Table	of	Contents

# UNITED	STATES	SECURITIES	AND	EXCHANGE	COMMISSION

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

# For	the	Fiscal	Year	Ended	December	31,	2003

Commission	file	number	1-5153

# Marathon	Oil	Corporation

(Exact	name	of	registrant	as	specified	in	its	charter)

(State	of	Incorporation)

# Common	Stock,	par	value	$1.00

(I.R.S.	Employer	Identification	No.)

(Address	of	principal	executive	offices)

# Securities	registered	pursuant	to	Section	12	(b)	of	the	Act:*

# Title	of	Each	Class

Rights	to	Purchase	Series	A	Junior	Preferred	Stock	(Traded	with	Common

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

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	(§229.405	of	this	chapter)	is	not	contained	herein,	and	will	not be	contained,	to	the	best	of	registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or

any	amendment	to	this	Form	10-K.	þ

Indicate	by	check	mark	whether	the	registrant	is	an	accelerated	filer	(as	defined	in	Rule	12b-2	of	the	Act).	Yes		þ	No		¨

Aggregate	market	value	of	Common	Stock	held	by	non-affiliates	as	of	June	30,	2003:	$8	billion.	The	amount	shown	is	based	on	the	closing	price	of	the registrant's	Common	Stock	on	the	New	York	Stock	Exchange	composite	tape	on	that	date.	Shares	of	Common	Stock	held	by	executive	officers	and	directors	of the	registrant	are	not	included	in	the	computation.	However,	the	registrant	has	made	no	determination	that	such	individuals	are	"affiliates"	within	the meaning	of	Rule	405	under	the	Securities	Act	of	1933.

There	were	310,648,972	shares	of	Marathon	Oil	Corporation	Common	Stock	outstanding	as	of	January	31,	2004.

# Documents	Incorporated	By	Reference:

Portions	of	the	registrant's	proxy	statement	relating	to	its	2004	annual	meeting	of	stockholders,	to	be	filed	with	the	Securities	and	Exchange	Commission pursuant	to	Regulation	14A	under	the	Securities	Exchange	Act	of	1934,	are	incorporated	by	reference	to	the	extent	set	forth	in	Part	III,	Items	10-14	of	this report.

	* 	 The	Common	Stock	is	listed	on	the	New	York	Stock	Exchange,	the	Chicago	Stock	Exchange	and	the	Pacific	Stock	Exchange.

** 	 The	Preferred	Stock	Purchase	Rights	expired	on	January	31,	2003,	pursuant	to	the	terms	of	the	Rights	Agreement,	as	amended	through	January	29,	2003, between	Marathon	Oil	Corporation	and	National	City	Bank,	as	rights	agent.

Unless	the	context	otherwise	indicates,	references	in	this	Form	10-K	to	"Marathon,"	"we,"	or	"us"	are	references	to	Marathon	Oil	Corporation,	its	wholly	owned and	majority	owned	subsidiaries,	and	its	ownership	interest	in	equity	investees	(corporate	entities,	partnerships,	limited	liability	companies	and	other	ventures,	in	which Marathon	exerts	significant	influence	by	virtue	of	its	ownership	interest,	typically	between	20	and	50	percent).

# PART	II

# PART	III

# Disclosures	Regarding	Forward-Looking	Statements

This	annual	report	on	Form	10-K,	particularly	Item	1.	and	Item	2.	Business	and	Properties,	Item	3.	Legal	Proceedings,	Item	7.	Management's	Discussion	and Analysis	of	Financial	Condition	and	Results	of	Operations	and	Item	7A.	Quantitative	and	Qualitative	Disclosures	About	Market	Risk,	includes	forward-looking statements	within	the	meaning	of	Section	27A	of	the	Securities	Act	of	1933	and	Section	21E	of	the	Securities	Exchange	Act	of	1934.	These	statements	typically	contain words	such	as	"anticipates",	"believes",	"estimates",	"expects",	"forecasts",	"plans",	"predicts"	or	"projects"	or	variations	of	these	words,	suggesting	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,	that	could	cause	future	outcomes	to	differ	materially	from	those	set	forth	in	the forward-looking	statements.

Forward-looking	statements	with	respect	to	Marathon	may	include,	but	are	not	limited	to,	levels	of	revenues,	gross	margins,	income	from	operations,	net	income	or earnings	per	share;	levels	of	capital,	exploration,	environmental	or	maintenance	expenditures;	the	success	or	timing	of	completion	of	ongoing	or	anticipated	capital, exploration	or	maintenance	projects;	volumes	of	production,	sales,	throughput	or	shipments	of	liquid	hydrocarbons,	natural	gas	and	refined	products;	levels	of worldwide	prices	of	liquid	hydrocarbons,	natural	gas	and	refined	products;	levels	of	reserves,	proved	or	otherwise,	of	liquid	hydrocarbons	or	natural	gas;	the	acquisition or	divestiture	of	assets;	the	effect	of	restructuring	or	reorganization	of	business	components;	the	potential	effect	of	judicial	proceedings	on	the	business	and	financial condition;	and	the	anticipated	effects	of	actions	of	third	parties	such	as	competitors,	or	federal,	state	or	local	regulatory	authorities.

# PART	I

# Item	1.	and	2.	Business	and	Properties

# General

Marathon	Oil	Corporation	was	originally	organized	in	2001	as	USX	HoldCo,	Inc.,	a	wholly	owned	subsidiary	of	old	USX	Corporation.	As	a	result	of	a reorganization	completed	in	July	2001	(the	"Holding	Company	Reorganization"),	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.

Before	December	31,	2001,	Marathon	had	two	outstanding	classes	of	common	stock:	USX-Marathon	Group	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.	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's	principal	operating	subsidiaries	are	Marathon	Oil	Company	and	Marathon	Ashland	Petroleum	LLC	("MAP").	Marathon	Oil	Company	and	its predecessors	have	been	engaged	in	the	oil	and	gas	business	since	1887.	MAP	is	62-percent	owned	by	Marathon	and	38-percent	owned	by	Ashland	Inc.

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	MAP;	and	other	energy	related	businesses.

# Operating	Highlights

•	 Realized	continued	exploration	success	with	nine	discoveries	offshore	Angola,	Norway,	Gulf	of	Mexico,	and	Equatorial	Guinea.

•	 Maintained	financial	discipline	and	flexibility:

•	 Completed	non-core	asset	rationalization	program	generating	proceeds	over	$1.2	billion;

•Initiated	business	transformation	with	projected	annual	savings	of	$135	million	starting	in	2004;

•	 Lowered	the	cash	adjusted	debt-to-capital	ratio	to	33	percent	at	year-end;	and

•Increased	the	quarterly	dividend	from	23	to	25	cents	per	share.

•	 Established	and	strengthened	core	areas:

•	 Achieved	2003	reserve	replacement	of	124	percent	excluding	dispositions;

•	 Established	core	growth	area	in	Russia	with	the	acquisition	of	Khanty	Mansiysk	Oil	Corporation	("KMOC");

•Initiated	production	from	Equatorial	Guinea	Phase	2A	condensate	expansion	project	and	continued	progress	on	Phase	2B	liquefied	petroleum	gas ("LPG")	expansion;	and

•	 Acquired	interests	in	three	additional	Norwegian	production	licenses.

•	 Advanced	integrated	gas	strategy:

•	 Signed	heads	of	agreement	with	Equatorial	Guinea	government	and	GEPetrol	covering	fiscal	terms	of	a	proposed	liquefied	natural	gas	("LNG")	project in	Equatorial	Guinea;

•	 Signed	letter	of	understanding	with	BG	Group	for	long-term	LNG	offtake	agreement	for	proposed	LNG	project	in	Equatorial	Guinea;	and

•	 Signed	statement	of	intent	with	Qatar	Petroleum	to	study	a	gas-to-liquids	("GTL"),	LPG,	and	condensate	project	in	Qatar.

•	 Strengthened	MAP:

•	 Commenced	an	expansion	project	to	increase	the	capacity	of	the	Detroit,	Michigan	refinery	by	26,000	barrels	per	day;

•	 Neared	completion	of	Catlettsburg,	Kentucky	refinery	repositioning	project;

•Increased	refinery	efficiencies	and	feedstock	throughputs	at	Garyville,	Louisiana	and	Texas	City,	Texas;

•	 Enhanced	logistics	network	with	the	acquisition	of	an	additional	interest	in	the	Centennial	Pipeline	and	start-up	of	the	Cardinal	Products	Pipeline;	and •	 Pilot	Travel	Centers	acquired	60	Williams	travel	centers.

# Segment	and	Geographic	Information

For	operating	segment	and	geographic	information,	see	Note	8	to	the	Consolidated	Financial	Statements	on	page	F-20.

# Exploration	and	Production

Marathon	is	currently	conducting	exploration	and	development	activities	in	nine	countries.	Principal	exploration	activities	are	in	the	United	States,	Norway, Equatorial	Guinea,	Angola,	and	Canada.	Principal	development	activities	are	in	the	United	States,	the	United	Kingdom,	Ireland,	Norway,	Equatorial	Guinea,	Gabon,	and Russia.	Marathon	is	also	pursuing	opportunities	in	north	and	west	Africa	and	the	Middle	East.

At	year-end	2003,	Marathon	was	producing	crude	oil	and/or	natural	gas	in	seven	countries,	including	the	United	States.	Marathon's	worldwide	liquid	hydrocarbon production,	including	Marathon's	proportionate	share	of	equity	investees'	production,	decreased	six	percent	from	2002	levels.	Marathon's	2003	worldwide	sales	of natural	gas	production,	including	Marathon's	proportionate	share	of	equity	investees'	production	and	gas	acquired	for	injection	and	subsequent	resale,	decreased approximately	five	percent	from	2002.	In	total,	Marathon's	2003	worldwide	production	averaged	389,000	barrels	of	oil	equivalent	("BOE")	per	day,	including discontinued	operations	and	impacts	of	acquisitions	and	dispositions,	compared	to	412,000	BOE	per	day	in	2002.	In	2004,	Marathon's	worldwide	production	is	expected to	average	365,000	BOE	per	day,	excluding	acquisitions	and	dispositions.

The	above	projection	of	2004	worldwide	liquid	hydrocarbon	production	and	natural	gas	volumes	is	a	forward-looking	statement.	Some	factors	that	could potentially	affect	timing	and	levels	of	production	include	pricing,	supply

and	demand	for	petroleum	products,	amount	of	capital	available	for	exploration	and	development,	regulatory	constraints,	production	decline	rates	of	mature	fields, timing	of	commencing	production	from	new	wells,	drilling	rig	availability,	future	acquisitions	or	dispositions	of	producing	properties,	unforeseen	hazards	such	as weather	conditions,	acts	of	war	or	terrorist	acts	and	the	government	or	military	response	thereto,	and	other	geological,	operating	and	economic	considerations.	These factors	(among	others)	could	cause	actual	results	to	differ	materially	from	those	set	forth	in	the	forward-looking	statement.

# United	States

Including	Marathon's	proportionate	share	of	equity	investee	production,	approximately	57	percent	of	Marathon's	2003	worldwide	liquid	hydrocarbon	production and	63	percent	of	its	worldwide	natural	gas	production	was	produced	from	U.S.	operations.	Marathon's	ongoing	U.S.	strategy	is	to	apply	its	technical	expertise	in	fields with	undeveloped	potential,	to	dispose	of	interests	in	non-core	properties	with	limited	upside	potential	and	high	production	costs,	and	to	acquire	interests	in	properties with	upside	potential.

During	2003,	Marathon	drilled	21	gross	(11	net)	exploratory	wells	of	which	15	gross	(9	net)	wells	encountered	hydrocarbons.	Of	these	15	wells,	3	gross	(2	net) wells	were	temporarily	suspended	or	are	in	the	process	of	completing.

Marathon's	principal	U.S.	exploration,	development,	and	producing	areas	are	located	in	the	Gulf	of	Mexico	and	the	states	of	Texas,	New	Mexico,	Alaska, Wyoming,	and	Oklahoma.

# U.S.	Southern	Business	Unit

Gulf	of	Mexico	–	During	2003,	Marathon's	share	of	Gulf	of	Mexico	production	averaged	53,500	barrels	per	day	("bpd")	of	liquid	hydrocarbons,	representing	48 percent	of	Marathon's	total	U.S.	liquid	hydrocarbon	production,	and	135	million	cubic	feet	per	day	("mmcfd")	of	natural	gas,	representing	18	percent	of	Marathon's	total U.S.	natural	gas	production.	Liquid	hydrocarbon	production	decreased	by	9,000	net	bpd	and	natural	gas	production	increased	by	32	net	mmcfd	from	the	prior	year.	The decrease	in	liquid	hydrocarbon	production	is	mainly	due	to	natural	field	decline.	The	increase	in	natural	gas	production	is	related	to	a	full	year	of	Camden	Hills production	in	2003	and	new	production	from	Petronius	drilling,	partially	offset	by	other	natural	field	declines.	At	year-end	2003,	Marathon	held	interests	in	10 producing	fields	and	17	platforms,	of	which	7	platforms	are	operated	by	Marathon.

In	2003,	Marathon	announced	the	Neptune-5	discovery,	which	is	located	in	Atwater	Valley	Block	574	in	6,215	feet	of	water.	This	well	was	drilled	to	a	total	depth of	19,142	feet	and	encountered	more	than	500	feet	of	net	oil	pay.	Although	several	hydrocarbon-bearing	intervals	are	present,	one	interval	has	a	gross	hydrocarbon column	thickness	of	more	than	1,200	feet.	Two	appraisal	sidetrack	wells	were	also	drilled.	The	first	sidetrack	well,	drilled	down-dip	from	the	original	Neptune-5 location,	encountered	a	similar	thickness	of	net	oil	pay	and	penetrated	an	oil	water	contact,	which	extended	the	gross	oil	column	by	approximately	100	feet.	The	second sidetrack,	drilled	to	an	up-dip	location,	encountered	approximately	190	feet	of	net	oil	pay	in	several	intervals.	Marathon	and	its	partners	in	the	Neptune	Unit	are integrating	the	results	of	this	discovery	into	field	development	studies.	Marathon	holds	a	30	percent	interest	in	the	Neptune	Unit.

Also	announced	in	2003,	the	Perseus	discovery	is	located	on	Viosca	Knoll	Block	830	in	3,376	feet	of	water,	approximately	five	miles	from	the	existing	Petronius platform.	The	well	was	drilled	to	a	total	depth	of	13,134	feet	and	encountered	over	130	net	feet	of	oil	pay	in	the	primary	targets.	The	Perseus	discovery	is	expected	to begin	production	in	2004	via	an	extended	reach	well	currently	being	drilled	from	the	Petronius	platform	and	extend	the	plateau	of	the	Petronius	production	profile. Marathon	holds	a	50	percent	interest	in	the	Perseus	discovery	and	the	Petronius	development.	Petronius	is	currently	producing	a	gross	average	of	60,000	bpd	and	100 mmcfd.

The	Gulf	of	Mexico	continues	to	be	a	core	area	for	Marathon	with	the	potential	to	add	new	reserves	and	increase	production.	At	the	end	of	2003,	Marathon	had interests	in	149	blocks	in	the	Gulf	of	Mexico,	including	90	in	the	deepwater	area.

Permian	Basin	–	The	Permian	Basin	region	extends	from	southeast	New	Mexico	to	west	Texas.	Marathon's	share	of	production	in	this	region	averaged	30,200	bpd and	132	mmcfd	in	2003,	compared	to	32,400	bpd	and	146	mmcfd	in	2002.	The	reduction	in	liquid	hydrocarbon	and	gas	production	was	primarily	due	to	the	impact	of the	disposition	of	properties.

In	June	2003,	MKM	Partners	L.P.	("MKM"),	a	joint	venture	of	Marathon	and	Kinder	Morgan	Energy	Partners	L.P.	("Kinder	Morgan"),	sold	its	interest	in	the SACROC	unit	to	Kinder	Morgan.	Also	in	June	2003,	MKM	was	dissolved	and	its	interest	in	the	Yates	field	was	distributed	to	Marathon	and	Kinder	Morgan.	In November	2003,	Marathon	sold	its	interest	in	the	Yates	field	to	Kinder	Morgan.	These	properties	contributed	approximately	9,000	net	bpd	to	2003	production.

