock distributed to United States		–
Steel shareholders		–			–			(1,526	)
Exchangeable Shares exchanged for Common Stock		–			–			(9	)
6.50% Preferred stock converted to right to receive cash at Separation		–			–			(118	)
Balance at end of year	$	3,033		$	3,032		$	3,035
Unearned compensation:
Balance at beginning of year	$	(7	)	$	(10	)	$	(8	)
Change during year	$	(2	)		3			(11	)
Transferred to United States Steel		–			–			9
Balance at end of year	$	(9	)	$	(7	)	$	(10	)
Retained earnings:
Balance at beginning of year	$	1,874		$	1,643		$	1,847
Net income		1,321			516			157		$	1,321		$	516		$	157
Excess redemption value over carrying value of preferred securities		–			–			(20	)
Dividends paid on:
Preferred stock		–			–			(8	)
Common Stock (per share: $.96 in 2003 $.92 in 2002 and $.92 in 2001)		(298	)		(285	)		(284	)
Steel Stock (per share: $.55 in 2001)		–			–			(49	)
Balance at end of year	$	2,897		$	1,874		$	1,643
Accumulated other comprehensive income (loss)(a):
Minimum pension liability adjustments:
Balance at beginning of year	$	(47	)	$	(14	)	$	(21	)
Changes during year		(46	)		(33	)		(13	)		(46	)		(33	)		(13	)
Reclassified to income		–			–			20			–			–			20
Balance at end of year	$	(93	)	$	(47	)	$	(14	)
Foreign currency translation adjustments:
Balance at beginning of year	$	(1	)	$	(3	)	$	(29	)
Changes during year		(3	)		2			(3	)		(3	)		2			(3	)
Reclassified to income		–			–			29			–			–			29
Balance at end of year	$	(4	)	$	(1	)	$	(3	)
Deferred gains (losses) on derivative instruments:
Balance at beginning of year	$	(21	)	$	51		$	–
Cumulative effect adjustment		–			–			(8	)		–			–			(8	)
Reclassification of the cumulative effect adjustment into income		3			(1	)		23			3			(1	)		23
Changes in fair value		62			(36	)		34			62			(36	)		34
Reclassification to income		(59	)		(35	)		2			(59	)		(35	)		2
Balance at end of year	$	(15	)	$	(21	)	$	51
Total balances at end of year	$	(112	)	$	(69	)	$	34
Total comprehensive income										$	1,278		$	413		$	241
Total stockholders’ equity	$	6,075		$	5,082		$	4,940
(a) Related income tax provision (credit) on changes and reclassifications during the year:		2003			2002			2001
Minimum pension liability adjustments	$	(25	)	$	(18	)	$	(7	)
Foreign currency translation adjustments		(2	)		2			–
Net deferred gains (losses) on derivative instruments		3			(39	)		27

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

F-7

Notes to Consolidated Financial Statements

1. Summary of Principal Accounting Policies

Basis of presentation — Marathon Oil Corporation was originally organized in 2001 as USX HoldCo, Inc., a wholly owned subsidiary of USX Corporation. As a result of a reorganization completed in July 2001, USX HoldCo, Inc. (1) became the parent entity of the consolidated enterprise (the former USX Corporation was merged into a subsidiary of USX HoldCo, Inc.) and (2) changed its name to USX Corporation. In connection with the transaction discussed in the next paragraph (the Separation), USX Corporation changed its name to Marathon Oil Corporation. The accompanying consolidated financial statements reflect Marathon Oil Corporation and its subsidiaries as the continuation of the consolidated enterprise.

Prior to December 31, 2001, Marathon had two outstanding classes of common stock: USX-Marathon Group common stock (Common Stock), which was intended to reflect the performance of Marathon’s energy business, and USX—U.S. Steel Group common stock (Steel Stock), which was intended to reflect the performance of Marathon’s steel business. As described further in Note 3, on December 31, 2001, Marathon disposed of its steel business through a tax-free distribution of the common stock of its wholly owned subsidiary United States Steel Corporation (United States Steel) to holders of Steel Stock in exchange for all outstanding shares of Steel Stock on a one-for-one basis.

In connection with the Separation, Marathon’s certificate of incorporation was amended on December 31, 2001 and, from that date, Marathon has only one class of common stock authorized.

Marathon is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through its 62 percent owned consolidated subsidiary Marathon Ashland Petroleum LLC (MAP); and integrated gas.

Principles applied in consolidation — These consolidated financial statements include the accounts of the businesses comprising Marathon.

The assets and liabilities of MAP are consolidated in these financial statements and minority interest representing 38 percent of the carrying value of the net assets of MAP has been recognized. Under certain circumstances, the MAP Limited Liability Company Agreement requires unanimous approval of certain matters brought to the MAP Board of Managers. Marathon does not believe that the rights of the minority shareholder of MAP are substantive because the likelihood of those rights being triggered is remote.

Investments in unincorporated oil and gas joint ventures and undivided interests in certain pipelines, gas processing plants and liquefied natural gas (LNG) tankers are consolidated on a pro rata basis.

Investments in entities over which Marathon has significant influence are accounted for using the equity method of accounting and are carried at Marathon’s share of net assets plus loans and advances. Differences in the basis of the investment and the separate net asset value of the investee, if any, are amortized into income in accordance with the remaining useful life of the underlying assets.

Investments in companies whose stock is publicly traded are carried at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost.

Income from equity method investments represents Marathon’s proportionate share of income from equity method investments. Other income includes dividend income from other investments. Dividend income is recognized when dividend payments are received.

Gains or losses from a change in ownership of a consolidated subsidiary or an unconsolidated investee are recognized in the period of change.

Use of estimates — The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Items subject to such estimates and assumptions include the carrying value of property, plant and equipment, goodwill, intangibles, equity method investments and non-exchange traded derivative contracts; valuation allowances for receivables, inventories and deferred income tax assets; environmental remediation liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; assets and obligations related to employee benefits; and the classification of gains or losses on cash flow hedges of forecasted transactions. Actual results could differ from the estimates and assumptions used.

Income per common share — Basic net income (loss) per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income (loss) per share assumes exercise of stock options and warrants and conversion of convertible debt and preferred securities, provided the effect is not antidilutive.

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Segment information — Marathon’s operations consist of three reportable operating segments:

• Exploration and Production (“E&P”)—explores for and produces crude oil and natural gas on a worldwide basis;

• Refining, Marketing and Transportation (“RM&T”)—refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States through MAP; and

• Integrated Gas (“IG”)—markets and transports its own and third-party natural gas and products manufactured from natural gas, such as liquefied natural gas and methanol, primarily in the United States, Europe and West Africa.

Management has determined that these are its operating segments because these are the components of Marathon (i) that engage in business activities from which revenues are earned and expenses are incurred, (ii) whose operating results are regularly reviewed by Marathon’s chief operating decision maker to make decisions about resources to be allocated and assess performance and (iii) for which discrete financial information is available. The chief operating decision maker (“CODM”) is responsible for performing the functions within Marathon of allocating resources to and assessing performance of Marathon’s operating segments. Information on assets by segment is not provided because it is not reviewed by the CODM. The CODM is also the manager over each of the segments. In this role, he is responsible for allocating resources within the segments, reviewing financial results of components within the segments, and assessing the performance of the components. The components within the segments that are separately reviewed and assessed by the CODM in his role as segment manager are aggregable with other components in the same segment because they have similar economic characteristics.

Segment income represents income from operations allocable to operating segments. Marathon corporate general and administrative costs are not allocated to operating segments. These costs primarily consist of employment costs (including pension effects), professional services, facilities and other related costs associated with corporate activities. Inventory market valuation adjustments and gain (loss) on ownership change in MAP also are not allocated to operating segments. Additionally, certain nonoperating or infrequently occurring items are not allocated to operating segments (see segment income reconcilement table on page F-21).

Revenue recognition — Revenues are recognized when products are shipped or services are provided to customers and the sales price is fixed or determinable and collectibility is reasonably assured. Costs associated with revenues are recorded in costs of revenues.

Marathon recognizes revenues from the production of oil and gas in the United States when title is transferred. Outside the United States, revenues are recognized at the time of lifting. Royalties on the production of oil and gas are either paid in cash or settled through the delivery of volumes. Marathon includes royalties in its revenue and cost of revenues when settlement of royalties is paid in cash, while settlement of royalties based on the delivery of volumes are excluded from revenue and cost of revenues.

Rebates from vendors are recognized as a reduction to cost of revenues when the initiating transaction occurs. Incentives that are derived from contractual provisions are accrued based on past experience and recognized within cost of revenues.

Matching buy/sell transactions settled in cash are recorded in both revenues and costs of revenues as separate sales and purchase transactions.

Marathon follows the sales method of accounting for gas production imbalances and would recognize a liability if the existing proved reserves were not adequate to cover the current imbalance situation.

Cash and cash equivalents — Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities generally of three months or less.

Inventories — Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.

The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses.

Derivative instruments — Marathon uses commodity-based derivatives and financial instrument related derivatives to manage its exposure to commodity price risk, interest rate risk or foreign currency risk. As market conditions change, Marathon may use selective derivative instruments that assume market risk in exchange for an upfront premium. Management has authorized the use of futures, forwards, swaps and combinations of options, including written or net written options, related to the purchase, production or sale of crude oil, natural gas and refined products, fair value of certain assets and liabilities, future interest expense and also certain business transactions denominated in foreign currencies. Changes in the fair value of all derivatives are recognized immediately in income, within revenues, other income, costs of revenues or net interest and other financing costs,

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unless the derivative qualifies as a hedge of future cash flows or certain foreign currency exposures. Cash flows related to the use of derivatives are classified in operating activities with the underlying hedged transaction.

For derivatives qualifying as hedges of future cash flows or certain foreign currency exposures, the effective portion of any changes in fair value is recognized in a component of stockholders’ equity called other comprehensive income and then reclassified to income, within revenues, costs of revenues or net interest and other financing costs, when the underlying anticipated transaction occurs. Any ineffective portion of such hedges is recognized in income as it occurs. For discontinued cash flow hedges prospective changes in the fair value of the derivative are recognized in income. Any gain or loss accumulated in other comprehensive income at the time a hedge is discontinued continues to be deferred until the original forecasted transaction occurs. However, if it is determined that the likelihood of the original forecasted transaction occurring is no longer probable, the entire gain or loss accumulated in other comprehensive income is immediately reclassified into income.

For derivatives designated as hedges of the fair value of recognized assets, liabilities or firm commitments, changes in the fair value of both the hedged item and the related derivative are recognized immediately in income, within revenues, costs of revenues or net interest and other financing costs, with an offsetting effect included in the basis of the hedged item. The net effect is to reflect in income the extent to which the hedge is not effective in achieving offsetting changes in fair value.

For derivative instruments that are classified as trading, changes in the fair value are recognized immediately within revenues as part of other income. Any premium received is amortized into income based on the underlying settlement terms of the derivative position. All related effects of a trading strategy, including physical settlement of the derivative position, are reflected within other income.

Property, plant and equipment — Marathon uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

Capitalized costs of producing oil and gas properties are depreciated and depleted by the units-of-production method. Support equipment and other property, plant and equipment are depreciated over their estimated useful lives.

Marathon evaluates its oil and gas producing properties for impairment of value on a field-by-field basis or, in certain instances, by logical grouping of assets if there is significant shared infrastructure, using undiscounted future cash flows based on total proved and risk-adjusted probable and possible reserves. Oil and gas producing properties deemed to be impaired are written down to their fair value, as determined by discounted future cash flows based on total proved and risk-adjusted probable and possible reserves or, if available, comparable market values. Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment. Other unproved properties are amortized over their remaining holding period.

For property, plant and equipment unrelated to oil and gas producing activities, depreciation is computed on the straight-line method over their estimated useful lives, which range from 3 to 42 years.

When property, plant and equipment depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Gains on disposal of property, plant and equipment are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when the assets are reclassified as held for sale. Proceeds from disposal of property, plant and equipment depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income.

Goodwill — Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired, primarily from the acquisitions of the Equatorial Guinea interests and Pennaco Energy, Inc. Annually, Marathon assesses the carrying amount of goodwill by testing for impairment. The impairment test requires allocating goodwill and other assets and liabilities to reporting units. Marathon has determined the components of the E&P segment have similar economic characteristics and therefore, aggregates the components into a single reporting unit. As a result, goodwill has been assigned to the E&P segment. The fair value of each reporting unit is determined and compared to the book value of the reporting unit. If the fair value of the reporting unit is less than the book value, including goodwill, then the recorded goodwill is impaired down to its implied fair value with a charge to expense.

Intangible assets — Intangible assets consists of deferred marketing costs, intangible contract rights, proprietary information, and unrecognized pension plan prior service costs. The marketing costs incurred in the RM&T segment relate to refurbishment of various branded jobber locations. These marketing costs are amortized over 5-10 years depending on the term of the associated marketing agreement. Additionally, Marathon has intangibles in IG associated with the acquisition of a contractual right to utilize the Elba Island LNG terminal in Savannah, Georgia. These rights are being amortized over the expected life of the contract.

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Major maintenance activities — Marathon incurs planned major maintenance costs primarily for refinery turnarounds. Such costs are expensed in the same annual period as incurred; however, estimated annual turnaround costs are recognized in income throughout the year on a pro rata basis.