East	Texas	–	Production	in	the	East	Texas	gas	fields	averaged	73	net	mmcfd	in	2003	compared	to	84	net	mmcfd	in	2002.	The	volume	decrease	was	primarily	due	to property	dispositions	totaling	approximately	11	mmcfd	and	natural	field	decline.	Active	development	of	the	Mimms	Creek	Field	continued	in	2003	with	Marathon drilling	22	wells.	The	2003	drilling	program	has	resulted	in	Mimms	Creek's	net	production	increasing	from	9	net	mmcfd	to	a	peak	of	17	net	mmcfd.

# U.S.	Northern	Business	Unit

Alaska	–	Marathon's	primary	focus	in	Alaska	is	the	expansion	of	its	natural	gas	business	through	exploration,	development	and	marketing.	Marathon's	share	of production	from	Alaska	averaged	166	mmcfd	of	natural	gas	in	2002	and	2003.

In	September	2003,	Marathon	began	producing	gas	from	its	Ninilchik	Unit	in	the	Cook	Inlet.	Production	is	currently	flowing	at	a	gross	rate	of	41	mmcfd,	21 mmcfd	of	which	is	net	to	Marathon,	and	is	being	transported	through	the	recently	completed	Kenai	Kachemak	Pipeline,	which	connects	Ninilchik	to	the	existing	natural gas	pipeline	infrastructure	serving	residential,	utility	and	industrial	markets	on	the	Kenai	Peninsula,	Anchorage	and	other	parts	of	south-central	Alaska.	Marathon operates	the	Ninilchik	Unit	and	holds	a	60	percent	interest	in	it	and	the	Kenai	Kachemak	Pipeline.

Wyoming	–	Liquid	hydrocarbon	production	for	2003	averaged	21,400	net	bpd	compared	with	22,800	net	bpd	in	2002.	The	decrease	was	primarily	attributed	to dispositions	of	approximately	1,000	net	bpd	of	liquids	in	non-core	areas	of	Wyoming.	Average	gas	production	increased	to	127	net	mmcfd	in	2003,	compared	to	125	net mmcfd	in	2002.

In	early	2001,	Marathon	completed	the	acquisition	of	Pennaco	Energy	Inc.,	creating	a	new	core	area	of	coal	bed	natural	gas	production	in	the	Powder	River	Basin ("PRB")	of	Wyoming.	Marathon	expanded	its	PRB	assets	by	approximately	one-third	in	May	2002	as	a	result	of	the	acquisition	of	the	assets	owned	by	its	major	partner in	this	basin.	Marathon	now	controls	more	than	650,000	net	acres	in	northeast	Wyoming	and	southeast	Montana	and	is	the	largest	individual	acreage	holder	in	the	PRB. During	2003,	Marathon	drilled	approximately	320	wells.	For	2003,	production	rates	of	coal	bed	natural	gas	were	82	net	mmcfd,	compared	to	79	net	mmcfd	in	2002.

Oklahoma	–	Gas	production	for	2003	averaged	96	net	mmcfd,	compared	with	108	net	mmcfd	in	2002.	The	decrease	in	gas	production	was	primarily	due	to	natural field	decline.	In	2003,	Marathon's	southern	Anadarko	Basin	exploration	efforts	continued	to	focus	on	the	western	extension	of	the	Cement	and	Marlow	fields. Exploration	drilling	efforts	resulted	in	five	discoveries.

# International

Including	Marathon's	proportionate	share	of	equity	investee	production,	approximately	43	percent	of	Marathon's	2003	worldwide	liquid	hydrocarbon	production and	37	percent	of	its	worldwide	natural	gas	production	was	produced	from	international	operations.	During	2003,	Marathon	drilled	54	gross	(36	net)	exploratory	wells of	which	47	gross	(32	net)	wells	encountered	hydrocarbons.	Of	these	47	wells,	21	gross	(14	net)	wells	were	temporarily	suspended	or	are	in	the	process	of	completing.

# Europe

U.K.	North	Sea	–	Marathon's	primary	asset	in	the	U.K.	North	Sea	is	the	Brae	area	complex	where	it	is	the	operator	and	owns	a	42	percent	interest	in	the	South, Central,	North,	and	West	Brae	fields	and	a	38	percent	interest	in	the	East	Brae	field.	The	Brae	A	platform	and	facilities	act	as	the	host	for	the	underlying	South	Brae field,	adjacent	Central	Brae	field	and	West	Brae/Sedgwick	fields.	The	North	Brae	field,	which	is	produced	via	the	Brae	B	platform,	and	the	East	Brae	field	are	gas- condensate	fields.	These	fields	are	produced	using	the	gas	cycling	technique,	whereby	gas	is	injected	into	the	reservoir	for	pressure	maintenance,	improved	sweep efficiency	and	increased	condensate	liquid	recovery.	Although	partial	cycling	continues,	the	majority	of	North	Brae	gas	is	being	transferred	to	the	East	Brae	reservoir	for pressure	maintenance	and	sales.

Marathon's	share	of	production	from	the	Brae	area	averaged	17,500	bpd	of	liquid	hydrocarbons	in	2003,	compared	with	20,100	bpd	in	2002.	The	decrease	resulted from	the	natural	decline	in	existing	fields	partially	offset	by	successful	development	and	remedial	well	work.	Marathon's	share	of	Brae	gas	sales	averaged	198	mmcfd	in 2002	and	2003.	Gas	sales	continue	to	be	maximized	on	available	capacity	within	the	pipeline	system.

The	strategic	location	of	the	Brae	platforms	and	pipeline	infrastructure	has	generated	third-party	processing	and	transportation	business	since	1986.	Currently,	there are	19	agreements	with	third-party	fields	contracted	to	use	the	Brae	system.	In	addition	to	generating	processing	and	pipeline	tariff	revenue,	this	third-party	business	also has	a	favorable	impact	on	Brae-area	operations	by	optimizing	infrastructure	usage	and	extending	the	economic	life	of	the	facilities.

The	Brae	group	owns	a	50	percent	interest	in	the	outside-operated	Scottish	Area	Gas	Evacuation	("SAGE")	system.	The	Beryl	group	owns	the	other	50	percent.	The SAGE	pipeline	provides	transportation	for	Brae	and	Beryl	area	gas	and	has	a	total	wet	gas	capacity	of	approximately	1,000	mmcfd.	The	SAGE	terminal	at	St.	Fergus	in northeast	Scotland	provides	processing	for	gas	from	the	SAGE	pipeline	and	processing	for	0.8	bcfd	of	third	party	gas	from	the	Britannia	field.

During	2003,	Marathon	and	its	partners	announced	the	startup	of	oil	and	gas	production	from	the	Marathon-operated	Braemar	field	in	the	U.K.	North	Sea.	The field	was	developed	with	a	single	subsea	well	tied	back	to	the	East	Brae	platform	7.5	miles	to	the	south	where	liquids	and	gas	are	processed.	Marathon	holds	a	26 percent	interest	in	Braemar.	Production	from	the	field	commenced	in	September	2003	at	an	initial	condensate	rate	of	3,700	gross	bpd	and	was	increased	in	January	2004 to	approximately	5,300	bpd.	In	August	2002,	a	16-inch	pipeline	link,	Linkline,	between	the	Marathon	operated	Brae	B	platform	and	the	outside-operated	Miller platform	was	sanctioned.	Marathon	has	a	19	percent	interest	in	the	Linkline.	The	Linkline	will	initially	be	used	for	transportation	of	Braemar	gas	that	has	been	contracted to	the	Miller	group	for	operational	purposes.

As	part	of	the	ongoing	rationalization	of	the	European	Business	Unit,	Marathon	added	one	new	block	(16/1)	to	its	inventory,	and	exited	four	blocks (22/7,22/22c,16/3d	and	16/6a-S).	This	resulted	in	an	overall	reduction	of	its	UK	leasehold	interests	from	24	blocks	at	the	start	of	2003	to	21	blocks	as	of	December	31, 2003.

U.K.	Atlantic	Margin	–	Marathon	has	an	approximately	30	percent	interest	in	the	outside-operated	Foinaven	area	complex.	This	is	made	up	of	a	28	percent	interest in	the	main	Foinaven	field,	47	percent	of	East	Foinaven	and	20	percent	of	the	single	well	T35	and	T25	accumulations.	Three	successful	wells	were	drilled	in	2003. Marathon's	share	of	production	from	the	Foinaven	fields	averaged	22,400	bpd	of	liquid	hydrocarbons	and	10	mmcfd	in	2003,	compared	to	31,000	net	bpd	and	9	mmcfd in	2002.	Lower	production	of	liquid	hydrocarbons	was	due	to	a	five-month	compressor	outage,	completion	failure	in	two	water	injection	wells,	and	early	water breakthrough	in	a	number	of	main-field	producers.	The	compressor	was	returned	to	service	in	November	2003	and	a	remedial	program	is	planned	to	address	the	well problems	in	2004.	In	December	2003,	production	from	Foinaven	was	averaging	25,100	net	bpd	and	11	net	mmcfd.

Ireland	–	Marathon	holds	a	100	percent	interest	in	the	Kinsale	Head,	Ballycotton	and	Southwest	Kinsale	fields	in	the	Irish	Celtic	Sea.	Natural	gas	sales	were	62	net mmcfd	in	2003,	compared	with	81	net	mmcfd	in	2002.	The	decrease	in	sales	is	primarily	the	result	of	the	timing	effect	associated	with	annual	storage	injection	versus storage	withdrawals	for	the	Kinsale	storage	facility,	and	natural	field	decline.

Marathon	further	developed	the	Kinsale	Head	area	in	2003	by	drilling	and	developing	an	additional	subsea	gas	well.	The	Greensand	subsea	gas	well	is	designed	to enhance	the	productivity	of	the	main	Kinsale	Head	natural	gas	producing	Greensand	reservoir	and	has	been	tied	back	to	Marathon's	existing	Kinsale	Head	Bravo platform.	Production	began	in	July	2003.

During	2002,	an	agreement	was	entered	into	with	the	Seven	Heads	group	to	provide	gas	processing	and	transportation	services,	as	well	as	field	operating	services, for	the	Seven	Heads	gas	being	brought	to	the	Kinsale	offshore	production	facilities	beginning	in	2003.	Production	from	Seven	Heads	commenced	in	December	2003. Under	this	agreement,	Marathon	provides	capacity	to	process	and	transport	between	60	mmcfd	to	100	mmcfd	of	Seven	Heads	gas.

Marathon	has	an	18.5	percent	interest	in	the	Corrib	gas	development	project,	located	approximately	40	miles	off	Ireland's	west	coast.	On	April	30,	2003,	an	Irish planning	authority	denied	the	application	for	the	proposed	onshore	terminal	to	bring	ashore	gas	from	the	Corrib	field.	In	late	2003,	the	project	partners	submitted	a	new application	to	the	planning	authority.	Marathon	has	reclassified	approximately	14	million	BOE	from	proved	undeveloped	reserves	until	the	terminal	application	is approved,	which	is	expected	to	be	in	late	2004.

Norway	–	In	the	Norwegian	North	Sea,	Marathon's	share	of	production	averaged	1,600	bpd	and	16	mmcfd	in	2003,	compared	to	800	bpd	and	15	mmcfd	in	2002. Marathon	owns	a	24	percent	interest	in	the	Heimdal	field	and	gas-condensate	processing	center.

Marathon	owns	a	47	percent	interest	in	the	Vale	field	which	is	located	northeast	of	the	Heimdal	field	in	374	feet	of	water.	This	single	subsea	well	tied	back	to	the Heimdal	platform	came	on	line	in	June	2002.	A	further	exploration	well	was	drilled	on	this	license	in	2003	and	resulted	in	an	oil	discovery	called	the	Klegg	field.	The Klegg	well	was	drilled	to	a	total	depth	of	7,799	feet	and	encountered	a	gross	oil	column	of	approximately	223	feet.	An	evaluation	of	development	options	is	underway with	a	decision	expected	in	2004.

Marathon	has	a	20	percent	interest	in	the	Byggve/Skirne	gas-condensate	field,	currently	in	development	on	license	PL102.	This	two	well	development	is	being	tied back	to	the	Heimdal	platform	gas	processing	center,	with	first	production	expected	early	2004.	Condensate	export	will	be	via	the	Heimdal-Brae-Forties	system	and	gas export	from	the	Heimdal	transportation	center.

On	April	15,	2003,	Marathon	announced	the	success	of	the	first	well	of	its	2003	Norwegian	continental	shelf	exploration	program	on	the	Kneler	prospect	in	the Alvheim	area.	Located	approximately	140	miles	from	Stavanger,	Norway	in	390	feet	of	water,	the	Kneler	exploration	well	was	drilled	to	total	depth	of	7,425	feet	and encountered	high	quality	crude	oil	in	a	gross	oil	column	of	155	feet	with	115	net	feet	of	pay	in	the	Heimdal	formation.	On	May	27,	2003,	Marathon	announced	a	second discovery	in	the	Alvheim	area	on	the	Boa	well.	The	discovery	well	is	located	approximately	4.5	miles	northwest	of	the	Kneler	discovery.	The	Boa	well	was	drilled	into the	Heimdal	formation	to	a	total	depth	of	7,531	feet.	This	well	encountered	an	82	foot	gross	gas	column	and	a	92	foot	gross	oil	column.	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.

In	December	2003,	Marathon	continued	to	grow	its	position	offshore	Norway	by	acquiring	interests	in	three	additional	production	licenses.	Marathon	is	operator	of two	of	the	three	licenses	with	100	percent	working	interest	(PL.307	and	PL.311)	and	40	percent	in	the	third	(PL.304).	Work	obligations	have	been	established	to	promote rapid	exploration	of	these	offshore	areas.

Netherlands	–	Divestment	of	Marathon's	interest	in	CLAM	Petroleum	B.V.	("CLAM")	was	completed	in	May	2003.

# West	Africa

Equatorial	Guinea—During	2002,	in	two	separate	transactions,	Marathon	acquired	interests	totaling	63	percent	in	the	Alba	field.	Additionally,	in	these transactions,	Marathon	acquired	a	net	52	percent	interest	in	an	onshore	liquefied	petroleum	gas	processing	plant	and	a	45	percent	net	interest	in	an	onshore	methanol production	plant,	both	held	through	separate	equity	method	investees.

The	large	scale	Alba	field	Phase	2	expansion,	which	began	in	2002,	made	significant	progress	in	2003.	The	field	development	and	condensate	production	expansion portions	of	the	project	(Phase	2A)	were	greater	than	90%	complete	at	year	end,	with	completion	expected	around	April	1st	of	2004.	Work	completed	in	2003	included:

•the	fabrication	and	installation	of	two	new	offshore	platforms,

•installation	of	production	flowlines,

•installation	of	gas	re-injection	lines	between	the	offshore	platforms	and	Marathon	facilities	on	Bioko	Island,

•	 drilling	and	completion	of	five	new	development	wells,

•tie-back	and	completion	of	three	pre-drilled	wells,

•construction	of	additional	condensate	storage	tanks	on	Bioko	Island,	and

•installation	of	onshore	pipelines	and	facilities	to	stabilize	and	transfer	the	increased	production	levels.

As	a	result	of	the	Phase	2A	expansion,	gross	condensate	production	had	grown	from	18,000	to	30,000	bpd	(15,800	net)	at	the	end	of	2003.	At	the	completion	of Phase	2A,	gross	condensate	production	will	be	further	increased	to	approximately	54,000	bpd	(30,000	net).

The	second	phase	of	additional	development	(Phase	2B)	includes	fabrication	and	installation	of	a	full	process	steam	LPG	cryogenic	gas	plant	and	associated storage,	marine	terminal,	and	fractionation	equipment	for	propane	and	heavier	gas	components.	This	addition	is	expected	to	result	in	additional	gross	condensate production	of	5,000	(2,600	net)	bpd.	Additionally,	20,000	(11,600	net)	bpd	of	LPG	is	expected	to	be	recovered.	Phase	2B	is	expected	to	be	completed	near	the	end	of 2004	raising	total	liquid	production	to	a	level	of	approximately	79,000	bpd.