Environmental remediation liabilities — Environmental remediation expenditures are capitalized if the costs mitigate or prevent future contamination or if the costs improve environmental safety or efficiency of the existing assets. Marathon provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. The timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted when the estimated amounts are reasonably fixed and determinable. If recoveries of remediation costs from third parties are probable, a receivable is recorded.

Asset retirement obligations — The fair value of asset retirement obligations are recognized in the period in which they are incurred if a reasonable estimate of fair value can be made. For Marathon, asset retirement obligations primarily relate to the abandonment of oil and gas producing facilities. Asset retirement obligations include costs to dismantle and relocate or dispose of production platforms, gathering systems, wells and related structures and restoration costs of land and seabed, including those leased. Estimates of these costs are developed for each property based upon the type of production structure, depth of water, reservoir characteristics, depth of the reservoir, market demand for equipment, currently available procedures and consultations with construction and engineering professionals. Depreciation of capitalized asset retirement cost and accretion of asset retirement obligations are recorded over time. The depreciation will generally be determined on a units-of-production basis, while the accretion to be recognized will escalate over the life of the producing assets. Asset retirement obligations have not been recognized for certain refinery, crude oil and product pipeline and marketing assets because the fair value cannot be estimated due to the uncertainty of the settlement date of the obligation.

Deferred taxes — Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases as reflected in Marathon’s filings with the respective taxing authority. The realization of deferred tax assets is assessed periodically based on several interrelated factors. These factors include Marathon’s expectation to generate sufficient future taxable income including future foreign source income, tax credits, operating loss carryforwards, and management’s intent regarding the permanent reinvestment of the income from certain foreign subsidiaries.

Pensions and other postretirement benefits — Marathon has noncontributory defined benefit pension plans covering substantially all domestic employees, international employees located in Ireland, Norway and the United Kingdom, and most MAP employees. In addition, several excess benefits plans exist covering domestic employees within defined regulatory compensation limits. Benefits under these plans are based primarily upon years of service and final average pensionable earnings. MAP also participates in a multiemployer plan that provides coverage for less than 5% of its employees. The benefits provided include both pension and health care.

Marathon also has defined benefit retiree health care and life insurance plans covering most employees upon their retirement. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions or through health maintenance organizations, both subject to various cost sharing features. Amendments made to Marathon’s retiree health care plan, in the fourth quarter 2003, reduced the other postretirement benefit obligation by approximately $97 million (see Note 24). Life insurance benefits are provided to certain nonunion and union represented retiree beneficiaries. Other postretirement benefits have not been prefunded. Marathon uses a December 31 measurement date for its plans.

Stock-based compensation — The Marathon Oil Corporation 2003 Incentive Compensation Plan (the “Plan”) authorizes the Compensation Committee of the Board of Directors of Marathon to grant stock options, stock appreciation rights, stock awards, cash awards and performance awards to employees. The Plan also allows Marathon to provide equity compensation to its non-employee directors of its Board of Directors. The Plan was approved by Marathon’s shareholders on April 30, 2003. No more than 20,000,000 shares of common stock may be issued under the Plan, and no more than 8,500,000 of those shares may be used for awards other than stock options or stock appreciation rights. Shares subject to awards that are forfeited, terminated, expire unexercised, settled in cash, exchanged for other awards, tendered to satisfy the purchase price of an award, withheld to satisfy tax obligations or otherwise lapse again become available for awards.

The Plan replaced the 1990 Stock Plan, the Non-Officer Restricted Stock Plan, the Non-Employee Director Stock Plan, the deferred stock benefit provision of the Deferred Compensation Plan for Non-Employee Directors, the Senior Executive Officer Annual Incentive Compensation Plan, and the Annual Incentive Compensation Plan (collectively, the “Prior Plans”). No new grants will be made from the Prior Plans on or after April 30, 2003, with the exception of a maximum of 262,500 shares that may be required to be granted in order to fulfill the terms of officers’ performance-based restricted stock awards under the 1990 Plan. Any other awards previously granted under the Prior Plans shall continue to vest and/or be exercisable in accordance with their original terms and conditions.

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Stock options represent the right to purchase shares of stock at the fair market value of the stock on the date of grant. Certain options are granted with a tandem stock appreciation right, which allows the recipient to instead elect to receive cash and/or common stock equal to the excess of the fair market value of shares of common stock, as determined in accordance with the plan, over the option price of shares. Most stock options granted under the Plan vest ratably over a three-year period and all expire 10 years from the date they are granted.

The Compensation Committee grants stock-based Performance Awards to officers under the Plan. The stock-based Performance Awards represent shares of common stock that are subject to forfeiture provisions and restrictions on transfer. Those restrictions may be removed if certain pre-established performance measures are met. The stock-based Performance Awards granted under the Plan generally vest over a thirty-three month service period.

Marathon also grants restricted stock to certain non-officer employees under the Plan. Participants are awarded restricted stock by the Salary and Benefits Committee based on their performance within certain guidelines. The restricted stock awards vest in one-third increments over a three-year period, contingent upon the recipient’s continued employment. Prior to vesting, the restricted stock recipients have the right to vote such stock and receive dividends thereon. The nonvested shares are not transferable and are retained by Marathon until they vest.

Unearned compensation is charged to equity when restricted stock and performance shares are granted. Compensation expense is recognized over the balance of the vesting period and is adjusted if conditions of the restricted stock or performance share grant are not met. Amounts related to the performance-based restricted stock awards under the 1990 Plan are subsequently adjusted for changes in the market value of the underlying stock.

Effective January 1, 2003, Marathon applied the fair value based method of accounting to future grants and any modified grants for stock-based compensation. All prior outstanding and unvested awards continue to be accounted for under the intrinsic value method. The following net income and per share data illustrates the effect on net income and net income per share if the fair value method had been applied to all outstanding and unvested awards in each period.

(In millions, except per share data)	2003			2002			2001
Net income applicable to Common Stock
As reported	$	1,321		$	516		$	377
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		23			5			5
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(17	)		(16	)		(11	)
Pro forma net income applicable to Common Stock	$	1,327		$	505		$	371
Basic and diluted net income per share
– As reported	$	4.26		$	1.66		$	1.22
– Pro forma	$	4.28		$	1.63		$	1.20

The above pro forma amounts were based on a Black-Scholes option-pricing model, which included the following information and assumptions:

(In millions, except per share data)	2003			2002			2001
Weighted-average grant-date exercise price per share	$	25.58		$	28.12		$	32.52
Expected annual dividends per share	$	.97		$	.92		$	.92
Expected life in years		5			5			5
Expected volatility		34	%		35	%		34	%
Risk free interest rate		3.0	%		4.5	%		4.9	%
Weighted-average grant-date fair value of options granted during the year, as calculated from above	$	5.37		$	7.79		$	9.45

Concentrations of credit risk – Marathon is exposed to credit risk in the event of nonpayment by counterparties, a significant portion of which are concentrated in energy related industries. The creditworthiness of customers and other counterparties is subject to continuing review, including the use of master netting agreements, where appropriate. While no single customer accounts for more than 10% of annual revenues, Marathon has significant exposures to United States Steel arising from the Separation. These exposures are discussed in Note 3.

Reclassifications – Certain reclassifications of prior years’ data have been made to conform to 2003 classifications.

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2. New Accounting Standards

Effective January 1, 2003, Marathon adopted Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). This statement requires that the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset. Previous accounting standards used the units-of-production method to match estimated future retirement costs with the revenues generated from the producing assets. In contrast, SFAS No. 143 requires depreciation of the capitalized asset retirement cost and accretion of the asset retirement obligation over time. The depreciation will generally be determined on a units-of-production basis over the life of the field, while the accretion to be recognized will escalate over the life of the producing assets, typically as production declines.

For Marathon, asset retirement obligations primarily relate to the abandonment of oil and gas producing facilities. While assets such as refineries, crude oil and product pipelines, and marketing assets have retirement obligations covered by SFAS No. 143, certain of those obligations are not recognized since the fair value cannot be estimated due to the uncertainty of the settlement date of the obligation.

The transition adjustment related to adopting SFAS No. 143 on January 1, 2003, was recognized as a cumulative effect of a change in accounting principle. The cumulative effect on net income of adopting SFAS No. 143 was a net favorable effect of $4 million, net of tax of $4 million. At the time of adoption, total assets increased $120 million, and total liabilities increased $116 million. The amounts recognized upon adoption are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted risk-free interest rate. Changes in asset retirement obligations during the year were:

(In millions)	2003			Pro forma 2002(a)
Asset retirement obligations as of January 1	$	339		$	316
Liabilities incurred during 2003(b)		32			–
Liabilities settled during 2003(c)		(42	)		–
Accretion expense (included in depreciation, depletion and amortization)		20			23
Revisions of previous estimates		41			–
Asset retirement obligations as of December 31	$	390		$	339

^(a) Pro forma data as if SFAS No. 143 had been adopted on January 1, 2002. If adopted, income before cumulative effect of changes in accounting principles for 2002 would have been increased by $1 million and there would have been no impact on earnings per share.

^(b) Includes $12 million related to the acquisition of Khanty Mansiysk Oil Corporation in 2003.

^(c) Includes $25 million associated with assets sold in 2003.

In the second quarter of 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections” (“SFAS No. 145”). Effective January 1, 2003, Marathon adopted the provisions relating to the classification of the effects of early extinguishment of debt in the consolidated statement of income. As a result, losses of $53 million from the early extinguishment of debt in 2002, which were previously reported as an extraordinary item (net of tax of $20 million), have been reclassified into income before income taxes. The adoption of SFAS No. 145 had no impact on net income for 2002.

Effective January 1, 2003, Marathon adopted Statement of Financial Accounting Standards No. 146 “Accounting for Exit or Disposal Activities” (“SFAS No. 146”). SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. There were no impacts upon the initial adoption of SFAS No. 146.

Effective January 1, 2003, Marathon adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS
No. 148”), an amendment of SFAS No. 123, provides alternative methods for the transition of the accounting for stock-based compensation from the intrinsic value method to the fair value method. Marathon has applied the fair value method to grants made, modified or settled on or after January 1, 2003. The impact on Marathon’s 2003 net income was not materially different than under previous accounting standards.

The FASB issued Statement of Financial Accounting Standards No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” on April 30, 2003. The Statement is effective for derivative contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this Statement did not have an effect on Marathon’s financial position, cash flows or results of operations.

        The FASB issued Statement of Financial Accounting Standards No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” on May 30, 2003. The adoption of this Statement, effective July 1, 2003, did not have a material effect on Marathon’s financial position or results of operations.

Effective January 1, 2003, FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), requires the fair-value

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measurement and recognition of a liability for the issuance or modification of certain guarantees. There were no cumulative effect adjustments necessary upon the initial adoption of FIN 45. Enhanced disclosure requirements apply to both new and existing guarantees subject to FIN 45. See Note 28 for outstanding guarantees.

FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46R”), identifies certain off-balance sheet arrangements that meet the definition of a variable interest entity (“VIE”). The primary beneficiary of a VIE is the party that is exposed to the majority of the risks and/or returns of the VIE. The primary beneficiary is required to consolidate the VIE. In addition, more extensive disclosure requirements apply to the primary beneficiary, as well as other significant investors. FIN 46R was effective immediately for VIE’s created after January 31, 2003. For special-purposes entities (“SPEs”) created prior to February 1, 2003, FIN 46R is effective at the first interim or annual reporting period ending after December 15, 2003, or December 31, 2003 for Marathon. For non-SPE’s created prior to February 1, 2003, FIN 46R is effective for Marathon as of March 31, 2004. The adoption of this interpretation did not and is not expected to have any effect on Marathon’s financial statements.

The FASB issued Statement of Financial Accounting Standard Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, effective for interim periods beginning after December 15, 2003. This statement retains the disclosure requirements contained in SFAS Statement No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, which it replaces, but requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Certain required disclosures of information relating to foreign plans and estimated future benefit payments of all defined benefit plans have a delayed effective date for fiscal years ending after June 15, 2004. Marathon has elected earlier application of the entire disclosure provisions of this Statement.

On January 12, 2004, the FASB released FASB Staff Position No. FAS 106-1 (“FSP 106-1”) “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“the Act”). Due to uncertainties as to the effect of the provisions of the Act and certain accounting issues raised by the Act that are not addressed by Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, FSP 106-1 allows plan sponsors to elect a one-time deferral of the accounting for the Act. Marathon has elected to apply the one-time deferral until further guidance is provided by the FASB or the remeasurement of plan assets and obligations occurs subsequent to January 31, 2004. Accordingly, any measures of accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the financial statements and accompanying notes does not reflect the effects of the Act on Marathon’s plans.

Effective January 1, 2003, Marathon adopted Emerging Issues Task Force (“EITF”) Abstract No. 02-16 “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”), which requires rebates from vendors to be recorded as reductions to cost of revenues. Restatement of prior year results is permitted but not required. Rebates from vendors of $159 million for 2003 are recorded as a reduction to cost of revenues. Rebates from vendors of $169 million and $149 million for 2002 and 2001 are recorded in sales and other operating revenues. There was no effect on net income related to the adoption of EITF 02-16.

At the May 2003 EITF meeting, a consensus was reached on EITF Abstract No. 01-8, “Determining Whether an Arrangement Is a Lease” (“EITF 01-8”). This guidance, under certain conditions, modifies the accounting for agreements that historically have not been considered leases. EITF 01-8 is effective for all arrangements that are agreed upon, committed to, or modified after July 1, 2003. The adoption of EITF 01-08 did not have a material effect on Marathon’s financial position or results of operations.