On	July	23,	2003,	Marathon	announced	a	natural	gas	discovery	on	Block	D	offshore	Equatorial	Guinea,	where	Marathon	is	operator	with	a	90	percent	interest.	The discovery	well	is	on	the	Bococo	prospect,	located	in	238	feet	of	water,	approximately	six	miles	west	of	the	Alba	gas/condensate	field.	The	well	was	drilled	to	a	depth	of 6,110	feet	and	encountered	185	feet	of	net	gas	pay.	The	well	has	been	suspended	for	reentry	at	a	later	date.	The	Bococo	gas	discovery	complements	three	earlier	dry	gas discoveries	on	Block	D	for	future	development.

Marathon	is	currently	evaluating	the	results	of	the	recently	drilled	Deep	Luba	prospect,	which	will	test	for	potential	resources	under	the	Alba	field.	This	well	was drilled	from	an	Alba	platform,	which	could	enable	early	production	if	successful.

Gabon	–	Marathon	is	operator	of	the	Tchatamba	South,	Tchatamba	West	and	Marin	fields	with	a	56	percent	working	interest.	Production	in	Gabon	averaged	14,700 net	bpd	of	liquid	hydrocarbons	in	2003,	compared	with	16,700	net	bpd	in	2002.	The	decrease	is	attributable	to	the	timing	of	liftings.	Development	work	during	2003 brought	production	levels	at	the	Tchatamba	fields	up	to	the	facility	capacity	of	approximately	42,000	gross	bpd.

Angola	–	Offshore	Angola,	Marathon	has	a	10	percent	working	interest	in	Block	31	and	a	30	percent	working	interest	in	Block	32.	In	2002,	Marathon	participated in	the	first	ultra-deepwater	discovery	in	Block	31.	The	discovery,	the	Plutao	1-A,	was	drilled	to	a	total	depth	of	14,607	feet	and	tested	5,357	bpd	through	a	48/64–inch choke.	In	2003,	Marathon	announced	additional	discoveries	in	Block	31,	including	the	Saturno-1	and	Marte-1	wells.	The	Saturno-1	was	drilled	to	a	total	depth	of	15,444 feet	and	tested	at	a	maximum	rate	of	5,000	bpd.	The	Marte-1	discovery	well	was	drilled	to	a	total	depth	of	13,756	feet	and	tested	at	a	maximum	rate	of	5,200	bpd. Development	options	for	Block	31	are	currently	being	evaluated.	Also	on	Block	31,	Marathon	has	participated	in	the	Venus	well,	which	has	reached	total	depth.	Results of	the	Venus	well	will	be	reported	upon	government	approvals.

In	2003,	Marathon	announced	the	first	discovery	on	Block	32.	The	Gindungo-1	well	was	drilled	in	a	water	depth	of	4,739	feet	and	successively	tested	at	rates	of 7,400	and	5,700	barrels	of	light	oil	per	day	from	two	separate	zones.	Also	on	Block	32,	Marathon	has	participated	in	the	Canela	well	located	approximately	8	miles south	of	the	Gindungo	discovery	on	Block	32.	The	Canela	well	has	reached	total	depth.	Results	of	the	Canela	well	will	be	reported	upon	government	approvals.

# Other	International

Russia	–	On	May	13,	2003	Marathon	Oil	Corporation	announced	that	it	had	completed	the	acquisition	of	KMOC	for	an	aggregate	purchase	price	of	approximately $285	million,	including	the	assumption	of	$31	million	in	debt.	KMOC	currently	produces	approximately	16,000	net	bpd	in	the	Khanty	Mansiysk	region	of	western Siberia	in	the	Russian	Federation.

Western	Canada	–	On	October	1,	2003,	Marathon	completed	the	sale	of	the	operations	in	western	Canada	for	$612	million.

Eastern	Canada	–	In	2002,	Marathon	announced	a	gas	discovery	at	the	Annapolis	G-24	deepwater	wildcat	well	approximately	215	miles	south	of	Halifax,	Nova Scotia	in	5,504	feet	of	water.	The	G-24	encountered	approximately	100	feet	of	net	gas	pay	over	several	zones.	Marathon	is	operator	and	has	a	30	percent	interest	in	the Annapolis	lease.	In	addition,	Marathon	is	operator	of	the	adjacent	Empire	and	Cortland	leases	with	50	percent	and	75	percent	interests,	respectively.	During	2003,	3-D seismic	was	acquired	over	both	blocks	to	better	define	the	trend.

Qatar	–	Marathon	and	three	other	companies	are	parties	to	a	memorandum	of	understanding	to	further	explore	the	possibility	of	developing	a	portion	of	the	North field	offshore	Qatar.	Marathon	and	its	partners	are	pursuing	technical	and	commercial	discussions	with	Qatar	Petroleum	that	could	lead	to	a	GTL,	LPG	and	condensate project	as	part	of	the	northern	field	development.

Libya	–	Marathon	is	a	member	of	the	Oasis	Group,	which	acquired	exploration	and	production	rights	in	six	concessions	in	the	mid-1950s.	Marathon	has	a	16.3 percent	interest	in	these	concessions.	In	1986,	the	Oasis	Group	ceased	active	participation	in	the	concessions	following	the	imposition	of	trade	sanctions	by	the	U.	S. government.

In	2002,	the	U.	S.	State	Department	reaffirmed	the	authority	of	the	Oasis	Group	to	hold	discussions	with	representatives	of	the	Libyan	National	Oil	Company	and	the Libyan	government	relative	to	the	future	of	the	concessions.	Based	on	the	U.S.	Government's	recent	announcement	on	February	26,	2004,	the	Oasis	Group	is	in	active discussions	with	the	Libyan	National	Oil	Company	concerning	the	negotiation	of	terms	for	their	eventual	return	to	the	country.

The	above	discussions	include	forward-looking	statements	concerning	the	Phase	2A	and	Phase	2B	expansion	projects,	including	estimated	completion	dates, development	plans,	expected	production	levels,	dates	of	initial	production,	which	are	based	on	a	number	of	assumptions,	including	(among	others)	prices,	amount	of capital	available	for	exploration	and	development,	worldwide	supply	and	demand	for	petroleum	products,	regulatory	constraints,	reserve	estimates,	production	decline rates	of	mature	fields,	reserve	replacement	rates,	drilling	rig	availability,	unforeseen	problems	arising	from	construction	and	other	geological,	operating	and	economic considerations.	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.	In	addition,	development	of	new production	properties	in	countries	outside	the	United	States	may	require	protracted	negotiations	with	host	governments	and	is	frequently	subject	to	political considerations	and	tax	regulations,	which	could	adversely	affect	the	economics	of	projects.	To	the	extent	these	assumptions	prove	inaccurate	and/or	negotiations	and other	considerations	are	not	satisfactorily	resolved,	actual	results	could	be	materially	different	than	present	expectations.

# Reserves

At	December	31,	2003,	Marathon's	net	proved	liquid	hydrocarbon	and	natural	gas	reserves,	including	its	proportionate	share	of	equity	investees'	net	proved reserves,	totaled	approximately	1.0	billion	BOE,	of	which	46	percent	were	located	in	the	United	States.	(For	purposes	of	determining	BOE,	natural	gas	volumes	are converted	to	approximate	liquid	hydrocarbon	barrels	by	dividing	the	natural	gas	volumes	expressed	in	thousands	of	cubic	feet	("mcf")	by	six.	The	liquid	hydrocarbon volume	is	added	to	the	barrel	equivalent	of	gas	volume	to	obtain	BOE.)

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.	On	a	BOE	basis,	excluding	dispositions,	Marathon	replaced	124	percent	of	its	2003	worldwide	oil	and	gas production.	Excluding	acquisitions	and	dispositions,	Marathon	replaced	76	percent	of	worldwide	oil	and	gas	production.

The	following	table	sets	forth	estimated	quantities	of	net	proved	oil	and	gas	reserves	at	the	end	of	each	of	the	last	three	years.

# Estimated	Quantities	of	Net	Proved	Oil	and	Gas	Reserves	at	December	31

|  | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Liquid\tHydrocarbons\t(Millions\tof\tBarrels) |  |  |  |  |  |  |
| United\tStates | 193 | 226 | 243 | 210 | 245 | 268 |
| Europe | 47 | 63 | 69 | 59 | 76 | 88 |
| West\tAfrica | 120 | 113 | 14 | 218 | 203 | 17 |
| Other\tInternational | 31 | 2 | — | 89 | 3 | — |
| Total\tConsolidated\tContinuing\tOperations | 391 | 404 | 326 | 576 | 527 | 373 |
| Equity\tInvestees(a) | 2 | 177 | 178 | 2 | 183 | 184 |
| Worldwide\tContinuing\tOperations | 393 | 581 | 504 | 578 | 710 | 557 |
| Discontinued\tOperations(b) | — | 9 | 11 | — | 10 | 13 |
| WORLDWIDE | 393 | 590 | 515 | 578 | 720 | 570 |
| Developed\treserves\tas\t%\tof\ttotal\tnet\tproved\treserves | 68.0% | 81.9% | 90.4% |  |  |  |
| Natural\tGas\t(Billions\tof\tCubic\tFeet) |  |  |  |  |  |  |
| United\tStates | 1,067 | 1,206 | 1,308 | 1,635 | 1,724 | 1,793 |
| Europe | 421 | 408 | 473 | 484 | 562 | 615 |
| West\tAfrica | 528 | 552 | — | 665 | 653 | — |
| Total\tConsolidated\tContinuing\tOperations | 2,016 | 2,166 | 1,781 | 2,784 | 2,939 | 2,408 |
| Equity\tInvestee(c) | — | 36 | 32 | — | 59 | 51 |
| Worldwide\tContinuing\tOperations | 2,016 | 2,202 | 1,813 | 2,784 | 2,998 | 2,459 |
| Discontinued\tOperations(b) | — | 290 | 308 | — | 379 | 399 |
| WORLDWIDE | 2,016 | 2,492 | 2,121 | 2,784 | 3,377 | 2,858 |
| Developed\treserves\tas\t%\tof\ttotal\tnet\tproved\treserves | 72.4% | 73.8% | 74.2% |  |  |  |
| Total\tBOE\t(Millions\tof\tBarrels) |  |  |  |  |  |  |
| United\tStates | 371 | 427 | 461 | 483 | 532 | 567 |
| Europe | 117 | 132 | 148 | 139 | 170 | 190 |
| West\tAfrica | 208 | 205 | 14 | 329 | 312 | 17 |
| Other\tInternational | 31 | 2 | — | 89 | 3 | — |
| Total\tConsolidated\tContinuing\tOperations | 727 | 766 | 623 | 1,040 | 1,017 | 774 |
| Equity\tInvestees(a) | 2 | 183 | 183 | 2 | 193 | 193 |
| Worldwide\tContinuing\tOperations | 729 | 949 | 806 | 1,042 | 1,210 | 967 |
| Discontinued\tOperations(b) | — | 57 | 62 | — | 73 | 79 |
| WORLDWIDE | 729 | 1,006 | 868 | 1,042 | 1,283 | 1,046 |
| Developed\treserves\tas\t%\tof\ttotal\tnet\tproved\treserves | 70.0% | 78.4% | 83.0% |  |  |  |

(a) Represents	Marathon's	equity	interests	in	LLC	JV	Chernogorskoye	("Chernogorskoye"),	MKM	and	CLAM.	MKM	was	dissolved	and	the	Yates	interest	was	sold	in	2003.	Marathon's	interest	in	CLAM	was	sold	in 2003.

(b) Represents	Marathon's	western	Canadian	assets,	which	were	sold	in	2003.

(c) Represents	Marathon's	equity	interest	in	CLAM,	which	was	sold	in	2003.

The	above	estimates,	which	are	forward-looking	statements,	are	based	on	a	number	of	assumptions,	including	(among	others)	prices,	presently	known	physical	data concerning	size	and	character	of	the	reservoirs,	economic	recoverability,	production	experience	and	other	operating	considerations.	To	the	extent	these	assumptions prove	inaccurate,	actual	recoveries	could	be	different	than	current	estimates.

For	additional	details	of	estimated	quantities	of	net	proved	oil	and	gas	reserves	at	the	end	of	each	of	the	last	three	years,	see	"Consolidated	Financial	Statements	and Supplementary	Data	–	Supplementary	Information	on	Oil	and	Gas	Producing	Activities	–	Estimated	Quantities	of	Proved	Oil	and	Gas	Reserves"	on	pages	F-45	through F-46.	Marathon	has	filed	reports	with	the	U.S.	Department	of	Energy	("DOE")	for	the	years	2002	and	2001	disclosing	the	year-end	estimated	oil	and	gas	reserves. Marathon	will	file	a	similar	report	for	2003.	The	year-end	estimates	reported	to	the	DOE	are	the	same	as	the	estimates	reported	in	the	Supplementary	Information	on	Oil and	Gas	Producing	Activities.

# Delivery	Commitments

Marathon	has	commitments	to	deliver	fixed	and	determinable	quantities	of	natural	gas	to	customers	under	a	variety	of	contractual	arrangements.

In	Alaska,	Marathon	has	two	long-term	sales	contracts	with	the	local	utility	companies,	which	obligates	Marathon	to	supply	approximately	213	bcf	of	natural	gas over	the	remaining	life	of	these	contracts,	which	terminate	in	2012	and	2016.	In	addition,	Marathon	has	a	30	percent	ownership	interest	in	a	Kenai,	Alaska,	LNG	plant and	a	proportionate	share	of	the	long-term	LNG	sales	obligation	to	two	Japanese	utility	companies.	This	obligation	is	estimated	to	total	138	bcf	through	the	remaining life	of	the	contract,	which	terminates	March	31,	2009.	These	commitments	are	structured	with	variable-pricing	terms.	Marathon's	production	from	various	gas	fields	in the	Cook	Inlet	supply	the	natural	gas	to	service	these	contracts.	Marathon's	proved	reserves	and	estimated	production	rates	in	the	Cook	Inlet	sufficiently	meet	these contractual	obligations.

In	the	U.K.,	Marathon	has	two	long-term	sales	contracts	with	utility	companies,	which	obligate	Marathon	to	supply	approximately	236	bcf	of	natural	gas	through September	2009.	Marathon's	Brae	area	production,	together	with	natural	gas	acquired	for	injection	and	subsequent	resale,	will	supply	the	natural	gas	to	service	these contracts.	Marathon's	Brae	area	proved	reserves,	acquired	natural	gas	contracts	and	estimated	production	rates	sufficiently	meet	these	contractual	obligations.	The	terms of	these	gas	sales	contracts	also	reflect	variable-pricing	structures.

# Oil	and	Natural	Gas	Production

The	following	tables	set	forth	daily	average	net	production	of	liquid	hydrocarbons	and	natural	gas	for	each	of	the	last	three	years:

# Net	Liquid	Hydrocarbons	Production(a)	(b)

(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	shown	are	before	royalties.

(c) Amounts	reflect	production	from	leasehold	ownership,	after	royalties	and	interests	of	others.

(d) Amounts	reflect	equity	tanker	liftings	and	direct	deliveries	of	liquid	hydrocarbons.	The	amounts	correspond	with	the	basis	for	fiscal	settlements	with	governments.	Crude	oil	purchases,	if	any,	from	host	governments are	not	included.

(e) Represents	Marathon's	equity	interests	in	Chernogorskoye,	MKM	and	CLAM.

(f) Amounts	represent	Marathon's	western	Canadian	operations,	which	were	sold	in	2003.

(g) Amounts	exclude	volumes	purchased	from	third	parties	for	injection	and	subsequent	resale	of	23	mmcfd	in	2003,	4	mmcfd	in	2002	and	8	mmcfd	in	2001.

(h) Represents	Marathon's	equity	interests	in	CLAM.

# Productive	and	Drilling	Wells

The	following	tables	set	forth	productive	wells	and	service	wells	for	each	of	the	last	three	years	and	drilling	wells	as	of	December	31,	2003.

# Gross	and	Net	Wells

|  | Gross | Net | Gross | Net | Gross | Net | Gross | Net |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| United\tStates | 5,580 | 2,040 | 4,649 | 3,555 | 2,726 | 834 | 72 | 37 |
| Europe | 52 | 14 | 65 | 35 | 27 | 9 | — | — |
| West\tAfrica | 7 | 4 | 10 | 7 | 1 | 1 | 7 | 3 |
| Other\tInternational | 109 | 109 | — | — | 21 | 21 | 6 | 6 |
| Total\tConsolidated | 5,748 | 2,167 | 4,724 | 3,597 | 2,775 | 865 | 85 | 46 |
| Equity\tInvestees(d) | 96 | 21 | — | — | 15 | 3 | — | — |
| WORLDWIDE | 5,844 | 2,188 | 4,724 | 3,597 | 2,790 | 868 | 85 | 46 |

|  | Gross | Net | Gross | Net | Gross | Net |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| United\tStates | 6,495 | 2,715 | 4,577 | 2,876 | 2,752 | 807 |
| Europe | 53 | 20 | 62 | 34 | 26 | 9 |
| West\tAfrica | 6 | 3 | 6 | 4 | 1 | 1 |
| Other\tInternational | 485 | 226 | 1,529 | 1,032 | 47 | 16 |
| Total\tConsolidated | 7,039 | 2,964 | 6,174 | 3,946 | 2,826 | 833 |
| Equity\tInvestees(d) | 2,298 | 742 | 85 | 4 | 1,002 | 174 |
| WORLDWIDE | 9,337 | 3,706 | 6,259 | 3,950 | 3,828 | 1,007 |

|  | Gross | Net | Gross | Net | Gross | Net |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| United\tStates | 6,550 | 2,415 | 4,828 | 2,935 | 2,852 | 856 |
| Europe | 53 | 20 | 63 | 35 | 27 | 9 |
| West\tAfrica | 6 | 3 | — | — | — | — |
| Other\tInternational | 529 | 242 | 1,463 | 989 | 44 | 17 |
| Total\tConsolidated | 7,138 | 2,680 | 6,354 | 3,959 | 2,923 | 882 |
| Equity\tInvestees(d) | 2,002 | 609 | 83 | 4 | 1,142 | 243 |
| WORLDWIDE | 9,140 | 3,289 | 6,437 | 3,963 | 4,065 | 1,125 |

(a) Includes	active	wells	and	wells	temporarily	shut-in.	Of	the	gross	productive	wells,	gross	wells	with	multiple	completions	operated	by	Marathon	totaled	273,	357,	and	341	in	2003,	2002	and	2001,	respectively. Information	on	wells	with	multiple	completions	operated	by	other	companies	is	not	available	to	Marathon.

(b) Consist	of	injection,	water	supply	and	disposal	wells.

(c) Consists	of	exploratory	and	development	wells.

# Drilling	Activity

The	following	table	sets	forth,	by	geographic	area,	the	number	of	net	productive	and	dry	development	and	exploratory	wells	completed	in	each	of	the	last	three years	(references	to	"net"	wells	or	production	indicate	Marathon's	ownership	interest	or	share,	as	the	context	requires):

# Net	Productive	and	Dry	Wells	Completed (a)

|  |  | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- | :--- |
| United\tStates(b)\nDevelopment(c) | –\tOil | 4 | 8 | 10 |
|  | –\tGas | 231 | 174 | 751 |
|  | –\tDry | — | 1 | 1 |
|  | Total | 235 | 183 | 762 |
| Exploratory(d) | –\tOil | 1 | 2 | 2 |
|  | –\tGas | 7 | 5 | 9 |
|  | –\tDry | 2 | 6 | 8 |
|  | Total | 10 | 13 | 19 |
|  | Total\tUnited\tStates | 245 | 196 | 781 |
| International(e)\nDevelopment(c) | –\tOil | 31 | 2 | 1 |
|  | –\tGas | 14 | 28 | 54 |
|  | –\tDry | 1 | 3 | 5 |
|  | Total | 46 | 33 | 60 |
| Exploratory(d) | –\tOil | 2 | — | — |
|  | –\tGas | 21 | 20 | 16 |
|  | –\tDry | 5 | 3 | 5 |
|  | Total | 28 | 23 | 21 |
|  | Total\tInternational | 74 | 56 | 81 |
|  | Total\tWorldwide | 319 | 252 | 862 |

(a) Includes	the	number	of	wells	completed	during	the	applicable	year	regardless	of	the	year	in	which	drilling	was	initiated.	Excludes	any	wells	where	drilling	operations	were	continuing	or	were	temporarily	suspended as	of	the	end	of	the	applicable	year.	A	dry	well	is	a	well	found	to	be	incapable	of	producing	hydrocarbons	in	sufficient	quantities	to	justify	completion.	A	productive	well	is	an	exploratory	or	development	well	that	is not	a	dry	well.

(b) Includes	Marathon's	equity	interest	in	MKM.

(c) Indicates	wells	drilled	in	the	proved	area	of	an	oil	or	gas	reservoir.

(d) Includes	both	wildcat	and	delineation	wells.

(e) Includes	Marathon's	equity	interest	in	Chernogorskoye	and	CLAM.

# Oil	and	Gas	Acreage

The	following	table	sets	forth,	by	geographic	area,	the	developed	and	undeveloped	oil	and	gas	acreage	that	Marathon	held	as	of	December	31,	2003:

# Gross	and	Net	Acreage

| (Thousands	of	Acres) | Gross | Net | Gross | Net | Gross | Net |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| United\tStates | 3,080 | 733 | 4,921 | 2,182 | 8,001 | 2,915 |
| Europe | 402 | 312 | 1,430 | 623 | 1,832 | 935 |
| West\tAfrica | 68 | 42 | 3,204 | 937 | 3,272 | 979 |
| Other\tInternational | 599 | 599 | 2,756 | 2,161 | 3,355 | 2,760 |
| Total\tConsolidated | 4,149 | 1,686 | 12,311 | 5,903 | 16,460 | 7,589 |
| Equity\tInvestees(a) | 47 | 10 | — | — | 47 | 10 |
| WORLDWIDE | 4,196 | 1,696 | 12,311 | 5,903 | 16,507 | 7,599 |

(a) Represents	Marathon's	interest	in	Chernogorskoye.

# Refining,	Marketing	and	Transportation

RM&T	operations	are	primarily	conducted	by	MAP	and	its	subsidiaries,	including	its	wholly	owned	subsidiaries,	Speedway	SuperAmerica	LLC	("SSA")	and Marathon	Ashland	Pipe	Line	LLC.

# Refining

MAP	owns	and	operates	seven	refineries	with	an	aggregate	refining	capacity	of	935,000	barrels	of	crude	oil	per	day.	The	table	below	sets	forth	the	location	and daily	throughput	capacity	of	each	of	MAP's	refineries	as	of	December	31,	2003:

# In-Use	Refining	Capacity

# (Barrels	per	Day)

| In-Use	Refining	Capacity |  |
| :--- | :--- |
| (Barrels\tper\tDay) |  |
| Garyville,\tLA | 232,000 |
| Catlettsburg,\tKY | 222,000 |
| Robinson,\tIL | 192,000 |
| Detroit,\tMI | 74,000 |
| Canton,\tOH | 73,000 |
| Texas\tCity,\tTX | 72,000 |
| St.\tPaul\tPark,\tMN | 70,000 |
| TOTAL | 935,000 |

MAP's	refineries	include	crude	oil	atmospheric	and	vacuum	distillation,	fluid	catalytic	cracking,	catalytic	reforming,	desulfurization	and	sulfur	recovery	units.	The refineries	have	the	capability	to	process	a	wide	variety	of	crude	oils	and	to	produce	typical	refinery	products,	including	reformulated	gasoline.	MAP's	refineries	are integrated	via	pipelines	and	barges	to	maximize	operating	efficiency.	The	transportation	links	that	connect	the	refineries	allow	the	movement	of	intermediate	products	to optimize	operations	and	the	production	of	higher	margin	products.	For	example,	naphtha	may	be	moved	from	Texas	City	to	Robinson	where	excess	reforming	capacity is	available;	gas	oil	may	be	moved	from	Robinson	to	Detroit	where	excess	fluid	catalytic	cracking	unit	capacity	is	available;	and	light	cycle	oil	may	be	moved	from Texas	City	to	Robinson	where	excess	desulfurization	capacity	is	available.

MAP	also	produces	asphalt	cements,	polymerized	asphalt,	asphalt	emulsions	and	industrial	asphalts.	MAP	manufactures	petroleum	pitch,	primarily	used	in	the graphite	electrode,	clay	target	and	refractory	industries.	Additionally,	MAP	manufactures	aromatics,	aliphatic	hydrocarbons,	cumene,	base	lube	oil,	polymer	grade propylene	and	slack	wax.

During	2003,	MAP's	refineries	processed	917,000	bpd	of	crude	oil	and	138,000	bpd	of	other	charge	and	blend	stocks.	The	following	table	sets	forth	MAP's refinery	production	by	product	group	for	each	of	the	last	three	years:

# Refined	Product	Yields

| (Thousands	of	Barrels	per	Day) | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Gasoline | 567 | 581 | 581 |
| Distillates | 284 | 285 | 286 |
| Propane | 21 | 21 | 22 |
| Feedstocks\tand\tSpecial\tProducts | 93 | 80 | 69 |
| Heavy\tFuel\tOil | 24 | 20 | 39 |
| Asphalt | 72 | 72 | 76 |
| TOTAL | 1,061 | 1,059 | 1,073 |

Planned	maintenance	activities	requiring	temporary	shutdown	of	certain	refinery	operating	units,	or	turnarounds,	are	periodically	performed	at	each	refinery.	MAP initiated	major	turnarounds	at	its	Catlettsburg,	Garyville,	and	Texas	City	refineries	in	2003.

Technology	upgrades	and	expansions	of	the	fluid	catalytic	cracking	units	("FCCU")	at	the	Garyville	and	Texas	City	refineries	were	completed	during	early	2003. These	projects	have	increased	combined	FCCU	capacity	by	over	20,000	bpd,	and	resulted	in	improved	yields,	reduced	operating	costs,	and	enhanced	reliability	of	these facilities.

At	its	Catlettsburg,	Kentucky	refinery,	MAP	has	completed	the	approximately	$440	million	multi-year	integrated	investment	program	to	upgrade	product	yield realizations	and	reduce	fixed	and	variable	manufacturing	expenses.	This	program	involves	the	expansion,	conversion	and	retirement	of	certain	refinery	processing	units that,	in	addition	to	improving	profitability,	will	allow	the	refinery	to	begin	producing	low-sulfur	(TIER	2)	gasoline.	Project	startup	was	in	the	first	quarter	of	2004.

In	the	fourth	quarter	of	2003,	MAP	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	is	scheduled	for	the	fourth	quarter	of	2005.	Marathon	will loan	MAP	the	funds	necessary	for	these	upgrade	and	expansion	projects.

# Marketing

In	2003,	MAP's	refined	product	sales	volumes	(excluding	matching	buy/sell	transactions)	totaled	19.8	billion	gallons	(1,293,000	bpd).	Excluding	sales	related	to matching	buy/sell	transactions,	the	wholesale	distribution	of	petroleum	products	to	private	brand	marketers	and	to	large	commercial	and	industrial	consumers,	primarily located	in	the	Midwest,	the	upper	Great	Plains	and	the	Southeast,	and	sales	in	the	spot	market,	accounted	for	approximately	70	percent	of	MAP's	refined	product	sales volumes	in	2003.	Approximately	50	percent	of	MAP's	gasoline	volumes	and	91	percent	of	its	distillate	volumes	were	sold	on	a	wholesale	or	spot	market	basis	to independent	unbranded	customers	or	other	wholesalers	in	2003.

Approximately	half	of	MAP's	propane	is	sold	into	the	home	heating	markets	and	industrial	consumers	purchase	the	balance.	Propylene,	cumene,	aromatics, aliphatics,	and	sulfur	are	marketed	to	customers	in	the	chemical	industry.	Base	lube	oils	and	slack	wax	are	sold	throughout	the	United	States.	Pitch	is	also	sold domestically,	but	approximately	13	percent	of	pitch	products	are	exported	into	growing	markets	in	Canada,	Mexico,	India,	and	South	America.

MAP	markets	asphalt	through	owned	and	leased	terminals	throughout	the	Midwest	and	Southeast.	The	MAP	customer	base	includes	approximately	900	asphalt- paving	contractors,	government	entities	(states,	counties,	cities	and	townships)	and	asphalt	roofing	shingle	manufacturers.

The	following	table	sets	forth	the	volume	of	MAP's	consolidated	refined	product	sales	by	product	group	for	each	of	the	last	three	years:

# Refined	Product	Sales

| (Thousands	of	Barrels	per	Day) | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Gasoline | 776 | 773 | 748 |
| Distillates | 365 | 346 | 345 |
| Propane | 21 | 22 | 21 |
| Feedstocks\tand\tSpecial\tProducts | 97 | 82 | 71 |
| Heavy\tFuel\tOil | 24 | 20 | 41 |
| Asphalt | 74 | 75 | 78 |
| TOTAL | 1,357 | 1,318 | 1,304 |
| Matching\tBuy/Sell\tVolumes\tincluded\tin\tabove | 64 | 71 | 45 |

MAP	sells	reformulated	gasoline	in	parts	of	its	marketing	territory,	primarily	Chicago,	Illinois;	Louisville,	Kentucky;	northern	Kentucky;	and	Milwaukee, Wisconsin.	MAP	also	sells	low-vapor-pressure	gasoline	in	nine	states.

As	of	December	31,	2003,	MAP	supplied	petroleum	products	to	approximately	3,900	Marathon	and	Ashland	branded	retail	outlets	located	primarily	in	Michigan, Ohio,	Indiana,	Kentucky	and	Illinois.	Branded	retail	outlets	are	also	located	in	Florida,	Georgia,	Wisconsin,	West	Virginia,	Minnesota,	Tennessee,	Virginia,

Pennsylvania,	North	Carolina,	South	Carolina	and	Alabama.

Retail	sales	of	gasoline	and	diesel	fuel	were	also	made	through	company-operated	outlets	by	SSA.	As	of	December	31,	2003,	this	subsidiary	had	1,775	retail	outlets in	9	states	that	sold	petroleum	products	and	convenience-store	merchandise	and	services,	primarily	under	the	brand	names	"Speedway"	and	"SuperAmerica."	SSA's revenues	from	the	sale	of	convenience-store	merchandise	totaled	$2.2	billion	in	2003,	compared	with	$2.4	billion	in	2002.	Profit	levels	from	the	sale	of	such merchandise	and	services	tend	to	be	less	volatile	than	profit	levels	from	the	retail	sale	of	gasoline	and	diesel	fuel.	During	2003,	SSA	withdrew	from	markets	in	the Southeast	when	it	sold	190	convenience	stores	located	in	Florida,	South	Carolina,	North	Carolina	and	Georgia	for	approximately	$140	million	plus	store	inventory.

Pilot	Travel	Centers	LLC	("PTC"),	a	joint	venture	with	Pilot	Corporation	("Pilot"),	is	the	largest	operator	of	travel	centers	in	the	United	States	with	approximately 260	locations	in	34	states.	The	travel	centers	offer	diesel	fuel,	gasoline	and	a	variety	of	other	services,	including	on-premises	brand	name	restaurants.	On	February	27, 2003,	PTC	purchased	60	retail	travel	centers	from	the	Williams	Companies	located	in	15	states,	primarily	in	the	Midwest,	Southeast	and	Southwest.	Pilot	and	MAP	each own	a	50	percent	interest	in	PTC.

MAP's	retail	marketing	strategy	is	focused	on	SSA's	Midwest	operations,	additional	growth	of	the	Marathon	brand,	and	continued	growth	for	PTC.

# Supply	and	Transportation

MAP	obtains	the	crude	oil	it	processes	from	negotiated	contracts	and	spot	purchases	or	exchanges.	In	2003,	MAP's	net	purchases	of	U.S.	produced	crude	oil	for refinery	input	averaged	422,000	bpd,	including	a	net	30,000	bpd	from	Marathon.	In	2003,	Canada	was	the	source	for	13	percent	or	122,000	bpd	of	crude	oil	processed and	other	foreign	sources	supplied	41	percent	or	373,000	bpd	of	the	crude	oil	processed	by	MAP's	refineries,	including	approximately	225,000	bpd	from	the	Middle East.	This	crude	was	acquired	from	various	foreign	national	oil	companies,	producing	companies	and	traders.