Since the issuance of Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended by SFAS Nos. 137 and 138, FASB has issued several interpretations. As a result, Marathon has recognized in income the effect of changes in the fair value of two long-term natural gas sales contracts in the United Kingdom. As of January 1, 2002, Marathon recognized a favorable cumulative effect of a change in accounting principle of $13 million, net of tax of $7 million.

3. Information about United States Steel

The Separation – On December 31, 2001, in a tax-free distribution to holders of Steel Stock, Marathon exchanged the common stock of United States Steel for all outstanding shares of Steel Stock on a one-for-one basis. The net assets of United States Steel at Separation were approximately the same as the net assets attributable to Steel Stock immediately prior to the Separation, except for a value transfer of $900 million in the form of additional net debt and other financings retained by Marathon. During the last six months of 2001, United States Steel completed a number of financings so that, upon Separation, the net debt and other financings of United States Steel as a separate legal entity would approximate the net debt and other financings attributable to Steel Stock. At December 31, 2001, the net debt and other financings of United States Steel was $54 million less than the net debt and other financings attributable to the Steel Stock, adjusted for the value transfer and certain one-time items related to the Separation. On February 6, 2002, United States Steel made a payment to Marathon of $54 million, plus applicable interest, to settle this difference.

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In connection with the Separation, Marathon and United States Steel entered into a number of agreements, including:

Financial Matters Agreement – Marathon and United States Steel have entered into a Financial Matters Agreement that provides for United States Steel’s assumption of certain industrial revenue bonds and certain other financial obligations of Marathon. The Financial Matters Agreement also provides that, on or before the tenth anniversary of the Separation, United States Steel will provide for Marathon’s discharge from any remaining liability under any of the assumed industrial revenue bonds.

Under the Financial Matters Agreement, United States Steel has all of the existing contractual rights under the leases assumed from Marathon, including all rights related to purchase options, prepayments or the grant or release of security interests. However, United States Steel has no right to increase amounts due under or lengthen the term of any of the assumed leases, other than extensions set forth in the terms of any of the assumed leases.

United States Steel is the sole general partner of Clairton 1314B Partnership, L.P. (Clairton 1314B), which owns certain cokemaking facilities formerly owned by United States Steel. Marathon has guaranteed to the limited partners all obligations of United States Steel under the partnership documents. The Financial Matters Agreement requires United States Steel to use commercially reasonable efforts to have Marathon released from its obligations under this guarantee. United States Steel may dissolve the partnership under certain circumstances, including if it is required to fund accumulated cash shortfalls of the partnership in excess of $150 million. In addition to the normal commitments of a general partner, United States Steel has indemnified the limited partners for certain income tax exposures.

The Financial Matters Agreement requires Marathon to use commercially reasonable efforts to assure compliance with all covenants and other obligations to avoid the occurrence of a default or the acceleration of the payment on the assumed obligations.

United States Steel’s obligations to Marathon under the Financial Matters Agreement are general unsecured obligations that rank equal to United States Steel’s accounts payable and other general unsecured obligations. The Financial Matters Agreement does not contain any financial covenants and United States Steel is free to incur additional debt, grant mortgages on or security interests in its property and sell or transfer assets without Marathon’s consent.

Tax Sharing Agreement – Marathon and United States Steel have entered into a Tax Sharing Agreement that reflects each party’s rights and obligations relating to payments and refunds of income, sales, transfer and other taxes that are attributable to periods beginning prior to and including the Separation Date and taxes resulting from transactions effected in connection with the Separation.

The Tax Sharing Agreement incorporates the general tax sharing principles of the former tax allocation policy. In general, Marathon and United States Steel, will make payments between them such that, with respect to any consolidated, combined or unitary tax returns for any taxable period or portion thereof ending on or before the Separation Date, the amount of taxes to be paid by each of Marathon and United States Steel will be determined, subject to certain adjustments, as if the former groups each filed their own consolidated, combined or unitary tax return. The Tax Sharing Agreement also provides for payments between Marathon and United States Steel for certain tax adjustments that may be made after the Separation. Other provisions address, but are not limited to, the handling of tax audits, settlements and return filing in cases where both Marathon and United States Steel have an interest in the results of these activities.

A preliminary settlement for the calendar year 2001 federal income taxes, which would have been made in March 2002 under the former tax allocation policy, was made immediately prior to the Separation at a discounted amount to reflect the time value of money. Under the preliminary settlement for calendar year 2001, United States Steel received approximately $440 million from Marathon immediately prior to Separation arising from the application of the tax allocation policy. This policy provided that United States Steel would receive the benefit of tax attributes (principally net operating losses and various tax credits) that arose out of its business and which were used on a consolidated basis.

Additionally, pursuant to the Tax Sharing Agreement, Marathon and United States Steel have agreed to protect the tax-free status of the Separation. Marathon and United States Steel each covenant that during the two-year period following the Separation, it will not cease to be engaged in an active trade or business. Each party has represented that there is no plan or intention to liquidate such party, take any other actions inconsistent with the information and representations set forth in the ruling request filed with the IRS or sell or otherwise dispose of its assets (other than in the ordinary course of business) during the two-year period following the Separation. To the extent that a breach of a representation or covenant results in corporate tax being imposed, the breaching party, either Marathon or United States Steel, will be responsible for the payment of the corporate tax.

In the fourth quarter 2003, in accordance with the terms of the tax sharing agreement, Marathon paid $16 million to United States Steel in connection with the settlement with the Internal Revenue Service of the consolidated federal income tax returns of USX Corporation for the years 1992 through 1994. Included in discontinued operations in 2003 is an $8 million adjustment to the liabilities to United States Steel under this tax sharing agreement.

F-15

Relationship between Marathon and United States Steel after the Separation – As a result of the Separation, Marathon and United States Steel are separate companies, and neither has any ownership interest in the other. Thomas J. Usher is chairman of the board of both companies, and as of December 31, 2003, four of the ten remaining members of Marathon’s board of directors are also directors of United States Steel.

Sales to United States Steel in 2003 and 2002 were $31 million and $14 million, primarily for natural gas. Purchases from United States Steel in 2003 and 2002 were $14 million and $12 million, primarily for raw materials. Management believes that transactions with United States Steel were conducted under terms comparable to those with unrelated parties.

In the fourth quarter of 2002, Marathon cancelled the unvested restricted stock awards held by certain former officers and provided each with an appropriate cash settlement. The total cost of the settlement was $5 million.

Discontinued operations presentation – Marathon has accounted for the business of United States Steel as a discontinued operation. The loss from discontinued operations for the period ended December 31, 2001 includes the net loss attributable to Steel Stock for the year, adjusted for corporate administrative expenses and interest expense (net of income tax effects) which may not be allocated to discontinued operations under generally accepted accounting principles and the loss on disposition of United States Steel, which is the excess of the net investment in United States Steel over the aggregate fair market value of the outstanding shares of the Steel Stock at the time of the Separation. Because operating and investing activities are separately identifiable to each of Marathon and United States Steel, such amounts have been separately disclosed in the statement of cash flows. Financing activities were managed on a centralized, consolidated basis. Therefore they have been reflected on a consolidated basis in the statement of cash flows.

Transactions related to invested cash, debt and related interest and other financing costs, and preferred stock and related dividends were attributed to discontinued operations based on the cash flows of United States Steel for the periods presented and the initial capital structure attributable to Steel Stock. However, certain limitations on the amount of interest expense allocated to discontinued operations are required by generally accepted accounting principles. Corporate general and administrative costs were allocated to discontinued operations based upon utilization. Other corporate general and administrative costs attributable to Steel Stock that were allocated using methods which considered certain measures of business activities, such as employment, investments and revenues, are not permitted to be classified as discontinued operations under generally accepted accounting principles. Income taxes were allocated to discontinued operations in accordance with Marathon’s tax allocation policy. In general, such policy provided that the consolidated tax provision and related tax payments or refunds were allocated to discontinued operations based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to United States Steel.

The results of operations of United States Steel, subject to the limitations described above, have been reclassified as discontinued operations for all periods presented in the Consolidated Statement of Income and are summarized as follows:

(In millions)	2001
Revenues and other income	$	6,375
Costs and expenses		6,755
Loss from operations		(380	)
Net interest and other financing costs		101
Loss before income taxes		(481	)
Credit for estimated income taxes		(312	)
Net loss	$	(169	)

The computation of the loss on disposition of United States Steel on December 31, 2001 was as follows:

(In millions)
Market value of Steel Stock (89,197,740 shares of stock issued and outstanding at $18.11 per share)	$	1,615
Less:
Net investment in United States Steel		2,564
Costs associated with the Separation, net of tax		35
Loss on disposition of United States Steel	$	(984	)

Amounts receivable from or payable to United States Steel arising from the Separation – As previously discussed, Marathon remains primarily obligated for certain financings for which United States Steel has assumed responsibility for repayment under the terms of the Separation. When United States Steel makes payments on the principal of these financings, both the receivable and the obligation will be reduced.

F-16

At December 31, 2003 and 2002, amounts receivable or payable to United States Steel were included in the balance sheet as follows:

(In millions)	December 31	2003		2002
Receivables:
Current:
Receivables related to debt and other obligations for which United States Steel has assumed responsibility for repayment		$	20	$	9
Noncurrent:
Receivables related to debt and other obligations for which United States Steel has assumed responsibility for repayment (a)		$	593	$	547
Payables:
Current:
Income tax settlement and related interest payable		$	4	$	28
Noncurrent:
Reimbursements payable under nonqualified employee benefit plans		$	8	$	7

^(a) Increase is due to the extension of an operating lease for equipment at United States Steel’s Clairton Works cokemaking facility which is now accounted for as a capital lease.

Marathon remains primarily obligated for $72 million of operating lease obligations assumed by United States Steel, of which $54 million has in turn been assumed by other third parties that had purchased plants and operations divested by United States Steel.

In addition, Marathon remains contingently liable for certain obligations of United States Steel. See Note 28 for additional details on these guarantees.

4. Related Party Transactions

Related parties include:

• Ashland Inc. (Ashland), which holds a 38 percent ownership interest in MAP, a consolidated subsidiary.

• Equity method investees.

Management believes that transactions with related parties were conducted under terms comparable to those with unrelated parties.

Revenues from related parties were as follows:

(In millions)	2003		2002		2001
Ashland	$	258	$	218	$	237
Equity investees:
Pilot Travel Centers LLC (PTC)		635		645		210
Other		28		6		–
Total	$	921	$	869	$	447

Related party sales to Ashland and PTC consist primarily of petroleum products.

Purchases from related parties were as follows:

(In millions)	2003		2002		2001
Ashland	$	24	$	33	$	29
Equity investees		163		145		129
Total	$	187	$	178	$	158

Receivables from related parties were as follows:

(In millions)	December 31	2003		2002
Ashland		$	22	$	18
Equity investees:
PTC			16		16
Other			9		4
Total		$	47	$	38

F-17

Payables to related parties were as follows:

(In millions)	December 31	2003		2002
Ashland		$	1	$	3
Equity investees			16		13
Total		$	17	$	16

MAP has a $190 million uncommitted revolving credit agreement with Ashland. Interest on borrowings is based on defined short-term borrowing rates. At December 31, 2003 and 2002, there were no borrowings against this facility. Interest paid to Ashland for borrowings under this agreement was less than $1 million for 2003, 2002 and 2001.

5. Business Combinations

On May 12, 2003, Marathon acquired Khanty Mansiysk Oil Corporation (“KMOC”) for $285 million, including the assumption of $31 million in debt. KMOC is currently developing nine oil fields in the Khanty-Mansiysk region of western Siberia in the Russian Federation. Results of operations for 2003 include the results of KMOC from May 12, 2003. The allocation of purchase price is preliminary, pending the finalization of certain contingencies. There was no goodwill associated with the purchase.

The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisition:

(In millions)
Cash	$	2
Receivables		10
Inventories		3
Investments and long-term receivables		19
Property, plant and equipment		323
Other assets		4
Total assets acquired	$	361
Current liabilities	$	20
Long-term debt		31
Asset retirement obligations		12
Deferred income taxes		42
Other liabilities		2
Total liabilities assumed	$	107
Net assets acquired	$	254

During 2002, in two separate transactions, Marathon acquired interests in the Alba Field offshore Equatorial Guinea, West Africa, and certain other related assets.

On January 3, 2002, Marathon acquired certain interests from CMS Energy Corporation for $1.005 billion. Marathon acquired three entities that own a combined 52.4% working interest in the Alba Production Sharing Contract and a net 43.2% interest in an onshore liquefied petroleum gas processing plant through an equity method investee. Additionally, Marathon acquired a 45.0% net interest in an onshore methanol production plant through an equity method investee. Results of operations for 2002 include the results of the interests acquired from CMS Energy from January 3, 2002.

On June 20, 2002, Marathon acquired 100% of the outstanding stock of Globex Energy, Inc. (“Globex”) for $155 million. Globex owned an additional 10.9% working interest in the Alba Production Sharing Contract and an additional net 9.0% interest in the onshore liquefied petroleum gas processing plant. Globex also held oil and gas interests offshore Australia, which were sold on October 28, 2003. Results of operations include the results of the interests acquired from Globex from June 20, 2002.

The CMS and Globex allocations of purchase price are final. The goodwill arising from the allocations was $175 million, which was assigned to the E&P segment. Significant factors that resulted in the recognition of goodwill include: the ability to acquire an established business with an assembled workforce and a proven track record and a strategic acquisition in a core geographic area.

Additionally, the purchase price allocated to equity method investments was $224 million higher than the underlying net assets of the investees. This excess will be amortized over the expected useful life of the underlying assets except for $81 million of goodwill relating to equity method investments.

F-18

The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisitions:

(In millions)
Receivables	$	24
Inventories		10
Investments and long-term receivables		463
Property, plant and equipment		661
Goodwill (none deductible for income tax purposes)		175
Other noncurrent assets		3
Total assets acquired	$	1,336
Current liabilities	$	33
Deferred income taxes		143
Total liabilities assumed	$	176
Net assets acquired	$	1,160

In the first quarter 2001, Marathon acquired Pennaco Energy, Inc. (Pennaco), a natural gas producer. Marathon acquired 87% of the outstanding stock of Pennaco through a tender offer completed on February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged with a wholly owned subsidiary of Marathon. Under the terms of the merger, each share not held by Marathon was converted into the right to receive $19 in cash. The total cash purchase price of Pennaco was $506 million. The acquisition was accounted for under the purchase method of accounting. The goodwill totaled $70 million. Goodwill amortization ceased upon adoption of Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Results of operations for 2001 include the results of Pennaco from February 7, 2001.

The following unaudited pro forma data for Marathon includes the results of operations of the above acquisitions giving effect to them as if they had been consummated at the beginning of the periods presented. The pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations. Included in the amounts for 2002 are approximately $3 million (net of tax of $2 million) or $0.01 per share of nonrecurring legal and employee benefit costs incurred by Globex related to the acquisition.

(In millions, except per share amounts)	2003		2002
Revenues and other income	$	41,257	$	31,648
Income from continuing operations		1,005		502
Net income		1,314		511
Per share amounts applicable to Common Stock Income from continuing operations – basic and diluted		3.24		1.63
Net income – basic and diluted		4.23		1.65

6. Discontinued Operations

On October 1, 2003, Marathon sold its exploration and production operations in western Canada for $612 million. This divestiture decision was made as part of Marathon’s strategic plan to rationalize noncore oil and gas properties. The results of these operations have been reported separately as discontinued operations in Marathon’s Consolidated Statement of Income. The sale resulted in a gain of $278 million, including a tax benefit of $8 million, which has been reported in discontinued operations. Revenues applicable to the discontinued operations totaled $188 million, $165 and $60 million for 2003, 2002, and 2001, respectively. Pretax income (loss) from discontinued operations totaled $66 million, $(4) million and $(155) million for 2003, 2002 and 2001, respectively. See Note 3 for discontinued operations related to the separation of United States Steel.

F-19

7. Income Per Common Share

	2003				2002						2001
(Dollars in millions, except per share data)	Basic		Diluted		Basic			Diluted			Basic			Diluted
COMMON STOCK
Income from continuing operations	$	1,012	$	1,012	$	507		$	507		$	1,405		$	1,405
Excess redemption value of preferred securities		–		–		–			–			(1	)		(1	)
Income from continuing operations applicable to Common Stock		1,012		1,012		507			507			1,404			1,404
Expenses included in income from continuing operations applicable to Steel Stock		–		–		–			–			41			41
Income (loss) from discontinued operations		305		305		(4	)		(4	)		(1,071	)		(1,071	)
Expenses included in loss on disposition of United States Steel applicable to Steel Stock		–		–		–			–			11			11
Cumulative effect of change in accounting principle		4		4		13			13			(8	)		(8	)
Net income applicable to Common Stock	$	1,321	$	1,321	$	516		$	516		$	377		$	377
Shares of common stock outstanding (thousands):
Average number of common shares outstanding		310,129		310,129		309,792			309,792			309,150			309,150
Effect of dilutive securities – stock options		–		197		–			159			–			360
Average common shares including dilutive effect		310,129		310,326		309,792			309,951			309,150			309,510
Per share:
Income from continuing operations	$	3.26	$	3.26	$	1.63		$	1.63		$	4.54		$	4.54
Income (loss) from discontinued operations	$	.99	$	.99	$	(.01	)	$	(.01	)	$	(3.46	)	$	(3.46	)
Cumulative effect of change in accounting principle	$	.01	$	.01	$	.04		$	.04		$	(.03	)	$	(.03	)
Net income	$	4.26	$	4.26	$	1.66		$	1.66		$	1.22		$	1.22
STEEL STOCK
Loss from discontinued operations	$	–	$	–	$	–		$	–		$	(169	)	$	(169	)
Expenses included in loss from continuing operations applicable to Steel Stock		–		–		–			–			(41	)		(41	)
Expenses included in loss on disposition of United States Steel applicable to Steel Stock		–		–		–			–			(11	)		(11	)
Preferred stock dividends		–		–		–			–			(8	)		(8	)
Loss on redemption of preferred securities		–		–		–			–			(14	)		(14	)
Net loss applicable to Steel Stock	$	–	$	–	$	–		$	–		$	(243	)	$	(243	)
Shares of common stock outstanding (thousands):
Average common shares including dilutive effect		–		–		–			–			89,058			89,058
Per share:
Loss from discontinued operations	$	–	$	–	$	–		$	–		$	(1.90	)	$	(1.90	)
Net loss	$	–	$	–	$	–		$	–		$	(2.73	)	$	(2.74	)

8. Segment Information

Marathon’s operations consist of three operating segments: 1) Exploration and Production (“E&P”) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (“RM&T”) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest, upper Great Plains and southeastern United States through its 62 percent owned consolidated subsidiary, Marathon Ashland Petroleum LLC (“MAP”); and 3) Integrated Gas (“IG”) – markets and transports its own and third-party natural gas and products manufactured from natural gas, such as liquefied natural gas and methanol, primarily in the United States, Europe, and West Africa.

Effective January 1, 2004, Marathon realigned its segment reporting to reflect a new business segment, Integrated Gas. This segment includes Marathon’s Alaska liquid natural gas (“LNG”) operations, Equatorial Guinea methanol operations, and certain other natural gas marketing and transportation activities, along with expenses related to the continued development of an integrated gas business. These activities were previously reported in the Other Energy Related Businesses (“OERB”) segment, which has been eliminated. Crude oil marketing and transportation activities and costs associated with a gas-to-liquids (“GTL”) demonstration plant, previously reported in OERB, are now reported in the E&P segment. Refined product transportation activities not included in MAP, also previously reported in OERB, are now reported in the RM&T segment. The following information has been restated to reflect the new segment structure.

Revenues by product line were:

(In millions)	2003		2002		2001
Refined products	$	24,092	$	19,729	$	20,841
Merchandise		2,395		2,521		2,506
Liquid hydrocarbons		10,500		6,517		6,502
Natural gas		3,796		2,362		2,801
Transportation and other products		180		166		146
Total	$	40,963	$	31,295	$	32,796

F-20

The following represents information by operating segment:

(In millions)	Exploration and Production		Refining, Marketing and Transportation		Integrated Gas			Total
2003
Revenues:
Customer	$	4,394	$	33,508	$	2,140		$	40,042
Intersegment(a)		405		97		108			610
Related parties		12		909		–			921
Total revenues	$	4,811	$	34,514	$	2,248		$	41,573
Segment income	$	1,514	$	819	$	(3	)	$	2,330
Income from equity method investments(b)		50		82		21			153
Depreciation, depletion and amortization(c)		755		375		12			1,142
Impairments(d)		3		–		–			3
Capital expenditures(e)		973		772		131			1,876
2002
Revenues:
Customer	$	3,894	$	25,384	$	1,148		$	30,426
Intersegment(a)		583		146		69			798
Related parties		–		869		–			869
Total revenues	$	4,477	$	26,399	$	1,217		$	32,093
Segment income	$	1,077	$	372	$	23		$	1,472
Income from equity method investments		75		48		14			137
Depreciation, depletion and amortization(c)		769		364		3			1,136
Impairments(d)		13		–		–			13
Capital expenditures(e)		820		621		48			1,489
2001
Revenues:
Customer	$	4,357	$	26,778	$	1,214		$	32,349
Intersegment(a)		496		21		68			585
United States Steel(a)		21		1		8			30
Related parties		–		447		–			447
Total revenues	$	4,874	$	27,247	$	1,290		$	33,411
Segment income	$	1,379	$	1,927	$	21		$	3,327
Income from equity method investments		71		41		6			118
Depreciation, depletion and amortization(c)		824		345		1			1,170
Impairments(d)		–		1		–			1
Capital expenditures(e)		834		591		1			1,426

^(a) Management believes intersegment transactions and transactions with United States Steel were conducted under terms comparable to those with unrelated parties.

^(b) Excludes a $124 million loss on the dissolution of MKM Partners L.P., which was not allocated to segments. See Note 13.

^(c) Differences between segment totals and Marathon totals represent impairments and amounts related to corporate administrative activities.

^(d) Excludes impairments of undeveloped oil and gas properties.

^(e) Differences between segment totals and Marathon totals represent amounts related to corporate administrative activities.

The following reconciles segment income to income from operations as reported in Marathon’s consolidated statement of income:

(In millions)	2003			2002			2001
Segment income	$	2,330		$	1,472		$	3,327
Items not allocated to segments:
Administrative expenses(a)		(203	)		(194	)		(187	)
Business transformation costs		(24	)		–			–
Inventory market valuation adjustments		–			71			(71	)
Gain (loss) on ownership change in MAP		(1	)		12			(6	)
Gain on offshore lease resolution with U.S. Government		–			–			59
Gain on asset disposition		106			24			–
Loss on dissolution of MKM Partners L.P.		(124	)		–			–
Contract settlement		–			(15	)		–
Separation costs		–			–			(14	)
Total income from operations	$	2,084		$	1,370		$	3,108

^(a) Includes administrative expenses related to Steel Stock of $25 million for 2001.

F-21

Geographic Area:

The information below summarizes the operations in different geographic areas. Transfers between geographic areas are at prices that approximate market.

		Revenues
(In millions)	Year	Within Geographic Areas		Between Geographic Areas			Total			Assets(a)
United States	2003 2002 2001	$	39,377 29,930 31,468	$	–   –   –		$	39,377 29,930 31,468		$	8,061 7,904 8,033
Canada	2003 2002 2001		413 265 364		1,218 917 871			1,631 1,182 1,235			24 485 498
United Kingdom	2003 2002 2001		849 916 848		–   –   –			849 916 848			1,215 1,316 1,534
Equatorial Guinea	2003 2002 2001		119 82 –		–   –   –			119 82 –			1,656 1,018 –
Other Foreign Countries	2003 2002 2001		205 102 116		134 153 134			339 255 250			1,049 1,144 474
Eliminations	2003 2002 2001		–   –   –		(1,352 (1,070 (1,005	) ) )		(1,352 (1,070 (1,005	) ) )		–   –   –
Total	2003 2002 2001	$	40,963 31,295 32,796	$	–   –   –		$	40,963 31,295 32,796		$	12,005 11,867 10,539

(a) Includes property, plant and equipment and investments.

9. Other Items

Net interest and other financing costs

(In millions)	2003			2002		2001
Interest and other financial income:
Interest income	$	39		$	12	$	29
Foreign currency adjustments		13			8		(5	)
Total		52			20		24
Interest and other financing costs:
Interest incurred(a)		282			288		203
Less interest capitalized		41			16		26
Net interest		241			272		177
Interest on tax issues		(13	)		9		(2	)
Financing costs on preferred stock of subsidiary		–			–		11
Other		10			7		10
Total		238			288		196
Net interest and other financing costs	$	186		$	268	$	172

^(a) Excludes $34 million and $28 million paid by United States Steel in 2003 and 2002 on assumed debt.

Foreign currency transactions

Aggregate foreign currency gains (losses) were included in the income statement as follows:

(In millions)	2003			2002			2001
Net interest and other financing costs	$	13		$	8		$	(5	)
Provision for income taxes		(15	)		(10	)		8
Aggregate foreign currency gains (losses)	$	(2	)	$	(2	)	$	3

F-22

10. Income Taxes

Provisions (credits) for income taxes were:

	2003							2002							2001
(In millions)	Current		Deferred			Total		Current		Deferred			Total		Current		Deferred			Total
Federal	$	280	$	95		$	375	$	105	$	(26	)	$	79	$	706	$	(96	)	$	610
State and local		56		(4	)		52		21		33			54		86		16			102
Foreign		177		(20	)		157		166		70			236		182		(67	)		115
Total	$	513	$	71		$	584	$	292	$	77		$	369	$	974	$	(147	)	$	827

A reconciliation of federal statutory tax rate (35%) to total provisions follows:

(In millions)	2003			2002			2001
Statutory rate applied to income before income taxes	$	559		$	307		$	781
Effects of foreign operations:
Remeasurement of deferred taxes due to legislated changes(a)		–			61			–
All other, including foreign tax credits		(7	)		(12	)		(16	)
State and local income taxes after federal income tax effects		35			34			66
Credits other than foreign tax credits		(6	)		(11	)		(9	)
Effects of partially owned companies		(6	)		(6	)		(5	)
Adjustment of prior years’ federal income taxes		17			(1	)		3
Other		(8	)		(3	)		7
Total provisions	$	584		$	369		$	827

^(a) Represents a one-time deferred tax charge as a result of the enactment of a supplemental tax in the United Kingdom.