MAP	operates	a	system	of	pipelines	and	terminals	to	provide	crude	oil	to	its	refineries	and	refined	products	to	its	marketing	areas.	At	December	31,	2003,	MAP owned,	leased,	or	had	an	ownership	interest	in	approximately	3,073	miles	of	crude	oil	trunk	lines	and	3,850	miles	of	product	trunk	lines.	MAP	owns	a	47	percent	interest in	LOOP	LLC	("LOOP"),	which	is	the	owner	and	operator	of	the	only	U.S.	deepwater	oil	port,	located	18	miles	off	the	coast	of	Louisiana;	a	50	percent	interest	in LOCAP	LLC,	which	owns	a	crude	oil	pipeline	connecting	LOOP	and	the	Capline	system;	and	a	37	percent	interest	in	the	Capline	system,	a	large	diameter	crude	oil pipeline	extending	from	St.	James,	Louisiana	to	Patoka,	Illinois.

MAP	also	has	a	33	percent	ownership	interest	in	Minnesota	Pipe	Line	Company,	which	owns	a	crude	oil	pipeline	in	Minnesota.	Minnesota	Pipe	Line	Company provides	MAP	with	access	to	crude	oil	common	carrier	transportation	from	Clearbrook,	Minnesota	to	Cottage	Grove,	Minnesota,	which	is	in	the	vicinity	of	MAP's	St. Paul	Park,	Minnesota	refinery.

On	February	10,	2003,	MAP	increased	its	ownership	in	Centennial	Pipeline	LLC	from	33	percent	to	50	percent	and	as	of	December	31,	2003,	MAP	and	Texas Eastern	Products	Pipeline	Company,	L.P.	own	Centennial	Pipeline	LLC	50	percent	each.	The	Centennial	Pipeline	system	connects	Gulf	Coast	refineries	with	the Midwest	market.

In	the	fourth	quarter	2003,	a	MAP	subsidiary,	Ohio	River	Pipe	Line	LLC,	completed	the	construction	of	the	Cardinal	Products	Pipeline,	which	extends	from Kenova,	West	Virginia	to	Columbus,	Ohio.	The	first	deliveries	from	the	pipeline	occurred	in	late	December	2003.	The	pipeline	is	an	interstate	common	carrier	pipeline and	is	expected	to	initially	move	approximately	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	fuel	to	this	market.

MAP's	88	light	product	and	asphalt	terminals	are	strategically	located	throughout	the	Midwest,	upper	Great	Plains	and	Southeast.	These	facilities	are	supplied	by	a combination	of	pipelines,	barges,	rail	cars	and/or	trucks.	MAP's	marine	transportation	operations	include	towboats	and	barges	that	transport	refined	products	on	the Ohio,	Mississippi	and	Illinois	rivers,	their	tributaries	and	the	Intercoastal	Waterway.	MAP	also	leases	and	owns	rail	cars	in	various	sizes	and	capacities	for	movement and	storage	of	petroleum	products	and	a	large	number	of	tractors,	tank	trailers	and	general	service	trucks.

The	above	RM&T	discussions	include	forward-looking	statements	concerning	anticipated	completion	of	refinery	projects	and	the	operation	of	the	Cardinal Products	Pipeline.	Some	factors	that	could	potentially	cause	actual	results	for	the	refinery	projects	to	differ	materially	from	present	expectations	include	(among	others) price	of	petroleum	products,	levels	of	cash	flow	from	operations,	unforeseen	problems	arising	from	construction,	regulatory	approval	constraints	and	unforeseen	hazards such	as	weather	conditions	and	delays	in	construction.	Some	factors	that	could	affect	the	pipeline	system	include	the	price	of	petroleum	products	and	other	supply	issues. This	forward-looking	information	may	prove	to	be	inaccurate	and	actual	results	may	differ	from	those	presently	anticipated.

# Other	Energy	Related	Businesses

Marathon	operates	other	businesses	that	market	and	transport	its	own	and	third-party	natural	gas,	crude	oil	and	products	manufactured	from	natural	gas,	such	as LNG	and	methanol,	primarily	in	the	United	States,	Europe	and	West	Africa.	Some	of	these	businesses,	as	well	as	other	business	projects	under	development,	comprise Marathon's	integrated	gas	strategy.

Marathon	owns	an	interest	in	the	following	pipeline	systems:	a	29	percent	interest	in	Odyssey	Pipeline	LLC	and	a	28	percent	interest	in	Poseidon	Oil	Pipeline Company,	LLC	(both	Gulf	of	Mexico	crude	oil	pipeline	systems);	a	24	percent	interest	in	Nautilus	Pipeline	Company,	LLC	and	a	24	percent	interest	in	Manta	Ray Offshore	Gathering	Company,	LLC	(both	Gulf	of	Mexico	natural	gas	pipeline	systems);	a	17	percent	interest	in	Explorer	Pipeline	Company	(a	light	product	pipeline system	extending	from	the	Gulf	of	Mexico	to	the	Midwest);	and	a	6	percent	interest	in	Wolverine	Pipe	Line	Company	(a	light	product	pipeline	system	extending	from Chicago,	IL	to	Toledo,	OH).	None	of	these	refined	product	systems	are	part	of	MAP.	Marathon	also	holds	interests	in	some	smaller	offshore	Gulf	of	Mexico	oil	pipeline systems.

Marathon	owns	a	34	percent	ownership	interest	in	the	Neptune	natural	gas	processing	plant	located	in	St.	Mary	Parish,	Louisiana,	which	commenced	operations	on March	20,	2000.	The	plant	has	the	capacity	to	process	300	mmcfd	of	natural	gas,	which	is	supplied	by	the	Nautilus	pipeline	system,	and	is	being	expanded	to	600	mmcfd capacity	effective	early	2004.

In	addition	to	the	sale	of	its	own	oil	and	natural	gas	production,	Marathon	purchases	oil	and	gas	from	third	party	producers	and	marketers	for	resale.

Marathon	owns	a	30	percent	interest	in	a	Kenai,	Alaska,	natural	gas	liquefication	plant	and	two	87,500	cubic	meter	tankers	used	to	transport	LNG	to	customers	in Japan.	Feedstock	for	the	plant	is	supplied	from	a	portion	of	Marathon's	natural	gas	production	in	the	Cook	Inlet.	From	the	first	production	in	1969,	the	LNG	has	been sold	under	a	long-term	contract	with	two	of	Japan's	largest	utility	companies.	Marathon	has	a	30	percent	participation	in	this	contract,	which	will	continue	through March	31,	2009.	LNG	deliveries	totaled	66	gross	bcf	(22	net	bcf)	in	2003.

On	January	3,	2002,	Marathon	acquired	a	45	percent	interest	in	a	methanol	plant	located	in	Malabo,	Equatorial	Guinea	from	CMS	Energy.	Feedstock	for	the	plant	is supplied	from	a	portion	of	Marathon's	natural	gas	production	in	the	Alba	field.	Methanol	production	totaled	836,000	gross	metric	tons	(376,000	net	metric	tons)	in 2003.	Production	from	the	plant	is	used	to	supply	customers	in	Europe	and	the	U.S.

In	August	2002,	Marathon	acquired	the	rights	to	deliver	up	to	58	bcf	of	LNG	annually	to	the	Elba	Island	LNG	terminal	near	Savannah,	Georgia.	The	contract	has	a 17-year	term	with	an	option	to	extend	for	an	additional	five-year	period.	The	agreement	provides	for	the	right	to	deliver	LNG	under	a	put	option	with	the	capacity	owner of	the	facility	and,	under	certain	conditions,	take	redelivery	of	natural	gas	for	onward	sale	to	third	parties.

Marathon's	Atlantic	Basin	integrated	gas	activity	centers	around	the	monetization	of	Marathon's	gas	reserves	from	the	Alba	field.	This	proposed	project	would involve	construction	of	a	3.4	million	metric	tonnes	per	year	LNG	facility	located	on	Bioko	Island,	Equatorial	Guinea,	with	startup	currently	projected	for	late	2007.	In the	second	quarter	of	2003,	Marathon,	the	Government	of	Equatorial	Guinea,	and	GEPetrol,	the	national	oil	company	of	Equatorial	Guinea,	signed	a	heads	of	agreement on	fiscal	terms	and	conditions	for	the	development	of	the	LNG	facility.	In	addition,	Marathon	signed	a	letter	of	understanding	with	BG	Gas	Marketing,	Ltd.	("BGML"), a	subsidiary	of	BG	Group	plc,	under	which	BGML	would	purchase	the	LNG	plant's	production	for	a	period	of	17	years.	BGML	has	stated	its	intent	to	deliver	the	LNG primarily	to	the	LNG	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	letter	of	understanding	are	subject	to	a	definitive	purchase	and	sale	agreement,	which	the	parties	expect	to	finalize	in	the	second	quarter	of	2004.

In	the	Pacific	Basin,	one	of	the	integrated	gas	projects	Marathon	has	been	pursuing,	the	Tijuana	Regional	Energy	Center,	will	not	proceed.	Marathon	has	been unable	to	make	significant	progress	on	this	project,	principally	due	to	the	lack	of	local	and	regional	support	that	would	be	necessary	to	obtain	land	use	and	other	key permits.	More	recently,	the	Baja	California	State	Government	announced	plans	to	expropriate	land,	on	which	Marathon	and	its	partners	held	options	to	purchase,	that would	have	been	the	site	for	the	proposed	project.

Marathon	has	been	engaged	in	GTL	research	and	development	since	the	early	1990s	with	the	goal	of	creating	a	process	and	facility	capable	of	converting	natural gas	into	ultra-clean	diesel	fuel.	Currently,	Marathon	is	participating	in	a	GTL	demonstration	plant	at	the	Port	of	Catoosa	near	Tulsa,	Oklahoma.	Dedicated	during	the fourth	quarter	of	2003,	this	complex	is	part	of	the	Department	of	Energy's	Ultra-Clean	Fuels	Program.	This	GTL	technology	development	is	being	pursued	in conjunction	with	Marathon's	proposed	Qatar	GTL	project.

In	the	first	quarter	of	2004,	Marathon	will	realign	its	segment	reporting.	A	new	segment,	Integrated	Gas,	will	be	introduced	and	the	Other	Energy	Related Businesses	("OERB")	segment	will	be	eliminated.	Of	the	business	activities	discussed	above,	the	Gulf	of	Mexico	crude	oil	pipeline	systems,	crude	oil	marketing activities	and	the	Catoosa	demonstration	plant	will	be	reported	in	the	Exploration	and	Production	segment.	The	refined	products	pipeline	systems	will	be	reported	in	the Refining,	Marketing	and	Transportation	segment.	The	remaining	activities	will	comprise	the	Integrated	Gas	segment	which	will	consist	of	LNG	facilities,	certain midstream	gas	plants	and	pipelines,	non-equity	natural	gas	marketing	activity,	and	continued	execution	of	other	integrated	gas	strategies	in	the	Atlantic	and	Pacific Basins,	which	may	or	may	not	be	connected	to	Marathon's	E&P	activity.	For	further	information,	see	"Management's	Discussion	and	Analysis	of	Financial	Condition and	Results	of	Operations	–	Outlook"	on	page	47.

The	above	OERB	discussion	contains	forward	looking	statements	concerning	the	plans	for	a	LNG	facility	and	a	LNG	offtake	transaction.	Factors	that	could	affect the	plans	for	the	LNG	plant	and	LNG	offtake	transaction	include	the	successful	negotiation	and	execution	of	definitive	purchase	and	sale	agreements	for	gas	supply	and LNG	offtake,	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,	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.

# Competition	and	Market	Conditions

Strong	competition	exists	in	all	sectors	of	the	oil	and	gas	industry	and,	in	particular,	in	the	exploration	and	development	of	new	reserves.	Marathon	competes	with major	integrated	and	independent	oil	and	gas	companies	for	the	acquisition	of	oil	and	gas	leases	and	other	properties,	for	the	equipment	and	labor	required	to	develop and	operate	those	properties	and	in	the	marketing	of	oil	and	natural	gas	to	end-users.	Many	of	Marathon's	competitors	have	financial	and	other	resources	greater	than those	available	to	Marathon.	As	a	consequence,	Marathon	may	be	at	a	competitive	disadvantage	in	bidding	for	the	rights	to	explore	for	oil	and	gas.	Acquiring	the	more attractive	exploration	opportunities	frequently	requires	competitive	bids	involving	front-end	bonus	payments	or	commitments-to-work	programs.	Marathon	also competes	in	attracting	and	retaining	personnel,	including	geologists,	geophysicists	and	other	specialists.	Based	on	industry	sources,	Marathon	believes	it	currently	ranks eighth	among	U.S.-based	petroleum	corporations	on	the	basis	of	2002	worldwide	liquid	hydrocarbon	and	natural	gas	production.

Marathon	through	MAP	must	also	compete	with	a	large	number	of	other	companies	to	acquire	crude	oil	for	refinery	processing	and	in	the	distribution	and marketing	of	a	full	array	of	petroleum	products.	MAP	believes	it	ranks	fifth	among	U.S.	petroleum	companies	on	the	basis	of	crude	oil	refining	capacity	as	of	January	1, 2004.	MAP	competes	in	four	distinct	markets	–	wholesale,	spot,	branded	and	retail	distribution—for	the	sale	of	refined	products	and	believes	it	competes	with	about	40 companies	in	the	wholesale	distribution	of	petroleum	products	to	private	brand	marketers	and	large	commercial	and	industrial	consumers;	about	80	companies	in	the	sale of	petroleum	products	in	the	spot	market;	11	refiner/marketers	in	the	supply	of	branded	petroleum	products	to	dealers	and	jobbers;	and	approximately	275	petroleum product	retailers	in	the	retail	sale	of	petroleum	products.	Marathon	competes	in	the	convenience	store	industry	through	SSA's	retail	outlets.	The	retail	outlets	offer consumers	gasoline,	diesel	fuel	(at	selected	locations)	and	a	broad	mix	of	other	merchandise	and	services.	Some	locations	also	have	on-premises	brand-name	restaurants such	as	Subway™.	Marathon	also	competes	in	the	travel	center	industry	through	its	50	percent	ownership	in	PTC.

Marathon's	operating	results	are	affected	by	price	changes	in	crude	oil,	natural	gas	and	petroleum	products,	as	well	as	changes	in	competitive	conditions	in	the markets	it	serves.	Generally,	results	from	production	operations	benefit	from	higher	crude	oil	and	natural	gas	prices	while	refining	and	marketing	margins	may	be adversely	affected	by	crude	oil	price	increases.	Market	conditions	in	the	oil	and	gas	industry	are	cyclical	and	subject	to	global	economic	and	political	events	and	new	and changing	governmental	regulations.

# The	Separation

On	December	31,	2001,	pursuant	to	an	Agreement	and	Plan	of	Reorganization	dated	as	of	July	31,	2001	("Reorganization	Agreement"),	Marathon	completed	the Separation,	in	which:

•its	wholly	owned	subsidiary	United	States	Steel	LLC	converted	into	a	Delaware	corporation	named	United	States	Steel	Corporation	and	became	a	separate, publicly	traded	company;	and

•	 USX	Corporation	changed	its	name	to	Marathon	Oil	Corporation.

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.

In	connection	with	the	Separation	and	pursuant	to	the	Plan	of	Reorganization,	Marathon	and	United	States	Steel	have	entered	into	a	series	of	agreements	governing their	relationship	after	the	Separation	and	providing	for	the	allocation	of	tax	and	certain	other	liabilities	and	obligations	arising	from	periods	before	the	Separation.	The following	is	a	description	of	the	material	terms	of	two	of	those	agreements.

# Financial	Matters	Agreement

Under	the	financial	matters	agreement,	United	States	Steel	has	assumed	and	agreed	to	discharge	all	Marathon's	principal	repayment,	interest	payment	and	other obligations	under	the	following,	including	any	amounts	due	on	any	default	or	acceleration	of	any	of	those	obligations,	other	than	any	default	caused	by	Marathon:

•	 obligations	under	industrial	revenue	bonds	related	to	environmental	projects	for	current	and	former	U.S.	Steel	Group	facilities,	with	maturities	ranging	from 2009	through	2033;

•sale-leaseback	financing	obligations	under	a	lease	for	equipment	at	United	States	Steel's	Fairfield	Works	facility,	with	the	lease	term	extending	to	2012, subject	to	extensions;

•	 obligations	relating	to	various	lease	arrangements	accounted	for	as	operating	leases	and	various	guarantee	arrangements,	all	of	which	were	assumed	by United	States	Steel;	and

•certain	other	guarantees.

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.	United	States	Steel	may	accomplish	that	discharge	by	refinancing	or,	to	the	extent	not refinanced,	paying	Marathon	an	amount	equal	to	the	remaining	principal	amount	of	all	accrued	and	unpaid	debt	service	outstanding	on,	and	any	premium	required	to immediately	retire,	the	then	outstanding	industrial	revenue	bonds.	$2	million	of	the	industrial	revenue	bonds	are	scheduled	to	mature	in	the	period	extending	through December	31,	2009.

Under	the	financial	matters	agreement,	United	States	Steel	shall	have	the	right	to	exercise	all	of	the	existing	contractual	rights	under	the	lease	obligations	assumed from	Marathon,	including	all	rights	related	to	purchase	options,	prepayments	or	the	grant	or	release	of	security	interests.	United	States	Steel	shall	have	no	right	to increase	amounts	due	under	or	lengthen	the	term	of	any	of	the	assumed	lease	obligations	without	the	prior	consent	of	Marathon	other	than	extensions	set	forth	in	the terms	of	the	assumed	lease	obligations.

The	financial	matters	agreement	also	requires	United	States	Steel	to	use	commercially	reasonable	efforts	to	have	Marathon	released	from	its	obligations	under	a guarantee	Marathon	provided	with	respect	to	all	United	States	Steel's	obligations	under	a	partnership	agreement	between	United	States	Steel,	as	general	partner,	and General	Electric	Credit	Corporation	of	Delaware	and	Southern	Energy	Clairton,	LLC,	as	limited	partners.	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	take	all	necessary	action	or	refrain	from	acting	so	as	to	assure compliance	with	all	covenants	and	other	obligations	under	the	documents	relating	to	the	assumed	obligations	to	avoid	the	occurrence	of	a	default	or	the	acceleration	of the	payment	obligations	under	the	assumed	obligations.	The	agreement	also	obligates	Marathon	to	use	commercially	reasonable	efforts	to	obtain	and	maintain	letters	of credit	and	other	liquidity	arrangements	required	under	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	our	consent.

# Tax	Sharing	Agreement

Marathon	and	United	States	Steel	have	a	tax	sharing	agreement	that	applies	to	each	of	their	consolidated	tax	reporting	groups.	Provisions	of	this	agreement	include the	following:

•for	any	taxable	period,	or	any	portion	of	any	taxable	period,	ended	on	or	before	December	31,	2001,	unpaid	tax	sharing	payments	will	be	made	between Marathon	and	United	States	Steel	generally	in	accordance	with	the	general	tax	sharing	principles	in	effect	before	the	Separation;

•	 no	tax	sharing	payments	will	be	made	with	respect	to	taxable	periods,	or	portions	thereof,	beginning	after	December	31,	2001;	and

•	 provisions	relating	to	the	tax	and	related	liabilities,	if	any,	that	result	from	the	Separation	ceasing	to	qualify	as	a	tax-free	transaction	and	limitations	on	post- Separation	activities	that	might	jeopardize	the	tax-free	status	of	the	Separation.

Under	the	general	tax	sharing	principles	in	effect	before	the	Separation:

•the	taxes	payable	by	each	of	the	Marathon	Group	and	the	U.S.	Steel	Group	were	determined	as	if	each	of	them	had	filed	its	own	consolidated,	combined	or unitary	tax	return;	and

•the	U.S.	Steel	Group	would	receive	the	benefit,	in	the	form	of	tax	sharing	payments	by	the	parent	corporation,	of	the	tax	attributes,	consisting	principally	of net	operating	losses	and	various	credits,	that	its	business	generated	and	the	parent	used	on	a	consolidated	basis	to	reduce	its	taxes	otherwise	payable.

In	accordance	with	the	tax	sharing	agreement,	at	the	time	of	the	Separation,	Marathon	made	a	preliminary	settlement	with	United	States	Steel	of	approximately $440	million	as	the	net	tax	sharing	payments	owed	to	it	for	the	year	ended	December	31,	2001	under	the	pre-Separation	tax	sharing	principles.

The	tax	sharing	agreement	also	addresses	the	handling	of	tax	audits	and	contests	and	other	matters	respecting	taxable	periods,	or	portions	of	taxable	periods,	ended before	December	31,	2001.

In	the	tax	sharing	agreement,	each	of	Marathon	and	United	States	Steel	promised	the	other	party	that	it:

•	 would	not,	before	January	1,	2004,	take	various	actions	or	enter	into	various	transactions	that	might,	under	section	355	of	the	Internal	Revenue	Code	of 1986,	jeopardize	the	tax-free	status	of	the	Separation;	and

•	 would	be	responsible	for,	and	indemnify	and	hold	the	other	party	harmless	from	and	against,	any	tax	and	related	liability,	such	as	interest	and	penalties,	that results	from	the	Separation	ceasing	to	qualify	as	tax-free	because	of	its	taking	of	any	such	action	or	entering	into	any	such	transaction.

The	prescribed	actions	and	transactions	include:

•the	liquidation	of	Marathon	or	United	States	Steel;	and

•the	sale	by	Marathon	or	United	States	Steel	of	its	assets,	except	in	the	ordinary	course	of	business.

In	case	a	taxing	authority	seeks	to	collect	a	tax	liability	from	one	party	that	the	tax	sharing	agreement	has	allocated	to	the	other	party,	the	other	party	has	agreed	in the	sharing	agreement	to	indemnify	the	first	party	against	that	liability.

Even	if	the	Separation	otherwise	qualified	for	tax-free	treatment	under	section	355	of	the	Internal	Revenue	Code,	the	Separation	may	become	taxable	to	Marathon under	section	355(e)	of	the	Internal	Revenue	Code	if	capital	stock	representing	a	50	percent	or	greater	interest	in	either	Marathon	or	United	States	Steel	is	acquired, directly	or	indirectly,	as	part	of	a	plan	or	series	of	related	transactions	that	include	the	Separation.	For	this	purpose,	a	"50	percent	or	greater	interest"	means	capital	stock possessing	at	least	50	percent	of	the	total	combined	voting	power	of	all	classes	of	stock	entitled	to	vote	or	at	least	50	percent	of	the	total	value	of	shares	of	all	classes	of capital	stock.	To	minimize	this	risk,	both	Marathon	and	United	States	Steel	agreed	in	the	tax	sharing	agreement	that	they	would	not	enter	into	any	transactions	or	make any	change	in	their	equity	structures	that	could	cause	the	Separation	to	be	treated	as	part	of	a	plan	or	series	of	related	transactions	to	which	those	provisions	of	section 355(e)	of	the	Internal	Revenue	Code	may	apply.	If	an	acquisition	occurs	that	results	in	the	Separation	being	taxable	under	section	355(e)	of	the	Internal	Revenue	Code, the	agreement	provides	that	the	resulting	corporate	tax	liability	will	be	borne	by	the	party	involved	in	that	acquisition	transaction.

Although	the	tax	sharing	agreement	allocates	tax	liabilities	relating	to	taxable	periods	ending	on	or	prior	to	the	Separation,	each	of	Marathon	and	United	States Steel,	as	members	of	the	same	consolidated	tax	reporting	group	during	any	portion	of	a	taxable	period	ended	on	or	prior	to	the	date	of	the	Separation,	is	jointly	and severally	liable	under	the	Internal	Revenue	Code	for	the	federal	income	tax	liability	of	the	entire	consolidated	tax	reporting	group	for	that	year.	To	address	the possibility	that	the	taxing	authorities	may	seek	to	collect	all	or	part	of	a	tax	liability	from	one	party	where	the	tax	sharing	agreement	allocates	that	liability	to	the	other party,	the	agreement	includes	indemnification	provisions	that	would	entitle	the	party	from	whom	the	taxing	authorities	are	seeking	collection	to	obtain	indemnification from	the	other	party,	to	the	extent	the	agreement	allocates	that	liability	to	that	other	party.	Marathon	can	provide	no	assurance,	however,	that	United	States	Steel	will	be able	to	meet	its	indemnification	obligations,	if	any,	to	Marathon	that	may	arise	under	the	tax	sharing	agreement.

# Obligations	Associated	with	the	Separation	as	of	December	31,	2003

See	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	—	Obligations	Associated	with	the	Separation	of	United	States Steel"	on	page	43	for	a	discussion	of	Marathon's	obligations	associated	with	the	Separation.

# Environmental	Matters

Marathon	maintains	a	comprehensive	environmental	policy	overseen	by	the	Corporate	Governance	and	Nominating	Committee	of	Marathon's	Board	of	Directors. Marathon's	Health,	Environment	and	Safety	organization	has	the	responsibility	to	ensure	that	Marathon's	operating	organizations	maintain	environmental	compliance systems	that	are	in	accordance	with	applicable	laws	and	regulations.	The	Health,	Environment	and	Safety	Management	Committee,	which	is	comprised	of	officers	of Marathon,	is	charged	with	reviewing	its	overall	performance	with	various	environmental	compliance	programs.	Marathon	also	has	an	Emergency	Management	Team, composed	of	senior	management,	which	oversees	the	response	to	any	major	emergency	environmental	incident	involving	Marathon	or	any	of	its	properties.

Marathon's	businesses	are	subject	to	numerous	laws	and	regulations	relating	to	the	protection	of	the	environment.	These	environmental	laws	and	regulations include	the	Clean	Air	Act	("CAA")	with	respect	to	air	emissions,	the	Clean	Water	Act	("CWA")	with	respect	to	water	discharges,	the	Resource	Conservation	and Recovery	Act	("RCRA")	with	respect	to	solid	and	hazardous	waste	treatment,	storage	and	disposal,	the	Comprehensive	Environmental	Response,	Compensation,	and Liability	Act	("CERCLA")	with	respect	to	releases	and	remediation	of	hazardous	substances	and	the	Oil	Pollution	Act	of	1990	("OPA-90")	with	respect	to	oil	pollution and	response.	In	addition,	many	states	where	Marathon	operates	have	similar	laws	dealing	with	the	same	matters.	These	laws	and	their	associated	regulations	are	subject to	frequent	change	and	many	of	them	have	become	more	stringent.	In	some	cases,	they	can	impose	liability	for	the	entire	cost	of	cleanup	on	any	responsible	party without	regard	to	negligence	or	fault	and	impose	liability	on	Marathon	for	the	conduct	of	others	or	conditions	others	have	caused,	or	for	Marathon's	acts	that	complied with	all	applicable	requirements	when	we	performed	them.	The	ultimate	impact	of	complying	with	existing	laws	and	regulations	is	not	always	clearly	known	or determinable,	due	in	part	to	the	fact	that	certain	implementing	regulations	for	some	environmental	laws	have	not	yet	been	finalized	or,	in	some	instances,	are	undergoing revision.	These	environmental	laws	and	regulations,	particularly	the	1990

Amendments	to	the	CAA	and	its	implementing	regulations,	new	water	quality	standards	and	stricter	fuel	regulations,	could	result	in	increased	capital,	operating	and compliance	costs.

For	a	discussion	of	environmental	capital	expenditures	and	costs	of	compliance	for	air,	water,	solid	waste	and	remediation,	see	"Management's	Discussion	and Analysis	of	Environmental	Matters,	Litigation	and	Contingencies"	on	page	45	and	"Legal	Proceedings"	on	page	24.

Of	particular	significance	to	MAP	are	EPA	regulations	that	require	reduced	sulfur	levels	in	the	manufacture	of	gasoline	and	on-road	diesel	fuel	starting	in	2004	and 2006,	respectively.	Marathon	estimates	that	MAP's	combined	capital	costs	to	achieve	compliance	with	these	rules	could	amount	to	approximately	$900	million,	which includes	costs	that	could	be	incurred	as	part	of	other	refinery	upgrade	projects,	between	2002	and	2006.	Some	factors	that	could	potentially	affect	MAP's	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.

The	U.S.	EPA	has	finalized	new	and	revised	National	Ambient	Air	Quality	Standards	("NAAQS")	for	fine	particulate	emissions	(PM2.5)	and	ozone.	In	connection with	these	new	standards,	EPA	will	designate	certain	areas	as	"nonattainment,"	meaning	that	the	air	quality	in	such	areas	do	not	meet	the	NAAQS.	To	address	these nonattainment	areas	EPA	has	proposed	a	rule	called	the	Interstate	Air	Quality	Rule	("IAQR")	that	will	require	significant	reductions	of	SO2	and	NOx	emissions	in numerous	states.	All	of	Marathon's	refinery	operations	are	located	within	these	affected	states.	If	this	rule	is	finalized,	it	could	have	a	significant	impact	on	Marathon's operations	as	well	as	the	operations	of	many	of	Marathon's	competitors.	At	this	time,	Marathon	cannot	determine	whether	the	IAQR	will	be	finalized	or	whether	it	will be	substantially	changed	before	it	is	final.	As	a	result,	Marathon	cannot	presently	reasonably	estimate	the	financial	impact	of	such	a	rule.

# Water

Marathon	maintains	numerous	discharge	permits	as	required	under	the	National	Pollutant	Discharge	Elimination	System	program	of	the	CWA	and	has implemented	systems	to	oversee	its	compliance	efforts.	In	addition,	Marathon	is	regulated	under	OPA-90,	which	amended	the	CWA.	Among	other	requirements,	OPA- 90	requires	the	owner	or	operator	of	a	tank	vessel	or	a	facility	to	maintain	an	emergency	plan	to	respond	to	releases	of	oil	or	hazardous	substances.	Also,	in	case	of	such releases	OPA-90	requires	responsible	companies	to	pay	resulting	removal	costs	and	damages,	provides	for	civil	penalties	and	imposes	criminal	sanctions	for	violations of	its	provisions.

Additionally,	OPA-90	requires	that	new	tank	vessels	entering	or	operating	in	U.S.	waters	be	double	hulled	and	that	existing	tank	vessels	that	are	not	double-hulled be	retrofitted	or	removed	from	U.S.	service,	according	to	a	phase-out	schedule.	As	of	December	31,	2003,	all	of	the	barges	used	in	MAP's	river	transportation	operations meet	the	double-hulled	requirements	of	OPA-90.

Marathon	operates	facilities	at	which	spills	of	oil	and	hazardous	substances	could	occur.	Several	coastal	states	in	which	Marathon	operates	have	passed	state	laws similar	to	OPA-90,	but	with	expanded	liability	provisions,	including	provisions	for	cargo	owner	responsibility	as	well	as	ship	owner	and	operator	responsibility. Marathon	has	implemented	emergency	oil	response	plans	for	all	of	its	components	and	facilities	covered	by	OPA-90.

# Solid	Waste

Marathon	continues	to	seek	methods	to	minimize	the	generation	of	hazardous	wastes	in	its	operations.	RCRA	establishes	standards	for	the	management	of	solid	and hazardous	wastes.	Besides	affecting	waste	disposal	practices,	RCRA	also	addresses	the	environmental	effects	of	certain	past	waste	disposal	operations,	the	recycling	of wastes	and	the	regulation	of	underground	storage	tanks	("USTs")	containing	regulated	substances.	Since	the	EPA	has	not	yet	promulgated	implementing	regulations	for all	provisions	of	RCRA	and	has	not	yet	made	clear	the	practical	application	of	all	the	implementing	regulations	it	has	promulgated,	the	ultimate	cost	of	compliance	with this	statute	cannot	be	accurately	estimated.	In	addition,	new	laws	are	being	enacted	and	regulations	are	being	adopted	by	various	regulatory	agencies	on	a	continuing basis,	and	the	costs	of	compliance	with	these	new	rules	can	only	be	broadly	appraised	until	their	implementation	becomes	more	accurately	defined.