Deferred tax assets and liabilities resulted from the following:

(In millions)	December 31	2003			2002
Deferred tax assets:
Net operating loss carryforwards (expiring in 2021)		$	–		$	6
Capital loss carryforwards (expiring in 2008)			67			–
State tax loss carryforwards (expiring in 2004 through 2021)			131			150
Foreign tax loss carryforwards(a)			479			442
Expected federal benefit for:
Crediting certain foreign deferred income taxes			307			331
Deducting state and foreign deferred income taxes			45			54
Employee benefits			301			259
Contingencies and other accruals			179			172
Investments in subsidiaries and equity investees			96			50
Other			126			121
Valuation allowances:
Federal			(67	)		–
State			(73	)		(78	)
Foreign			(436	)		(404	)
Total deferred tax assets(b)			1,155			1,103
Deferred tax liabilities:
Property, plant and equipment			2,014			1,947
Inventory			317			358
Prepaid pensions			96			78
Other			145			141
Total deferred tax liabilities			2,572			2,524
Net deferred tax liabilities		$	1,417		$	1,421

^(a) Includes $450 million for Norway which has no expiration date. The remainder expire 2004 through 2008.

^(b) Marathon expects to generate sufficient future taxable income to realize the benefit of the deferred tax assets. In addition, the ability to realize the benefit of foreign tax credits is based upon certain assumptions concerning future operating conditions (particularly as related to prevailing oil prices), income generated from foreign sources and Marathon’s tax profile in the years that such credits may be claimed.

F-23

Net deferred tax liabilities were classified in the consolidated balance sheet as follows:

(In millions)	December 31	2003		2002
Assets:
Other current assets		$	37	$	–
Other noncurrent assets			35		35
Liabilities:
Accrued taxes			–		11
Deferred income taxes			1,489		1,445
Net deferred tax liabilities		$	1,417	$	1,421

The consolidated tax returns of Marathon for the years 1995 through 2001 are under various stages of audit and administrative review by the IRS. Marathon believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled.

Pretax income from continuing operations included $453 million, $372 million and $257 million attributable to foreign sources in 2003, 2002 and 2001, respectively.

Undistributed income of certain consolidated foreign subsidiaries at December 31, 2003, amounted to $450 million. No provision for deferred U.S. income taxes has been made for these subsidiaries because Marathon intends to permanently reinvest such income in those foreign operations. If such income were not permanently reinvested, a deferred tax liability of $158 million would have been required.

See Note 3 for a discussion of the Tax Sharing Agreement between Marathon and United States Steel.

11. Business Transformation

During the third quarter of 2003, Marathon implemented an organizational realignment plan and business process improvements to further enable Marathon to focus and execute on its core business strategies by providing superior long-term value growth. This program includes streamlining Marathon’s business processes and services, realigning reporting relationships to reduce costs across all organizations, consolidating organizations in Houston and reducing the workforce.

During 2003, Marathon recorded $24 million of business transformation related costs against earnings, including $22 million in general and administrative expense and $2 million loss on assets held for sale. These charges included employee severance and benefit costs related to the elimination of approximately 400 regular employees, the majority of which were engaged in operations around the United States, relocation costs related to consolidating organizations in Houston, a pension curtailment loss, a postretirement plan curtailment gain, and fixed asset related costs.

The table below sets forth the significant components and activity in the business transformation program during 2003:

(In millions)	Business Transformation Charges (Gain)			Non-Cash Charges (Gain)			Cash Payments		Accrued Liabilities Balance at December 31, 2003
Employee severance and termination benefits	$	25		$	–		$	13	$	12
Pension plan curtailment loss		6			6			–		–
Relocation costs		5			–			–		5
Fixed asset related costs		4			2			1		1
Retiree health care plan curtailment gain		(16	)		(16	)		–		–
Total	$	24		$	(8	)	$	14	$	18

An additional charge of $51 million is expected to be incurred in 2004, including $34 million related to pension settlement.

12. Inventories

(In millions)	December 31	2003		2002
Liquid hydrocarbons and natural gas		$	674	$	689
Refined products and merchandise			1,151		1,186
Supplies and sundry items			128		109
Total		$	1,953		1,984

The LIFO method accounted for 91% and 92% of total inventory value at December 31, 2003 and 2002, respectively. Current acquisition costs were estimated to exceed the above inventory values at December 31, 2003, by approximately $655 million. Cost of revenues was reduced and income from operations was increased by $11 million in 2003, less than $1 million in 2002, and $17 million in 2001 as a result of liquidations of LIFO inventories.

F-24

13. Investments and Long-Term Receivables

(In millions)	December 31	2003		2002
Equity method investments		$	1,172	$	1,444
Other investments			3		33
Receivables due after one year			91		67
VAT receivable			13		–
Derivative assets			34		41
Deposits of restricted cash			5		43
Other			5		6
Total		$	1,323	$	1,634

Summarized financial information of investees accounted for by the equity method of accounting follows:

(In millions)	2003		2002		2001
Income data – year:
Revenues and other income	$	7,006	$	5,541	$	2,824
Operating income		435		329		332
Net income		319		264		257
Balance sheet data – December 31:
Current assets	$	619	$	537
Noncurrent assets		3,727		3,732
Current liabilities		641		548
Noncurrent liabilities		1,172		1,083

Marathon’s carrying value of its equity method investments is $96 million higher than the underlying net assets of investees. This basis difference is being amortized into expenses over the remaining useful lives of the underlying net assets.

Dividends and partnership distributions received from equity investees were $188 million in 2003, $114 million in 2002 and $95 million in 2001.

On June 30, 2003, Marathon Oil Corporation and Kinder Morgan Energy Partners, L.P. (“Kinder Morgan”) dissolved MKM Partners L.P. which had oil and gas production operations in the Permian Basin of Texas. Marathon held an 85% noncontrolling interest in the partnership. Prior to the dissolution of the partnership, Kinder Morgan acquired MKM Partners L.P.’s 12.75% interest in the SACROC unit for an undisclosed amount. The partnership recorded a loss on the disposal of SACROC of $19 million, of which Marathon’s share was $17 million. Also prior to the dissolution, Marathon recorded a $107 million impairment of its investment in MKM Partners L.P. due to an other-than-temporary decline in the fair value of the investment. The total loss recognized by Marathon related to the dissolution of MKM Partners L.P. was $124 million. The partnership’s interest in the Yates field was distributed to Marathon and Kinder Morgan upon dissolution.

14. Property, Plant and Equipment

(In millions)	December 31	2003		2002
Production		$	14,319	$	14,050
Refining			3,822		3,441
Marketing			1,926		2,047
Transportation			1,688		1,589
Other			438		340
Total			22,193		21,467
Less accumulated depreciation, depletion and amortization			11,363		11,077
Net		$	10,830	$	10,390

Property, plant and equipment includes gross assets acquired under capital leases of $49 million and $8 million at December 31, 2003 and 2002, with related amounts in accumulated depreciation, depletion and amortization of $2 million and $1 million at December 31, 2003 and 2002.

On November 3, 2003, Marathon sold its 42.45% interest in the Yates field and its 100% interest in the Yates gathering system to Kinder Morgan for $229 million and recognized a loss of $8 million. This divestiture decision was made as part of Marathon’s strategic plan to rationalize noncore oil and gas properties. The Yates field and gathering system consisted of assets of $240 million of property, plant and equipment and asset retirement obligations of $3 million.

F-25

During 2002, Marathon acquired additional interests in coalbed natural gas assets in the Powder River Basin of northern Wyoming and southern Montana from XTO Energy, Inc. (XTO) in exchange for certain oil and gas properties in eastern Texas and northern Louisiana. Additionally, 100 million cubic feet per day of long-term gas transportation capacity was released to Marathon by the original owner of the Powder River Basin interests. On July 1, 2002, Marathon completed this transaction by selling its production interests in the San Juan Basin of New Mexico to XTO for $42 million. Marathon recognized a gain of $24 million in 2002 related to this transaction.

15. Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2002, are as follows:

(In millions)	Exploration and Production			Refining, Marketing and Transportation		Total
Balance as of January 1, 2002	$	75		$	21	$	96
Goodwill acquired during the year		178			–		178
Balance as of December 31, 2002	$	253		$	21	$	274
Purchase price adjustment		(3	)		–		(3	)
Goodwill allocated to sale of western Canada operations		(15	)		–		(15	)
Balance as of December 31, 2003	$	235		$	21	$	256

The E&P segment tests for impairment in the second quarter of each year. The RM&T segment tests for impairment in the fourth quarter of each year. No impairment in the carrying value has been deemed necessary.

16. Intangible Assets

Intangible assets as of December 31, 2003, are as follows:

(In millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets
Branding agreements	$	53	$	19	$	34
Elba Island delivery rights		42		2		40
Other		40		23		17
Total	$	135	$	44	$	91
Unamortized intangible assets
Unrecognized prior service costs	$	23	$	–	$	23
Other		4		–		4
Total	$	27	$	–	$	27

Amortization expense related to intangibles during 2003 and 2002 totaled $12 million and $10 million, respectively. Estimated amortization expense for the years 2004-2008 is $12 million, $11 million, $11 million, $7 million and $5 million, respectively.

F-26

17. Derivative Instruments

The following table sets forth quantitative information by category of derivative instrument at December 31, 2003 and 2002. These amounts are reflected on a gross basis by individual derivative instrument. The amounts exclude the variable margin deposit balances held in various brokerage accounts. Marathon did not have any foreign currency contracts in place at December 31, 2003 and 2002.

		2003					2002
(In millions)	December 31	Assets(a)		(Liabilities)(a)			Assets(a)	(Liabilities)(a)
Commodity Instruments
Fair Value Hedges(b):
OTC commodity swaps		$	17	$	(1	)	$5	$–
Cash Flow Hedges(c):
Exchange-traded commodity futures		$	–	$	–		$3	$(1)
OTC commodity swaps			20		(26	)	3	(2)
OTC commodity options			2		(23	)	12	(53)
Non-Hedge Designation:
Exchange-traded commodity futures		$	94	$	(98	)	$24	$(58)
Exchange-traded commodity options			5		(11	)	9	(11)
OTC commodity swaps			61		(38	)	54	(32)
OTC commodity options			5		(4	)	13	(9)
Nontraditional Instruments(d)		$	70	$	(90	)	$91	$(39)
Financial Instruments
Fair Value Hedges:
OTC interest rate swaps(e)		$	11	$	(7	)	$12	$–

^(a) The fair value and carrying value of derivative instruments are the same. The fair value amounts for OTC positions are determined using option-pricing models or dealer quotes. The fair values of exhange-traded positions are based on market quotes derived from major exchanges. The fair value of interest rate swaps is based on dealer quotes. Marathon’s consolidated balance sheet is reflected on a net asset/(liability) basis by brokerage firm, as permitted by the master netting agreements.

^(b) There was no ineffectiveness associated with fair value hedges for 2003 or 2002 because the hedging instrument and the existing firm commitment contracts are priced on the same underlying index. Certain derivative instruments used in the fair value hedges mature between 2004 and 2008.

^(c) The ineffective portion of changes in the fair value for cash flow hedges, on a before tax basis, for December 31, 2003 and 2002 was less than $1 million. In addition, during 2003 and 2002, losses of $8 million and gains of $23 million was recognized in revenues, respectively, as the result of a discontinuation of a portion of a cash flow hedge related to natural gas production. Of the $15 million recorded in OCI as of December 31, 2003, $17 million is expected to be reclassified to income in 2004.

^(d) Nontraditional derivative instruments are created due to netting of physical receipts and delivery volumes with the same counterparty. Also included in this category are long-term natural gas contracts in the United Kingdom in which underlying physical contract price is currently less than other available market prices.

^(e) The fair value amounts are based on dealer quotes. These fair value amounts exclude accrued interest amounts not yet settled. As of December 31, 2003 and 2002, accrued interest approximated $7 million and $1 million respectively. The net fair value of the OTC interest rate swaps as of December 31, 2003 and 2002 of $4 million and $12 million respectively, is included in long-term debt (see Note 20).

F-27

18. Fair Value of Financial Instruments

Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 17, by individual balance sheet account. Marathon’s financial instruments at December 31, 2003 and 2002 were:

		2003				2002
(In millions)	December 31	Fair Value		Carrying Amount		Fair Value		Carrying Amount
Financial assets:
Cash and cash equivalents		$	1,396	$	1,396	$	488	$	488
Receivables			2,510		2,510		1,845		1,845
Receivables from United States Steel			549		613		382		556
Investments and long-term receivables			186		117		223		149
Total financial assets		$	4,641	$	4,636	$	2,938	$	3,038
Financial liabilities:
Accounts payable		$	3,369	$	3,369	$	2,857	$	2,857
Payables to United States Steel			12		12		35		35
Accrued interest			85		85		108		108
Long-term debt (including amounts due within one year)			4,740		4,181		5,008		4,486
Total financial liabilities		$	8,206	$	7,647	$	8,008	$	7,486

Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short-term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. Fair value of the receivables from United States Steel were estimated using market prices for United States Steel debt assuming the industrial revenue bonds are redeemed on or before the tenth anniversary of the Separation per the Financial Matters Agreement.