# Remediation

Marathon	owns	or	operates	certain	retail	outlets	where,	during	the	normal	course	of	operations,	releases	of	petroleum	products	from	USTs	have	occurred.	Federal and	state	laws	require	that	contamination	caused	by	such	releases	at	these	sites	be	assessed	and	remediated	to	meet	applicable	standards.	The	enforcement	of	the	UST regulations	under	RCRA	has	been	delegated	to	the	states,	which	administer	their	own	UST	programs.	Marathon's	obligation	to	remediate	such	contamination	varies, depending	on	the	extent	of	the	releases	and	the	stringency	of	the	laws	and	regulations	of	the	states	in	which	it	operates.	A	portion	of	these	remediation	costs	may	be recoverable	from	the	appropriate	state	UST	reimbursement	fund	once	the	applicable	deductible	has	been	satisfied.	Accruals	for	remediation	expenses	and	associated reimbursements	are	established	for	sites	where	contamination	has	been	determined	to	exist	and	the	amount	of	associated	costs	is	reasonably	determinable.

As	a	general	rule,	Marathon	and	Ashland	retained	responsibility	for	certain	remediation	costs	arising	out	of	the	prior	ownership	and	operation	of	businesses transferred	to	MAP.	Such	continuing	responsibility,	in	certain	situations,	may	be	subject	to	threshold	or	sunset	agreements,	which	gradually	diminish	this	responsibility over	time.

# Properties

The	location	and	general	character	of	the	principal	oil	and	gas	properties,	refineries	and	gas	plants,	pipeline	systems	and	other	important	physical	properties	of Marathon	have	been	described	previously.	Except	for	oil	and	gas	producing	properties,	which	generally	are	leased,	or	as	otherwise	stated,	such	properties	are	held	in	fee. The	plants	and	facilities	have	been	constructed	or	acquired	over	a	period	of	years	and	vary	in	age	and	operating	efficiency.	At	the	date	of	acquisition	of	important properties,	titles	were	examined	and	opinions	of	counsel	obtained,	but	no	title	examination	has	been	made	specifically	for	the	purpose	of	this	document.	The	properties classified	as	owned	in	fee	generally	have	been	held	for	many	years	without	any	material	unfavorably	adjudicated	claim.

The	basis	for	estimating	oil	and	gas	reserves	is	set	forth	in	"Consolidated	Financial	Statements	and	Supplementary	Data	–	Supplementary	Information	on	Oil	and Gas	Producing	Activities	–	Estimated	Quantities	of	Proved	Oil	and	Gas	Reserves"	on	pages	F-45	through	F-46.

# Property,	Plant	and	Equipment	Additions

For	property,	plant	and	equipment	additions,	see	"Management's	Discussion	and	Analysis	of	Financial	Condition,	Cash	Flows	and	Liquidity	–	Capital Expenditures"	on	page	40.

# Employees

Marathon	had	27,007	active	employees	as	of	December	31,	2003,	including	23,556	MAP	employees.	Of	the	total	number	of	MAP	employees,	17,139	were employees	of	Speedway	SuperAmerica	LLC,	most	of	whom	were	employees	at	retail	marketing	outlets.

Certain	hourly	employees	at	the	Catlettsburg	and	Canton	refineries	are	represented	by	the	Paper,	Allied-Industrial,	Chemical	and	Energy	Workers	International Union	under	labor	agreements	that	expire	on	January	31,	2006.	The	same	union	represents	certain	hourly	employees	at	the	Texas	City	refinery	under	a	labor	agreement that	expires	on	March	31,	2006.	The	International	Brotherhood	of	Teamsters	represents	certain	hourly	employees	at	the	St.	Paul	Park	and	Detroit	refineries	under	labor agreements	that	are	scheduled	to	expire	on	May	31,	2006	and	January	31,	2007,	respectively.

# Available	Information

General	information	about	Marathon,	including	the	Corporate	Governance	Principles	and	Charters	for	the	Audit	Committee,	Compensation	Committee,	Corporate Governance	and	Nominating	Committee,	and	Committee	on	Financial	Policy,	can	be	found	at	www.marathon.com.	In	addition,	Marathon's	Code	of	Business	Conduct and	Code	of	Ethics	for	Senior	Financial	Officers	is	available	on	the	website	at	www.marathon.com/Values/	Corporate_Governance/.	Marathon's	Annual	Report	on Form	10-K,	quarterly	reports	on	Form	10-Q	and	current	reports	on	Form	8-K,	as	well	as	any	amendments	and	exhibits	to	those	reports,	are	available	free	of	charge through	the	website	as	soon	as	reasonably	practicable	after	the	reports	are	filed	or	furnished	with	the	SEC.	These	documents	are	also	available	in	hard	copy,	free	of charge,	by	contacting	Marathon's	Investor	Relations	office.	Information	contained	on	Marathon's	website	is	not	incorporated	into	this	Form	10-K	or	other	securities filings.

# Item	3.	Legal	Proceedings

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.	Certain	of	these	matters	are	included	below	in	this	discussion.	The	ultimate	resolution	of	these	contingencies	could, individually	or	in	the	aggregate,	be	material.	However,	management	believes	that	Marathon	will	remain	a	viable	and	competitive	enterprise	even	though	it	is	possible that	these	contingencies	could	be	resolved	unfavorably.

# Natural	Gas	Royalty	Litigation

Marathon	was	served	in	two	qui	tam	cases,	which	allege	that	federal	and	Indian	lessees	violated	the	False	Claims	Act	with	respect	to	the	reporting	and	payment	of royalties	on	natural	gas	and	natural	gas	liquids.	The	first	case,	U.S.	ex	rel	Jack	J.	Grynberg	v.	Alaska	Pipeline	Co.,	et	al.	is	primarily	a	gas	measurement	case,	and	the second	case,	U.S.	ex	rel	Harrold	E.	Wright	v.	Agip	Petroleum	Co.	et	al,	is	primarily	a	gas	valuation	case.	These	cases	assert	that	false	claims	have	been	filed	by	lessees and	that	penalties,	damages	and	interest	total	more	than	$25	billion.	The	Department	of	Justice	has	announced	that	it	would	intervene	or	has	reserved	judgment	on whether	to	intervene	against	specified	oil	and	gas	companies	and	also	announced	that	it	would	not	intervene	against	certain	other	defendants	including	Marathon.	The matters	are	in	the	discovery	phase	and	Marathon	intends	to	vigorously	defend	these	cases.

# Powder	River	Basin	Arbitration

The	U.S.	Bureau	of	Land	Management	("BLM")	completed	a	multi-year	review	of	potential	environmental	impacts	from	coal	bed	methane	development	on	federal lands	in	the	Powder	River	Basin	in	Montana	and	Wyoming.	The	Agency's	Record	of	Decision	("ROD")	was	signed	on	April	30,	2003	supporting	increased	coal	bed methane	development.	Plaintiff	environmental	and	other	groups	filed	four	suits	in	May	2003	in	the	U.S.	District	Court	for	the	District	of	Montana	against	the	BLM alleging	the	Agency's	environmental	impact	review	was	not	adequate.	Plaintiffs	seek	a	court	order	enjoining	coal	bed	methane	development	on	federal	lands	in	the Powder	River	Basin	until	BLM	conducts	additional	studies	on	the	environmental	impact.	Marathon	has	been	allowed	to	intervene	as	a	party	in	all	four	of	the	cases.	As the	lawsuits	to	delay	energy	development	in	the	Powder	River	Basin	progress	through	the	courts,	BLM	continues	to	process	permits	to	drill	under	the	ROD.	In	January 2004,	the	Court	over	protests	of	Plaintiffs,	transferred	to	the	District	Court	of	Wyoming,	portions	of	two	of	the	cases	dealing	with	the	sufficiency	of	the	environmental impact	review	as	to	lands	in	Wyoming.

# Environmental	Proceedings

The	following	is	a	summary	of	proceedings	involving	Marathon	that	were	pending	or	contemplated	as	of	December	31,	2003,	under	federal	and	state	environmental laws.	Except	as	described	herein,	it	is	not	possible	to	predict	accurately	the	ultimate	outcome	of	these	matters;	however,	management's	belief	set	forth	in	the	first paragraph	under	Item	3.	"Legal	Proceedings"	above	takes	such	matters	into	account.

Claims	under	the	Comprehensive	Environmental	Response,	Compensation	and	Liability	Act	("CERCLA")	and	related	state	acts	have	been	raised	with	respect	to	the cleanup	of	various	waste	disposal	and	other	sites.	CERCLA	is	intended	to	facilitate	the	cleanup	of	hazardous	substances	without	regard	to	fault.	Potentially	responsible parties	("PRPs")	for	each	site	include	present	and	former	owners	and	operators	of,	transporters	to	and	generators	of	the	substances	at	the	site.	Liability	is	strict	and	can be	joint	and	several.	Because	of	various	factors	including	the	difficulty	of	identifying	the	responsible	parties	for	any	particular	site,	the	complexity	of	determining	the relative	liability	among	them,	the	uncertainty	as	to	the	most	desirable	remediation	techniques	and	the	amount	of	damages	and	cleanup	costs	and	the	time	period	during which	such	costs	may	be	incurred,	Marathon	is	unable	to	reasonably	estimate	its	ultimate	cost	of	compliance	with	CERCLA.

Projections,	provided	in	the	following	paragraphs,	of	spending	for	and/or	timing	of	completion	of	specific	projects	are	forward-looking	statements.	These	forward- looking	statements	are	based	on	certain	assumptions	including,	but	not	limited	to,	the	factors	provided	in	the	preceding	paragraph.	To	the	extent	that	these	assumptions prove	to	be	inaccurate,	future	spending	for,	or	timing	of	completion	of	environmental	projects	may	differ	materially	from	those	stated	in	the	forward-looking	statements.

At	December	31,	2003,	Marathon	had	been	identified	as	a	PRP	at	a	total	of	9	CERCLA	waste	sites.	Based	on	currently	available	information,	which	is	in	many cases	preliminary	and	incomplete,	Marathon	believes	that	its	liability	for	cleanup	and	remediation	costs	in	connection	with	all	but	one	of	these	sites	will	be	under	$1 million	per	site,	and	most	will	be	under	$100,000.	Marathon	believes	that	its	liability	for	cleanup	and	remediation	costs	in	connection	with	the	one	remaining	site	will	be under	$4	million.

In	addition,	there	are	four	sites	where	Marathon	has	received	information	requests	or	other	indications	that	it	may	be	a	PRP	under	CERCLA	but	where	sufficient information	is	not	presently	available	to	confirm	the	existence	of	liability.

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	which	has	retained	liability	for	all	costs	associated	with	remediation.	Based	on	currently	available	information,	which	is	in	many	cases	preliminary	and incomplete,	Marathon	believes	that	its	liability	for	cleanup	and	remediation	costs	in	connection	with	15	of	these	sites	will	be	under	$100,000	per	site,	43	sites	have potential	costs	between	$100,000	and	$1	million	per	site,	16	sites	may	involve	remediation	costs	between	$1	million	and	$5	million	per	site,	7	sites	have	incurred remediation	costs	of	more	than	$5	million	per	site,	and	one	additional	site	has	the	potential	to	exceed	$5	million.	There	are	27	sites	with	insufficient	information	to estimate	future	remediation	costs.

There	is	one	site	that	involves	a	remediation	program	in	cooperation	with	the	Michigan	Department	of	Environmental	Quality	at	a	closed	and	dismantled	refinery site	located	near	Muskegon,	Michigan.	During	the	next	10	to	20	years,	Marathon	anticipates	spending	less	than	$7	million	at	this	site.	Expenditures	in	2003	were approximately	$225,000,	and	expenditures	in	2004	will	be	approximately	$500,000.	Ongoing	work	at	this	site	is	subject	to	approval	by	the	Michigan	Department	of Environmental	Quality	("MDEQ"),	and	a	risk-based	closure	strategy	is	being	developed	and	will	be	approved	by	the	MDEQ.

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.

The	Kentucky	Natural	Resources	and	Environmental	Cabinet	issued	the	MAP	Catlettsburg,	Kentucky	Refinery	a	Notice	of	Violation	("NOV")	regarding	the	Tank 845	rupture	which	occurred	in	November	of	1999.	The	tank	rupture	caused	the	tank's	contents	to	be	released	onto	the	ground	and	adjoining	retention	area.	MAP resolved	this	matter	in	2003	for	a	civil	penalty	of	$120,000	and	the	entering	of	an	agreed	Administrative	Order.

In	2000,	the	Kentucky	Natural	Resources	and	Environmental	Cabinet	sent	Marathon	Ashland	Pipe	Line	LLC	a	NOV	seeking	a	civil	penalty	associated	with	a pipeline	spill	earlier	that	year	in	Winchester,	Kentucky.	MAP	has	settled	this	NOV	in	the	form	of	an	Agreed-to	Administrative	Order	which	was	finalized	and	entered	in January	2002	and	required	payment	of	a	$170,000	penalty	and	reimbursement	of	past	response	costs	up	to	$131,000.

In	July,	2002,	Marathon	received	a	Notice	of	Enforcement	from	the	State	of	Texas	for	alleged	excess	air	emissions	from	its	Yates	Gas	Plant	and	production operations	on	its	Kloh	lease.	The	Notices	did	not	compute	a	penalty	or	fine	for	these	pending	enforcement	actions;	a	tentative	settlement	for	under	$200,000	in	civil penalties	and	a	Supplemental	Environmental	Project	has	been	reached	and	awaits	full	Commission	approval.

In	May,	2003,	Marathon	received	a	Consolidated	Compliance	Order	&	Notice	or	Potential	Penalty	from	the	State	of	Louisiana	for	alleged	various	air	permit regulatory	violations.	This	matter	has	been	resolved	in	principle	with	the	State	for	a	civil	penalty	of	under	$150,000	and	awaits	formal	closure	with	the	State.

During	the	third	quarter	of	2003,	a	MAP	subsidiary,	Ohio	River	Pipe	Line	LLC	("ORPL"),	entered	into	Director's	Final	Findings	and	Orders	with	the	Ohio Environmental	Protection	Agency	("OEPA").	The	OEPA	had	alleged	ORPL	violations	of	a	stormwater	permit	and	pollution	prevention	plan	during	construction	of	the Cardinal	Products	Pipeline.	The	Findings	and	Orders	required	compliance	with	the	permit,	plan	and	other	requirements,	and	payment	of	a	$104,738	civil	penalty.

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

Not	applicable.

# Item	5.	Market	for	Registrant's	Common	Equity	and	Related	Stockholder	Matters

The	principal	market	on	which	the	Company's	common	stock	is	traded	is	the	New	York	Stock	Exchange.	Information	concerning	the	high	and	low	sales	prices	for the	common	stock	as	reported	in	the	consolidated	transaction	reporting	system	and	the	frequency	and	amount	of	dividends	paid	during	the	last	two	years	is	set	forth	in "Selected	Quarterly	Financial	Data	(Unaudited)"	on	page	F-41.

As	of	January	31,	2004,	there	were	61,404	registered	holders	of	Marathon	common	stock.

The	Board	of	Directors	intends	to	declare	and	pay	dividends	on	Marathon	common	stock	based	on	the	financial	condition	and	results	of	operations	of	Marathon	Oil Corporation,	although	it	has	no	obligation	under	Delaware	law	or	the	Restated	Certificate	of	Incorporation	to	do	so.	In	determining	its	dividend	policy	with	respect	to Marathon	common	stock,	the	Board	will	rely	on	the	financial	statements	of	Marathon.	Dividends	on	Marathon	common	stock	are	limited	to	legally	available	funds	of Marathon.

On	January	29,	2003,	Marathon	amended	the	Rights	Agreement,	dated	as	September	28,	1999,	as	amended,	between	Marathon	and	National	City	Bank,	as successor	rights	agent.	The	Rights	Agreement	was	amended	so	that	the	Rights	to	Purchase	Series	A	Junior	Preferred	Stock	expired	on	January	31,	2003,	more	than	six years	earlier	than	initially	specified	in	the	plan.

# Item	6.	Selected	Financial	Data

# 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	other	energy related	businesses.	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.

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	52.

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

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.

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.

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

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.

Marathon	operates	other	businesses	that	market	and	transport	its	own	and	third-party	natural	gas,	crude	oil	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.	Other	energy	related	businesses	("OERB") operations	could	be	impacted	by	unforeseen	events	such	as	explosions,	fires,	product	spills,	inclement	weather	or	availability	of	LNG	vessels.	They	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.