Marathon has a commitment to extend credit to Syntroleum Corporation (Syntroleum) that is described further in Note 28. It is not practicable to estimate the fair value because there are no quoted market prices available for transactions that are similar in nature.

19. Short-Term Debt

In November 2003, Marathon entered into a $575 million 364-day revolving credit agreement, which terminates in November 2004. Interest is based on defined short-term market rates. During the term of the agreement, Marathon is obligated to pay a facility fee on total commitments, which at December 31, 2003, was 0.10%. At December 31, 2003, there were no borrowings against this facility. Marathon has other uncommitted short-term lines of credit totaling $200 million, bearing interest at short-term market rates determined at the time of a request for borrowings against such facility. At December 31, 2003, there were no borrowings against these facilities.

MAP has a $190 million revolving credit agreement with Ashland Inc. that terminates in March 2004, as discussed in Note 4. At December 31, 2003, there were no borrowings against this facility.

F-28

20. Long-Term Debt

(In millions)	December 31	2003			2002
Marathon Oil Corporation:
Revolving credit facility due 2005(a)		$	–		$	–
Commercial paper(a)			–			100
9.625% notes due 2003			–			150
7.200% notes due 2004			251			300
6.650% notes due 2006			300			300
5.375% notes due 2007(b)			450			450
6.850% notes due 2008			400			400
6.125% notes due 2012(b)			450			450
6.000% notes due 2012(b)			400			400
6.800% notes due 2032(b)			550			550
9.375% debentures due 2012			163			163
9.125% debentures due 2013			271			271
9.375% debentures due 2022			81			81
8.500% debentures due 2023			123			123
8.125% debentures due 2023			229			229
6.570% promissory note due 2006(b)			15			21
Series A Medium term notes due 2022			3			3
4.750% – 6.875% Obligations relating to Industrial Development and Environmental Improvement Bonds and Notes due 2009 – 2033(c)			494			494
Sale-leaseback financing due 2003 – 2012(d)			76			81
Capital lease obligation due 2012(e)			59			–
Consolidated subsidiaries:
All other obligations, including capital lease obligations due 2004 – 2018			47			6
Total(f)(g)			4,362			4,572
Unamortized discount			(9	)		(13	)
Fair value adjustments on notes subject to hedging(h)			4			12
Amounts due within one year			(272	)		(161	)
Long-term debt due after one year		$	4,085		$	4,410

^(a) Marathon has a $1,354 million 5-year revolving credit agreement that terminates in November 2005. Interest on the facility is based on defined short-term market rates. During the term of the agreement, Marathon is obligated to pay a variable facility fee on total commitments, which at December 31, 2003 was 0.125%. At December 31, 2003, there were no borrowings against this facility. Commercial paper is supported by the unused and available credit on the 5-year facility and, accordingly, is classified as long-term debt.

^(b) These notes contain a make whole provision allowing Marathon the right to repay the debt at a premium to market price.

^(c) United States Steel has assumed responsibility for repayment of $470 million of these obligations.

^(d) This sale-leaseback financing arrangement relates to a lease of a slab caster at United States Steel’s Fairfield Works facility in Alabama with a term through 2012. Marathon is the primary obligor under this lease. Under the Financial Matters Agreement, United States Steel has assumed responsibility for all obligations under this lease. This lease is an amortizing financing with a final maturity of 2012, subject to additional extensions.

^(e) This obligation relates to a lease of equipment at United States Steel’s Clairton Works cokemaking facility in Pennsylvania with a term through 2012. Marathon is the primary obligor under this lease. Under the Financial Matters Agreement, United States Steel has assumed responsibility for all obligations under this lease. This lease is an amortizing financing with a final maturity of 2012, subject to additional extensions. This equipment has been subleased to Clairton 1314B, L.P. through July 2, 2004.

^(f) Required payments of long-term debt for the years 2005-2008 are $16 million, $315 million, $474 million and $417 million, respectively. Of these amounts, payments assumed by United States Steel are $7 million, $11 million, $21 million and $14 million, respectively.

^(g) In the event of a change in control of Marathon, as defined in the related agreements, debt obligations totaling $1,837 million at December 31, 2003, may be declared immediately due and payable.

^(h) See Note 17 for information on interest rate swaps.

F-29

21. Deferred Credits and Other Liabilities

Deferred credits and other liabilities included the following:

(In millions)	December 31	2003		2002
Deferred credits:
Deferred revenue on gas supply contracts		$	27	$	36
Deferred credits on crude oil contracts			30		29
Deferred gain on formation of Centennial Pipeline LLC			12		12
Other deferred credits			1		7
Other liabilities:
Environmental remediation liabilities			82		51
Accrued LNG facility costs			22		15
Derivative liabilities			22		–
Indemnification payable			9		–
Guarantees			4		–
Royalties payable			–		6
Other			24		12
Total deferred credits and other liabilities		$	233	$	168

22. Preferred Securities Formerly Outstanding

USX Capital LLC, a former wholly owned subsidiary of Marathon, had sold 10,000,000 shares (carrying value of $250 million) of 8 ³/4% Cumulative Monthly Income Preferred Shares (MIPS) (liquidation preference of $25 per share) in 1994. On December 31, 2001, USX Capital LLC called for redemption all of the outstanding MIPS. In December 2001, $27 million of MIPS were exchanged for debt securities of United States Steel. At the redemption date, USX Capital LLC paid $25.18 per share reflecting the redemption price of $25 per share, plus a cash payment for accrued but unpaid dividends through the redemption date. After the redemption date, the MIPS ceased to accrue dividends and only represented the right to receive the redemption price.

In 1997, Marathon exchanged approximately 3.9 million, $50 face value, 6.75% Convertible Quarterly Income Preferred Securities of USX Capital Trust I (QUIPS), a Delaware statutory business trust, for an equivalent number of shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock). In December 2001, $12 million of QUIPS were exchanged for debt securities of United States Steel. At the time of Separation, all outstanding QUIPS became redeemable at their face value plus accrued but unpaid distributions. The QUIPS were included in the net investment in United States Steel. In early January 2002, Marathon paid $185 million to retire the QUIPS.

Marathon had issued 6.50% Preferred Stock and prior to the Separation, had 2,209,042 shares (stated value of $1.00 per share; liquidation preference of $50.00 per share) outstanding. In December 2001, $10 million of 6.50% Preferred Stock were exchanged for debt securities of United States Steel. At the time of Separation, all outstanding shares of the 6.50% Preferred Stock were converted into the right to receive $50.00 in cash. In early January 2002, Marathon paid $110 million to retire the 6.50% Preferred Stock.

In 1998, in conjunction with the acquisition of Tarragon Oil and Gas Limited, Marathon issued 878,074 Exchangeable Shares, which were exchangeable solely on a one-for-one basis into Common Stock. Holders of Exchangeable Shares were entitled to receive dividend payments equivalent to dividends declared on Common Stock. The Exchangeable Shares were exchangeable at any time at the option of holder, could be called for early redemption under certain circumstances and were automatically redeemable on August 11, 2003. The remaining outstanding Exchangeable Shares were redeemed early in exchange for Common Stock on August 11, 2001.

F-30

23. Supplemental Cash Flow Information

(In millions)	2003			2002			2001
Net cash provided from operating activities from continuing operations included:
Interest and other financing costs paid (net of amount capitalized)	$	254		$	258		$	165
Income taxes paid to taxing authorities		537			173			437
Income tax settlements paid to United States Steel		16			7			819
Commercial paper and revolving credit arrangements–net:
Commercial paper – issued	$	4,733		$	10,669		$	389
– repayments		(4,833	)		(10,569	)		(465	)
Credit agreements – borrowings		3			3,700			925
– repayments		(34	)		(4,175	)		(750	)
Ashland credit agreements – borrowings		182			266			112
– repayments		(182	)		(266	)		(112	)
Other credit arrangements – net		–			–			(150	)
Total	$	(131	)	$	(375	)	$	(51	)
Non cash investing and financing activities:
Common Stock issued for dividend reinvestment and employee stock plans	$	4		$	9		$	23
Common Stock issued for Exchangeable Shares		–			–			9
Capital expenditures for which payment has been deferred		–			–			29
Asset retirement costs capitalized		61			–			–
Liabilities assumed in connection with capital expenditures		–			10			–
Debt payments assumed by United States Steel		5			4			–
Capital lease obligations:
Asset acquired		41			–			–
Assumed by United States Steel		59			–			–
Disposal of assets:
Exchange of Steel Stock for net investment in United States Steel		–			–			1,615
Exchange of oil and gas producing properties for Powder River Basin assets		–			42
Notes received in asset disposal transactions		–			5			–
Liabilities assumed in acquisitions:
KMOC		107			–			–
Equatorial Guinea interests		–			179			–
Pennaco		–			–			309
Net assets contributed to joint ventures		42			–			571
Joint venture dissolution		212			–			–
Preferred stocks exchanged for debt		–			–			49
Liabilities assumed by buyer of discontinued operations		212			–			–

F-31

24. Pensions and Other Postretirement Benefits

The following summarizes the obligations and funded status for plans other than those sponsored by MAP:

	Pension Benefits										Other Benefits
	2003						2002				2003			2002
(In millions)	U.S.			Int’l			U.S.			Int’l(a)
Change in benefit obligations
Benefit obligations at January 1	$	455		$	156		$	430			$	433		$	374
Service cost		23			7			17				6			5
Interest cost		31			11			27				27			25
Plan amendment		–			–			–				(97	)		–
Actuarial losses		64			93			7				52			55
Curtailments		1			–			–				(4	)		–
Benefits paid		(34	)		(5	)		(26	)			(30	)		(26	)
Benefit obligations at December 31	$	540		$	262		$	455			$	387		$	433
Change in plan assets
Fair value of plan assets at January 1	$	413		$	104		$	502
Actual return on plan assets		81			32			(48	)
Employer contribution		–			8			–
Trustee distributions(b)		–			–			(18	)
Benefits paid from plan assets		(31	)		(5	)		(23	)
Fair value of plan assets at December 31	$	463		$	139		$	413
Funded status of plans at December 31(c)	$	(77	)	$	(123	)	$	(42	)	$(48)	$	(387	)	$	(433	)
Unrecognized net transition asset		(4	)		–			(6	)	–		–			–
Unrecognized prior service costs (benefits)		20			–			27		–		(81	)		(3	)
Unrecognized net losses		230			114			216		48		162			122
Prepaid (accrued) benefit cost	$	169		$	(9	)	$	195		$–	$	(306	)	$	(314	)
Amounts recognized in the statement of financial position:
Prepaid benefit cost	$	181		$	–		$	201		$–	$	–		$	–
Accrued benefit liability		(21	)		(93	)		(20	)	(32)		(306	)		(314	)
Accumulated other comprehensive income(d)		9			84			14		32		–			–
Prepaid (accrued) benefit cost	$	169		$	(9	)	$	195		$–	$	(306	)	$	(314	)

The accumulated benefit obligation for all defined benefit pension plans was $658 million and $488 million at December 31, 2003 and 2002, respectively. Other Benefits in the above table is not applicable to Marathon’s foreign subsidiaries.

^(a) The reconciliations of the change in benefit obligations and fair value of plan assets for 2002 were not available for the international plans. The benefit obligation and fair value of plan assets at December 31, 2002 were $156 million and $104 million, respectively.

(b) Represents transfers of excess pension assets to fund retiree health care benefits accounts under Section 420 of the Internal Revenue Code.

(c) Includes several plans that have accumulated benefit obligations in excess of plan assets:

	December 31
	2003					2002
	U.S.			Int’l		U.S.			Int’l
Projected benefit obligations	$	(35	)	(262	)	$	(26	)	$	(143	)
Accumulated benefit obligations		(21	)	(233	)		(19	)		(127	)
Fair value of plan assets		–		139			–			95

^(d) Excludes income tax effects.

F-32

The following summarizes the obligations and funded status for those plans sponsored by MAP:

	Pension Benefits						Other Benefits
(In millions)	2003			2002			2003			2002
Change in benefit obligations
Benefit obligations at January 1	$	831		$	727		$	295		$	216
Service cost		64			49			15			11
Interest cost		59			47			19			15
Actuarial losses		144			49			21			56
Benefits paid		(47	)		(41	)		(4	)		(3	)
Benefit obligations at December 31	$	1,051		$	831		$	346		$	295
Change in plan assets
Fair value of plan assets at January 1	$	356		$	440
Actual return on plan assets		75			(43	)
Employer contribution		89			–
Benefits paid from plan assets		(47	)		(41	)
Fair value of plan assets at December 31	$	473		$	356
Funded status of plans at December 31(a)		(578	)	$	(475	)	$	(346	)	$	(295	)
Unrecognized net transition asset		(3	)		(5	)		–			–
Unrecognized prior service costs (credits)		21			22			(33	)		(40	)
Unrecognized net losses		411			323			98			82
Accrued benefit cost	$	(149	)	$	(135	)	$	(281	)	$	(253	)
Amounts recognized in the statement of financial position:
Accrued benefit liability	$	(248	)	$	(197	)	$	(281	)	$	(253	)
Intangible asset		23			24			–			–
Accumulated other comprehensive loss(b)		76			38			–			–
Accrued benefit cost	$	(149	)	$	(135	)	$	(281	)	$	(253	)

The accumulated benefit obligation for all defined benefit pension plans was $721 million and $553 million at December 31, 2003 and 2002, respectively.

^(a) All MAP plans have accumulated benefit obligations in excess of plan assets:

	December 31
	2003			2002
Projected benefit obligations	$	(1,051	)	$	(831	)
Accumulated benefit obligations		(721	)		(553	)
Fair value of plan assets		473			356
(b)    Excludes the effects of minority interest and income taxes.

The following information disclosed thru page F-35 relates to the plans sponsored by Marathon and MAP.

	Pension Benefits												Other Benefits
	2003						2002			2001			2003			2002			2001
(In millions)	U.S.			Int’l
Components of net periodic benefit cost
Service cost	$	87		$	7		$	66		$	55		$	21		$	16		$	14
Interest cost		90			11			74			68			46			40			42
Expected return on plan assets		(84	)		(7	)		(100	)		(107	)		–			–			–
Amortization – net transition gain		(4	)		–			(4	)		(4	)		–			–			–
– prior service costs (credits)		5			–			5			5			(10	)		(8	)		(7	)
– actuarial loss		32			5			7			–			12			4			4
Multi-employer and other plans(a)		2			–			7			5			2			2			–
Curtailment and termination losses (gains)		6	(b)		1			–			3			(16	)(b)		–			–
Net periodic benefit cost(c)	$	134		$	17		$	55		$	25		$	55		$	54		$	53

^(a) International net periodic pension cost of $5 million and $3 million for years ending 2002 and 2001, respectively, were disclosed in the aggregate as other plans.

^(b) Includes business transformation costs.

^(c) Includes MAP’s net periodic pension cost of $106 million, $54 million, $38 million and other benefits cost of $34 million, $23 million and $17 million for 2003, 2002, and 2001 respectively.

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	Pension Benefits												Other Benefits
	2003				2002				2001				2003	2002	2001
	U.S.		Int’l		U.S.		Int’l		U.S.		Int’l
Increase in minimum liability included in other comprehensive income, excluding tax effects and minority interest	$	33	$	52	$	31	$	32	$	4	$	–	N/A	N/A	N/A

Plan Assumptions

	Pension Benefits												Other Benefits
	2003				2002				2001				2003		2002		2001
	U.S.		Int’l		U.S.		Int’l		U.S.		Int’l
Weighted-average assumptions used to determine benefit obligation at December 31:
Discount Rate	6.25	%	5.40	%	6.50	%	6.75	%	7.00	%	6.00	%	6.25	%	6.50	%	7.00	%
Rate of compensation increase	4.50	%	4.50	%	4.50	%	4.25	%	5.00	%	4.50	%	4.50	%	4.50	%	5.00	%
Weighted average actuarial assumptions used to determine net periodic benefit cost for years ended December 31:
Discount rate	6.50	%	5.50	%	7.00	%	6.00	%	7.50	%	6.00	%	6.50	%	7.00	%	7.50	%
Expected long-term return on plan assets	9.00	%	7.00	%	9.50	%	7.52	%	9.50	%	6.85	%	N/A		N/A		N/A
Rate of compensation increase	4.50	%	4.25	%	5.00	%	4.50	%	5.00	%	4.50	%	4.50	%	5.00	%	5.00	%

Expected Long-Term Return on Plan Assets

U.S. Plans

Historical markets are studied and long-term historical relationships between equities and fixed income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Certain components of the asset mix are modeled with various assumptions regarding inflation, debt returns and stock yields. Peer data and historical returns are reviewed to check for reasonability and appropriateness.

International Plans

The overall expected long-term return on plan assets is derived as the weighted average of the expected returns on the different asset classes, weighted by holdings as of year end. The long term rate of return on equity investments is assumed to be 2.5% greater than the yield on local government stock. Expected returns on debt securities are taken directly at market yields and cash is taken at the local currency base rate.

Assumed health care cost trend rates at December 31:

	2003		2002
Health care cost trend rate assumed for next year	9.5	%	10.0	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	5	%	5	%
Year that the rate reaches the ultimate trend rate	2012		2012

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan.

A one-percentage-point change in assumed health care cost trend rates would have the following effects:

(In millions)	1-Percentage- Point Increase		1-Percentage- Point Decrease
Effect on total of service and interest cost components	$	12	$	(9	)
Effect on other postretirement benefit obligations		104		(84	)

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Plan Assets

The pension plans weighted-average asset allocations at December 2003 and 2002, by asset category are as follows:

	Plan Assets at December 31
	2003				2002
Asset Category	U.S.		Int’l		U.S.		Int’l
Equity securities	77	%	76	%	77	%	73	%
Debt securities	22	%	23	%	22	%	24	%
Real estate	1	%	–		1	%	1	%
Other	–		1	%	–		2	%
Total	100	%	100	%	100	%	100	%

Plan Investment Policies and Strategies

U.S. Plans

The investment policy reflects the funded status of the plan and the future ability of the Company to make further contributions. Historical performance results and future expectations suggest that common stocks will provide higher total investment returns than fixed-income securities over a long-term investment horizon. As a result, equity investments will likely continue to exceed 50% of the value of the fund. Accordingly, bond and other fixed income investments will comprise the remainder of the fund. Short term investments shall reflect the liquidity requirements for making pension payments. Management of the plans’ assets is delegated to the United States Steel and Carnegie Pension Fund. Investments are diversified by industry and type, limited by grade and maturity. The policy prohibits investments in any securities in the steel industry and allows derivatives subject to strict guidelines. Investment performance and risk is measured and monitored on an ongoing basis through quarterly investment meetings and periodic asset and liability studies.

International Plans

The investment policy is guided by the objective of achieving over the long-term a return on the investments which is consistent with assumptions made by the actuary in determining the funding requirements of the plans. The target asset allocation of 70% equities, 25% debt securities and 5% cash and the unitized pool approach meets this objective and controls and various risks to which the plans’ assets are exposed including matching the timing of estimated future obligations to the maturities of the plans’ assets. The day-to-day management of the plans’ assets are delegated to several professional investment managers. The spread of assets by type and the investment managers’ policies on investing in individual securities within each type provides adequate diversification of investments. The use of derivatives by the investment managers is permitted and plan specific, subject to strict guidelines. Investment performance and risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews and periodic asset and liability studies.

Cash Flows

Contributions

MAP, and Marathon’s foreign subsidiaries expect to contribute approximately $93 million and $22 million to the funded pension plans in 2004. Marathon is not required to make a cash contribution to the funded domestic pension plan in 2004. Cash contributions that are expected to be paid from the general assets of the company for both the unfunded pension and postretirement benefit plans are expected to be approximately $2 million and $35 million, respectively in 2004.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

	Pension Benefits						Other Benefits
	U.S.				Int’l
	MOC		MAP				MOC		MAP
2004(a)	$	27	$	36	$	5	$	27	$	8
2005		28		45		5		29		9
2006		28		48		5		29		11
2007		30		56		5		26		13
2008		33		59		6		26		15
Years 2009-2013		203		394		32		139		123

^(a) Excludes the potential payments relating to business transformation.

Marathon also contributes to several defined contribution plans for eligible employees. Contributions to these plans, which for the most part are based on a percentage of the employees’ salary, totaled $37 million in 2003, $37 million in 2002 and $35 million in 2001.

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25. Stock-Based Compensation Plans

The following is a summary of stock option activity:

	Shares		Price(a)
Balance December 31, 2000	6,113,620		26.50
Granted	1,642,395		32.52
Exercised	(961,480	)	21.70
Canceled	(64,430	)	30.11
Balance December 31, 2001	6,730,105		28.62
Granted	1,763,500		28.12
Exercised	(242,155	)	27.58
Canceled	(186,840	)	24.50
Balance December 31, 2002	8,064,610		28.70
Granted	1,729,800		25.58
Exercised	(642,265	)	24.48
Canceled	(145,765	)	30.27
Balance December 31, 2003(b)	9,006,380		28.33

^(a) Weighted-average exercise price.

^(b) Of the options outstanding as of December 31, 2003, 1,715,200 and 7,291,180 were outstanding under the 2003 Incentive Compensation Plan and 1990 Stock Plan, respectively.

The following table represents stock options at December 31, 2003:

	Outstanding					Exercisable
Range of Exercise Prices	Number of Shares Under Option	Weighted-Average Remaining Contractual Life		Weighted-Average Exercise Price		Number of Shares Under Option	Weighted-Average Exercise Price
$17.00 – 23.41	644,700	3.8	years	$	21.88	444,700	$	21.19
25.50 – 26.91	2,866,400	8.2			25.54	1,166,200		25.55
28.12 – 34.00	5,495,280	6.5			30.62	5,480,280		30.62
Total	9,006,380	6.9			28.33	7,091,180		25.37

The following table presents information on restricted stock grants:

	2003		2002		2001
2003 Incentive Compensation Plan:(a)
Number of shares granted		293,710		–		–
Weighted-average grant-date fair value per share	$	26.01	$	–	$	–
1990 Stock Plan:(b)
Number of shares granted		39,960		170,028		205,346
Weighted-average grant-date fair value per share	$	25.52	$	27.84	$	31.30
Non Officers’ plan:(c)
Number of shares granted		–		332,210		541,808
Weighted-average grant-date fair value per share	$	–	$	24.27	$	29.36
Special Restricted Stock Program:(d)
Number of shares granted		–		93,730		–
Weighted-average grant-date fair value per share	$	–	$	27.77	$	–

^(a) Of the shares granted under the 2003 Incentive Compensation Plan, none have vested and 38,700 have been cancelled or forfeited. In addition to the shares, 810 restricted stock units have been granted to international participants under the plan. Thus, as of December 31, 2003, 255,010 shares and 810 units were outstanding under the plan.

^(b) Of the shares granted under the 1990 Stock Plan, 389,793 have vested and 287,166 have been cancelled or forfeited. Thus, as of December 31, 2003, 148,400 shares were outstanding under the plan.

^(c) Of the shares granted under the Non-Officer Plan since 2001, 255,208 have vested and 84,816 have been cancelled or forfeited. In addition to the shares, 73,390 restricted stock units have been granted to international participants under the plan, none have vested and 9,180 have been cancelled or forfeited. Thus, as of December 31, 2003, 533,994 shares and 64,210 units were outstanding under the plan.

^(d) Of the shares granted under the Special Restricted Stock Program, 5,960 shares have been cancelled or forfeited. In addition to the shares, 6,360 restricted stock units were granted to international participants pursuant to this program. All shares and units granted under the program vested on January 23, 2003, and no additional shares will be granted.

F-36

Marathon maintains an equity compensation program for its non-employee directors under the Plan. Pursuant to the program, non-employee directors must defer 50% of their annual retainers in the form of common stock units. In addition, the program provides each non-employee director with a matching grant of up to 1,000 shares of common stock upon his or her initial election to the board if he or she purchases an equivalent number of shares within 60 days of joining the board. Common stock units are book entry units equal in value to a share of stock. During 2003, 15,799 shares of stock were issued; during 2002, 14,472 shares of stock were issued and during 2001, 12,358 shares of stock were issued.

26. Stockholder Rights Plan

In 2002, the Marathon’s stockholder rights plan (the Rights Plan), was amended due to the Separation. In January 2003, the expiration date of the Rights Plan was accelerated to January 31, 2003.

27. Leases

Marathon leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. Future minimum commitments for capital lease obligations (including sale-leasebacks accounted for as financings) and for operating lease obligations having remaining noncancelable lease terms in excess of one year are as follows:

(In millions)	Capital Lease Obligations		Operating Lease Obligations
2004	$	29	$	108
2005		20		80
2006		26		67
2007		34		38
2008		26		31
Later years		127		131
Sublease rentals		–		(77	)
Total minimum lease payments		262	$	378
Less imputed interest costs		81
Present value of net minimum lease payments included in long-term debt	$	181

In connection with past sales of various plants and operations, Marathon assigned and the purchasers assumed certain leases of major equipment used in the divested plants and operations of United States Steel. In the event of a default by any of the purchasers, United States Steel has assumed these obligations; however, Marathon remains primarily obligated for payments under these leases. Minimum lease payments under these operating lease obligations of $54 million have been included above and an equal amount has been reported as sublease rentals.

Of the $181 million present value of net minimum capital lease payments, $135 million was related to obligations assumed by United States Steel under the Financial Matters Agreement. Of the $378 million total minimum operating lease payments, $18 million was assumed by United States Steel under the Financial Matters Agreement.

During 2003, Marathon purchased two LNG tankers to transport LNG primarily from Kenai, Alaska to Tokyo, Japan which were previously leased. A $17 million charge was recorded on the termination of the two tanker operating leases.

Operating lease rental expense was:

(In millions)	2003			2002			2001
Minimum rental	$	182	(a)	$	196	(a)	$	159
Contingent rental		15			13			13
Sublease rentals		(9	)		(11	)		(11	)
Net rental expense	$	188		$	198		$	161

^(a) Excludes $23 million and $24 million paid by United States Steel in 2003 and 2002 on assumed leases.

F-37

28. Contingencies and Commitments

Marathon is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to Marathon’s consolidated financial statements. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.

Environmental matters – Marathon is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 2003 and 2002, accrued liabilities for remediation totaled $117 million and $84 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $86 million and $72 million at December 31, 2003 and 2002, respectively.

On May 11, 2001, MAP entered into a consent decree with the U.S. Environmental Protection Agency which commits it to complete certain agreed upon environmental projects over an eight-year period primarily aimed at reducing air emissions at its seven refineries. The court approved this consent decree on August 28, 2001. The total one-time expenditures for these environmental projects is approximately $330 million over the eight-year period, with about $170 million incurred through December 31, 2003. In addition, MAP has nearly completed certain agreed upon supplemental environmental projects as part of this settlement of an enforcement action for alleged Clean Air Act violations, at a cost of $9 million. MAP believes that this settlement will provide MAP with increased permitting and operating flexibility while achieving significant emission reductions.

Guarantees – Marathon and MAP have issued the following guarantees:

(In millions)	Term	Maximum Potential Undiscounted Payments as of December 31, 2003(m)
Indebtedness of equity investees:
LOCAP commercial paper(a)	Perpetual-Loan Balance Varies	$	23
LOOP Series 1991A Notes(a)	2008		7
LOOP Series 1992A Notes(a)	2008		34
LOOP Series 1992B Notes(a)	2004		9
LOOP Series 1997 Notes(a)	2017		13
LOOP revolving credit agreement(a)	Perpetual-Loan Balance Varies		25
LOOP Series 2003(a)	2004-2023		81
Centennial Pipeline Notes(b)	2008-2024		70
Centennial Pipeline revolving credit agreement(b)	2004-Loan Balance Varies		5
Miscellaneous	Varies		2
Other:
United States Steel/PRO-TEC Coating Company (c)	2004-2008		14
United States Steel/Clairton 1314B(c)	2004-2012		610
Centennial Pipeline catastrophic event(d)	Indefinite		50
Alliance Pipeline(e)	2004-2015		67
Kenai Kochemak Pipeline LLC(f)	2004-2017		15
Pilot Travel Centers Surety Bonds(g)	(g)		10
Corporate assets(h)	(h)		14
Canada(i)	Indefinite		568
Globex(j)	2004-2006		16
Yates(k)	Indefinite		228
Mobile transportation equipment leases(l)	2004-2008		7
Miscellaneous	Varies		5

^(a) Marathon holds interests in an offshore oil port, LOOP LLC (“LOOP”), and a crude oil pipeline system, LOCAP LLC (“LOCAP”). Both LOOP and LOCAP have secured various project financings with throughput and deficiency (“T&D”) agreements. A T&D agreement creates a potential obligation to advance funds in the event of a cash shortfall. When these rights are assigned to a lender to secure financing, the T&D is considered to be an indirect guarantee of indebtedness. Under the agreements, Marathon is required to advance funds if the investees are unable to service debt. Any such advances are considered prepayments of future transportation charges. The terms of the agreements vary but tend to follow the terms of the underlying debt. In April 2003, LOOP refinanced $81 million for certain of its series of outstanding bonds subject to these T&D agreements. The refinancing consisted of changes to maturity dates, as well as interest rates. Although certain series were paid down and new series issued, the total principal outstanding changed by only $2 million. Assuming non-payment by the investees, the maximum potential amount of future payments under the guarantees is estimated to be $193 million and $197

F-38

million at December 31, 2003 and 2002, respectively. Included in these amounts is a LOOP revolving credit facility of $25 million at December 31, 2003 and 2002, and a LOCAP revolving credit facility of $20 million and $25 million at December 31, 2003 and 2002, respectively. The undrawn portion of the revolving credit facilities is $35 million and $28 million as of December 31, 2003 and 2002, respectively.

^(b) MAP holds an interest in a refined products pipeline, Centennial Pipeline LLC (“Centennial”), and has guaranteed the repayment of Centennial’s outstanding balance under a Master Shelf Agreement and Revolver, which expires in 2024. The guarantee arose in order to obtain adequate financing. Prior to expiration of the guarantee, MAP could be relinquished from responsibility under the guarantee should Centennial meet certain financial tests. If Centennial defaults on its outstanding balance, the estimated maximum potential amount of future payments is $75 million at December 31, 2003 and 2002.

^(c) Marathon has guaranteed United States Steel’s contingent obligation to repay certain distributions from its 50 percent-owned joint venture, PRO-TEC Coating Company (“PRO-TEC”). Should PRO-TEC default under its agreements and should United States Steel be unable to perform under its guarantee, Marathon is required to perform on behalf of United States Steel. The maximum potential payout is estimated at $14 million and $18 million at December 31, 2003 and 2002, respectively. Additionally, United States Steel is the sole general partner of Clairton 1314B Partnership, L.P., which owns certain cokemaking facilities formerly owned by United States Steel. Marathon has guaranteed to the limited partners all obligations of United States Steel under the partnership documents. In addition to the commitment to fund operating cash shortfalls of the partnership discussed in Note 3, United States Steel, under certain circumstances, is required to indemnify the limited partners if the partnership product sales fail to qualify for the credit under Section 29 of the Internal Revenue Code. United States Steel has estimated the maximum potential amount of this indemnity obligation at December 31, 2003, including interest and tax gross-up, is approximately $610 million. Furthermore, United States Steel under certain circumstances has indemnified the partnership for environmental obligations. The maximum potential amount of this indemnity obligation is not estimable.

^(d) The agreement between Centennial and its members allows each member to contribute cash in lieu of Centennial procuring separate insurance in the event of third-party liability arising from a catastrophic event. There is an indefinite term for the agreement and each member is to contribute cash in proportion to its ownership interest, up to a maximum amount of $50 million and $33 million at December 31, 2003 and 2002, respectively. In February 2003, Marathon’s ownership interest in Centennial increased from 33% to 50%. As a result of this modification to the Centennial catastrophic event guarantee, MAP recorded a $4 million obligation during 2003.

^(e) Marathon is a party to a long-term transportation services agreement with Alliance Pipeline L.P. (“Alliance”). The agreement requires Marathon to pay minimum annual charges of approximately $5 million through 2015. The payments are required even if the transportation facility is not utilized. As this contract has been used by Alliance to secure its financing, the arrangement qualifies as an indirect guarantee of indebtedness. This agreement runs through 2015 and has a maximum potential payout of $67 million and $70 million at December 31, 2003 and 2002, respectively. As a result of the Canadian sale discussed below, Husky Oil Operations Limited (“Husky”) has indemnified Marathon for any claims related to these guarantees.

^(f) Kenai Kachemak Pipeline LLC (“KKPL”) was organized in late 2002. Marathon is an equity investor in KKPL, holding a 60%, noncontrolling interest. In April 2003, Marathon guaranteed KKPL’s performance to properly construct, operate, maintain and abandon the pipeline in accordance with the Alaska Pipeline Act and the Right of Way Lease Agreement with the State of Alaska. The major obligations covered under the guarantee include maintaining the right-of-way, satisfying any liabilities caused by operation of the pipeline, and providing for the abandonment costs. Obligations that could arise under the guarantee would vary according to the circumstances triggering payment but the maximum potential payment is estimated at $15 million at Dec. 31, 2003.

^(g) Marathon has engaged in a general agreement of indemnity with a surety bond provider for the execution of all surety bonds and has executed certain of these bonds on behalf of Pilot Travel Centers LLC (“PTC”). In the event of a demand on a bond by an obligee, Marathon is required to repay the surety bond provider. The bonds issued have been placed mainly for tax liability, licenses for liquor and lottery, workers’ compensation self-insurance, utility services, and for underground storage tank financial responsibility. Most surety bonds carry a one-year term, renewable annually, though a few bonds are for longer than a year. Accordingly, the maximum potential payment associated with these bonds continues to decrease as more bonds are cancelled and replaced with PTC’s own surety bond provider. Should Marathon have to pay any amounts under the remaining surety bonds, the PTC LLC agreement provides that each partner will bear their proportionate share of any amounts paid. As of December 31, 2003 and 2002, the maximum potential amount of future payment under the guarantee is estimated to be $10 million and $43 million, respectively.

^(h) Marathon provides a guarantee of the residual value of certain leased corporate assets.

⁽ⁱ⁾ In conjunction with the sale of certain Canadian assets to Husky during 2003, Marathon guaranteed Husky with regards to unknown environmental obligations and inaccuracies in representations, warranties, covenants and agreements by Marathon. These indemnifications are part of the normal course of doing business and selling assets. Per the Purchase and Sale agreement, the maximum potential amount of future payments associated with these guarantees is $568 million.

^(j) During 2003 Marathon also sold certain assets associated with its interest in Globex Far East Pty, Ltd. Marathon indemnified the purchaser from unknown environmental liabilities and inaccuracies by Marathon in representations, warranties, covenants and agreements. The maximum potential amount of future payments under the guarantees of $16 million is specified in the Purchase and Sale agreement. The term of this guarantee is three years.

^(k) As discussed in Note 14, Marathon sold its interest in the Yates field and gathering system to Kinder Morgan. In accordance with this transaction, Marathon indemnified Kinder Morgan from inaccuracies in Marathon’s representations, warranties, covenants and agreement. There is not a specified term on these guarantees and the maximum potential amount of future cash payments is estimated at $228 million.

^(l) These leases contain terminal rental adjustment clauses which provide that MAP will indemnify the lessor to the extent that the proceeds from the sale of the asset at the end of the lease falls short of the specified minimum percent of original value.

^(m) $325 million represents guarantees made by MAP and $35 million represents the undrawn portion of revolving credit facilities.

F-39

Contract commitments – At December 31, 2003 and 2002, Marathon’s contract commitments to acquire property, plant and equipment totaled $565 million and $443 million, respectively.

Commitments to extend credit – In May 2002, Marathon signed a Participation Agreement with Syntroleum in connection with the ultra-clean fuels production and demonstration project sponsored by the U.S. Department of Energy. In connection with this project, Marathon agreed to provide funding pursuant to a $21 million secured promissory note between Marathon and Syntroleum. The promissory note will bear interest at a rate of 8% per year. The promissory note is secured by a mortgage and security agreement in the assets of the project. In the event of a default by Syntroleum, the mortgage and security agreement provides Marathon access for project completion. As of December 31, 2003, Marathon had advanced Syntroleum $21 million under this commitment.

Put/call agreements – In connection with the 1998 formation of MAP, Marathon and Ashland entered into a Put/Call, Registration Rights and Standstill Agreement (the Put/Call Agreement). The Put/Call Agreement provides that at any time after December 31, 2004, Ashland will have the right to sell to Marathon all of Ashland’s ownership interest in MAP, for an amount in cash and/or Marathon debt or equity securities equal to the product of 85% (90% if equity securities are used) of the fair market value of MAP at that time, multiplied by Ashland’s percentage interest in MAP. Payment could be made at closing, or at Marathon’s option, in three equal annual installments, the first of which would be payable at closing. At any time after December 31, 2004, Marathon will have the right to purchase all of Ashland’s ownership interests in MAP, for an amount in cash equal to the product of 115% of the fair market value of MAP at that time, multiplied by Ashland’s percentage interest in MAP.

As part of the formation of PTC, MAP and Pilot Corporation (Pilot) entered into a Put/Call and Registration Rights Agreement (Agreement). The Agreement provides that any time after September 1, 2008, Pilot will have the right to sell its interest in PTC to MAP for an amount of cash and/or Marathon, MAP or Ashland equity securities equal to the product of 90% (95% if paid in securities) of the fair market value of PTC at the time multiplied by Pilot’s percentage interest in PTC. At any time after September 1, 2011, under certain conditions, MAP will have the right to purchase Pilot’s interest in PTC for an amount of cash and/or Marathon, MAP or Ashland equity securities equal to the product of 105% (110% if paid in securities) of the fair market value of PTC at the time multiplied by Pilot’s percentage interest in PTC.

29. Accounting Standards Not Yet Adopted

An issue currently on the EITF agenda, Issue No. 03-S “Applicability of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Oil and Gas Companies,” will address how oil and gas companies should classify the costs of acquiring contractual mineral interests in oil and gas properties on the balance sheet. The EITF is considering an alternative interpretation of Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets” that mineral or drilling rights or leases, concessions or other interests representing the right to extract oil or gas should be classified as intangible assets rather than oil and gas properties. Management believes that our current balance sheet classification for these costs is appropriate under generally accepted accounting principles. If a reclassification is ultimately required, the estimated amount of the leasehold acquisition costs to be reclassified would be $2.3 billion and $2.4 billion at December 31, 2003 and 2002. Should such a change be required, there would be no impact on our previously filed income statements (or reported net income), statements of cash flow or statements of stockholders’ equity for prior periods. Additional disclosures related to intangible assets would also be required.

F-40

EX-99.2

Exhibit 99.2

Marathon Oil Corporation

Supplemental Statistics (Unaudited)

2003

(Dollars in Millions)	Quarter Ended March 31			Quarter Ended June 30			Quarter Ended Sept. 30			Quarter Ended Dec. 31			Year Ended Dec. 31
Income From Operations
Exploration and production
Domestic	$	361		$	244		$	301		$	249		$	1,155
International		154			68			47			90			359
E&P segment income		515			312			348			339			1,514
Refining, marketing, and transportation		70			258			394			97			819
Integrated gas		2			27			(22	)		(10	)		(3	)
Segment income		587			597			720			426			2,330
Items not allocated to segments		(40	)		(71	)		(62	)		(73	)		(246	)
Income from Operations	$	547		$	526		$	658		$	353		$	2,084
Capital Expenditures
Exploration and Production	$	217		$	297		$	233		$	226		$	973
Refining, Marketing and Transportation		131			157			197			287			772
Integrated Gas		8			14			13			96			131
Corporate		1			1			3			11			16
Total	$	357		$	469		$	446		$	620		$	1,892