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

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	43,	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	spotprice	at	$32.47	per	barrel,	no	IMV	reserve	was	needed.

# 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	45.

# 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.

# 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	52.

# 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 | $3,990 | $3,711 | $4,245 |
| RM&T | 34,514 | 26,399 | 27,247 |
| OERB | 3,209 | 2,122 | 2,062 |
| Segment\trevenues | 41,713 | 32,232 | 33,554 |
| Elimination\tof\tintersegment\trevenues | (750) | (937) | (728) |
| Elimination\tof\tsales\tto\tUnited\tStates\tSteel | – | – | (30) |
| Total\trevenues | $40,963 | $31,295 | $32,796 |
| Items\tincluded\tin\tboth\trevenues\tand\tcosts\tand\texpenses: |  |  |  |
| Consumer\texcise\ttaxes\ton\tpetroleum\tproducts\tand\tmerchandise | $4,285 | $4,250 | $4,404 |
| Matching\tcrude\toil\tand\trefined\tproduct\tbuy/sell\ttransactions\tsettled\tin\tcash: |  |  |  |
| E&P | $222 | $289 | $454 |
| RM&T | 6,936 | 4,191 | 3,797 |
| Total\tbuy/sell\ttransactions | $7,158 | $4,480 | $4,251 |

E&P	segment	revenues	increased	by	$279	million	in	2003	from	2002	and	decreased	by	$534	million	in	2002	from	2001.	The	2003	increase	was	primarily	due	to higher	worldwide	natural	gas	and	liquid	hydrocarbon	prices.	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.	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.

OERB	segment	revenues	increased	by	$1.087	billion	in	2003	from	2002	and	$60	million	in	2002	from	2001.	The	increase	in	2003	is	a	result	of	higher	natural	gas and	liquid	hydrocarbon	prices	and	increased	natural	gas	and	crude	oil	marketing	activity.	The	increase	in	2002	reflected	a	favorable	effect	from	increased	natural	gas	and crude	oil	marketing	activity	partially	offset	by	lower	natural	gas	prices.	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	36.

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

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	OERB	segment	were	primarily	a	result of	higher	natural	gas	and	liquid	hydrocarbon	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	31.

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\ttax\trate | 35.0% | 35.0% | 35.0% |
| Effects\tof\tforeign\toperations\t(a) | (0.4) | 5.6 | (0.7) |
| State\tand\tlocal\tincome\ttaxes\tafter\tfederal\tincome\ttax\teffects | 2.2 | 3.9 | 3.0 |
| Other\tfederal\ttax\teffects | (0.2) | (2.4) | (0.2) |
| Effective\ttax\trate | 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.

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 | $1,128 | $687 | $1,122 |
| International | 359 | 351 | 229 |
| E&P\tsegment\tincome | 1,487 | 1,038 | 1,351 |
| RM&T | 770 | 356 | 1,914 |
| OERB | 73 | 78 | 62 |
| Segment\tincome | 2,330 | 1,472 | 3,327 |
| Items\tnot\tallocated\tto\tsegments: |  |  |  |
| Administrative\texpenses(a) | (203) | (194) | (187) |
| Business\ttransformation\tcosts(b) | (24) | – | – |
| Inventory\tmarket\tvaluation\tadjustments(c) | – | 71 | (71) |
| Gain\t(loss)\ton\townership\tchange\tin\tMAP | (1) | 12 | (6) |
| Gain\ton\toffshore\tlease\tresolution\twith\tU.S.\tGovernment | – | – | 59 |
| Gain\ton\tasset\tdispositions(d) | 106 | 24 | – |
| Loss\ton\tdissolution\tof\tMKM\tPartners\tL.P.(e) | (124) | – | – |
| Contract\tsettlement(f) | – | (15) | – |
| Separation\tcosts(g) | – | – | (14) |
| Total\tincome\tfrom\toperations | $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.

# Average	Volumes	and	Selling	Prices

| (Dollars	in	millions,	except	as	noted) | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| OPERATING\tSTATISTICS |  |  |  |
| Net\tLiquid\tHydrocarbon\tProduction\t(mbpd)(a)(b) |  |  |  |
| United\tStates | 106.5 | 116.0 | 126.3 |
| Equity\tInvestee\t(MKM) | 4.4 | 8.5 | 9.4 |
| Total\tUnited\tStates | 110.9 | 124.5 | 135.7 |
| Europe | 41.5 | 51.9 | 46.2 |
| Other\tInternational | 10.0 | 1.0 | – |
| West\tAfrica | 27.1 | 25.3 | 16.0 |
| Equity\tInvestee(c) | 1.2 | – | .1 |
| Total\tInternational(d) | 79.8 | 78.2 | 62.3 |
| Worldwide\tcontinuing\toperations | 190.7 | 202.7 | 198.0 |
| Discontinued\toperations | 3.1 | 4.4 | 11.0 |
| Worldwide | 193.8 | 207.1 | 209.0 |
| Net\tNatural\tGas\tProduction\t(mmcfd)(b)(e)\nUnited\tStates | 731.6 | 744.8 | 793.1 |
| Europe | 285.9 | 303.5 | 326.4 |
| West\tAfrica | 65.9 | 53.3 | – |
| Equity\tInvestee\t(CLAM) | 12.4 | 24.8 | 30.7 |
| Total\tInternational | 364.2 | 381.6 | 357.1 |
| Worldwide\tcontinuing\toperations | 1,095.8 | 1,126.4 | 1150.2 |
| Discontinued\toperations | 74.1 | 103.9 | 122.8 |
| Worldwide | 1,169.9 | 1,230.3 | 1273.0 |
| Total\tproduction\t(mboepd) | 388.8 | 412.2 | 421.2 |
| Average\tSales\tPrices\t(excluding\tderivative\tgains\tand\tlosses) |  |  |  |
| Liquid\tHydrocarbons\t($\tper\tbbl)(a) |  |  |  |
| United\tStates | $26.92 | $22.18 | $20.62 |
| Equity\tInvestee\t(MKM) | 29.45 | 24.65 | 23.37 |
| Total\tUnited\tStates | 27.02 | 22.35 | 20.81 |
| Europe | 28.50 | 24.40 | 23.49 |
| Other\tInternational | 18.33 | 26.98 | – |
| West\tAfrica | 26.29 | 22.62 | 24.36 |
| Equity\tinvestee(c) | 13.72 | 15.87 | 28.28 |
| Total\tInternational | 26.24 | 23.85 | 23.74 |
| Worldwide\tcontinuing\toperations | 26.70 | 22.93 | 21.73 |
| Discontinued\toperations | 28.96 | 23.29 | 21.26 |
| Worldwide | $26.73 | $22.94 | $21.71 |
| Natural\tGas\t($\tper\tmcf)\nUnited\tStates | $4.53 | $2.87 | $3.69 |
| Europe | 3.35 | 2.67 | 2.78 |
| West\tAfrica | .25 | .24 | – |
| Equity\tInvestee\t(CLAM) | 3.69 | 3.05 | 3.38 |
| Total\tInternational | 2.80 | 2.35 | 2.83 |
| Worldwide\tcontinuing\toperations | 3.95 | 2.70 | 3.42 |
| Discontinued\toperations | 5.43 | 3.30 | 4.17 |
| Worldwide | $4.05 | $2.75 | $3.49 |
| MAP: |  |  |  |
| Refined\tProducts\tSales\tVolumes\t(mbpd)(f) | 1,357.0 | 1,318.4 | 1,304.4 |
| Matching\tbuy/sell\tvolumes\tincluded\tin\trefined\tproduct\tsales\tvolumes\t(mbpd) | 64.0 | 70.7 | 45.0 |
| Refining\tand\tWholesale\tMarketing\tMargin(g)(h) | $0.0601 | $0.0387 | $0.1167 |

(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.

(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.

Domestic	E&P	income	increased	by	$441	million	in	2003	from	2002	following	a	decrease	of	$435	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.

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.

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	$414	million	in	2003	from	2002	following	a	decrease	of	$1.558	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.

OERB	segment	income	decreased	by	$5	million	in	2003	from	2002	and	increased	by	$16	million	in	2002	from	2001.	The	2003	results	include	a	gain	of	$34 million	on	the	sale	of	Marathon's	interest	in	two	refined	product	pipeline	companies	and	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	and	a	loss	of	$17	million	on	the	termination	of	two tanker	operating	leases.	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	OERB	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 | $2,608 | $2,720 |
| International | 3,351 | 3,186 |
| Total\tE&P | 5,959 | 5,906 |
| RM&T | 4,492 | 4,234 |
| OERB | 181 | 67 |
| 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	41,	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.

# 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 | $342 | $416 | $537 |
| International | 629 | 403 | 294 |
| Total\tE&P | 971 | 819 | 831 |
| RM&T | 772 | 621 | 591 |
| OERB | 133 | 49 | 4 |
| 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	OERB	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,

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	52,	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.

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-<br>2006 | 2007-<br>2008 | Later<br>Years |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Short\tand\tlong-term\tdebt\t(a) | $4,181 | $258 | $308 | $850 | $2,765 |
| Sale-leaseback\tfinancing\t(includes\timputed\tinterest)\t(a) | 107 | 11 | 22 | 31 | 43 |
| Capital\tlease\tobligations\t(a) | 155 | 18 | 24 | 29 | 84 |
| Operating\tlease\tobligations\t(a) | 378 | 89 | 127 | 52 | 110 |
| Operating\tlease\tobligations\tunder\tsublease\t(a) | 77 | 19 | 20 | 17 | 21 |
| Purchase\tobligations: |  |  |  |  |  |
| Crude,\trefinery\tfeedstock\tand\trefined\tproducts\tcontracts\t(b) | 7,743 | 5,874 | 1,856 | 13 | — |
| Transportation\tand\trelated\tcontracts | 1,071 | 138 | 407 | 147 | 379 |
| Contracts\tto\tacquire\tproperty,\tplant\tand\tequipment | 565 | 486 | 72 | 3 | 4 |
| LNG\tfacility\toperating\tcosts\t(c) | 230 | 14 | 27 | 27 | 162 |
| Service\tand\tmaterials\tcontracts\t(d) | 188 | 89 | 56 | 23 | 20 |
| Unconditional\tpurchase\tobligations\t(e) | 67 | 5 | 11 | 11 | 40 |
| Commitments\tfor\toil\tand\tgas\texploration\t(non-capital)\t(f) | 32 | 8 | 24 | — | — |
| Total\tpurchase\tobligations | 9,896 | 6,614 | 2,453 | 224 | 605 |
| Other\tlong-term\tliabilities\treflected\ton\tthe\tConsolidated\tBalance\tSheet: |  |  |  |  |  |
| Accrued\tLNG\tfacility\toperating\tcosts\t(c) | 22 | 3 | 5 | 5 | 9 |
| Employee\tbenefit\tobligations\t(g) | 2,082 | 152 | 338 | 379 | 1,213 |
| Total\tother\tlong-term\tliabilities | 2,104 | 155 | 343 | 384 | 1,222 |
| Total\tcontractual\tcash\tobligations\t(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	44.

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.

# 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.

•	 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-<br>2006 | 2007-<br>2008 | Later<br>Years |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Contractual\tobligations\tassumed\tby\tUnited\tStates\tSteel |  |  |  |  |  |
| Long-term\tdebt | $470 | $– | $ – | $ – | $470 |
| Sale-leaseback\tfinancing\t(includes\timputed\tinterest) | 107 | 11 | 22 | 31 | 43 |
| Capital\tlease\tobligations | 84 | 13 | 13 | 19 | 39 |
| Operating\tlease\tobligations | 18 | 5 | 10 | 3 | – |
| Operating\tlease\tobligations\tunder\tsublease | 54 | 12 | 11 | 10 | 21 |
| Total\tcontractual\tobligations\tassumed\tby\tUnited\tStates\tSteel | $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.

# 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\t&amp;\tmaintenance | 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.

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.

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".

# Outlook

# Realignment	of	Business	Segments

In	January	2004,	Marathon	changed	its	business	segments	to	fully	reflect	all	the	operations	of	the	integrated	gas	strategy	within	a	single	segment.	In	the	first	quarter of	2004,	Marathon	will	realign	its	segment	reporting	and	introduce	a	new	business	segment,	Integrated	Gas.	This	segment	will	initially	include	Marathon's	Alaska	LNG operations,	Equatorial	Guinea	methanol	operations,	and	natural	gas	marketing	and	transportation	activities,	along	with	expenses	related	to	the	continued	development	of an	integrated	gas	business.	Crude	oil	marketing	and	transportation	activities,	previously	reported	in	other	energy	related	businesses,	will	be	reported	in	the	exploration and	production	segment.	Refined	product	transportation	activities	not	included	in	MAP,	also	previously	reported	in	other	energy	related	businesses,	will	be	reported	in the	refining,	marketing	and	transportation	segment.	The	following	represents	unaudited	information	for	the	realigned	operating	segment	for	the	previous	three	years:

| (In	millions) | Exploration<br>and<br>Production | Marketing<br>and<br>Transportation | Integrated<br>Gas | Total |
| :--- | :--- | :--- | :--- | :--- |
| 2003 |  |  |  |  |
| Revenues: |  |  |  |  |
| Customer | $4,394 | $33,508 | $2,140 | $40,042 |
| Intersegment(a) | 405 | 97 | 108 | 610 |
| Related\tparties | 12 | 909 | – | 921 |
| Total\trevenues | $4,811 | $34,514 | $2,248 | $41,573 |
| Segment\tincome\t(loss) | $1,514 | $819 | $(3) | $2,330 |
| Income\tfrom\tequity\tmethod\tinvestments | 50 | 82 | 21 | 153 |
| Depreciation,\tdepletion\tand\tamortization(b) | 755 | 375 | 12 | 1,142 |
| Impairments(c) | 3 | – | – | 3 |
| Capital\texpenditures(c) | 973 | 772 | 131 | 1,876 |
| 2002 |  |  |  |  |
| Revenues: |  |  |  |  |
| Customer | $3,894 | $25,384 | $1,148 | $30,426 |
| Intersegment(a) | 583 | 146 | 69 | 798 |
| Related\tparties | – | 869 | – | 869 |
| Total\trevenues | $4,477 | $26,399 | $1,217 | $32,093 |
| Segment\tincome | $1,077 | $372 | $23 | $1,472 |
| Income\tfrom\tequity\tmethod\tinvestments | 75 | 48 | 14 | 137 |
| Depreciation,\tdepletion\tand\tamortization(b) | 769 | 364 | 3 | 1,136 |
| Impairments(c) | 13 | – | – | 13 |
| Capital\texpenditures(c) | 820 | 621 | 48 | 1,489 |
| 2001 |  |  |  |  |
| Revenues: |  |  |  |  |
| Customer | $4,357 | $26,778 | $1,214 | $32,349 |
| Intersegment(a) | 496 | 21 | 68 | 585 |
| United\tStates\tSteel(a) | 21 | 1 | 8 | 30 |
| Related\tparties | – | 447 | – | 447 |
| Total\trevenues | $4,874 | $27,247 | $1,290 | $33,411 |
| Segment\tincome | $1,379 | $1,927 | $21 | $3,327 |
| Income\tfrom\tequity\tmethod\tinvestments | 71 | 41 | 6 | 118 |
| Depreciation,\tdepletion\tand\tamortization(b) | 824 | 345 | 1 | 1,170 |
| Impairments(c) | – | 1 | – | 1 |
| Capital\texpenditures(c) | 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) Differences	between	segment	totals	and	Marathon	totals	represent	impairments	and	amounts	related	to	corporate	administrative	activities.

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

# 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.

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.

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.

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.

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.

# 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.

# 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	OERB	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.

# 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)

| Derivative	Commodity	Instruments^(b)(c) | 10% | 25% | 10% | 25% |
| :--- | :--- | :--- | :--- | :--- |
| Crude\toil(d) | $28.3(e) | $87.9(e) | $42.3(e) | $141.8(e) |
| Natural\tgas(d) | 29.1(e) | 73.5(e) | 39.5(e) | 120.3(e) |
| Refined\tproducts(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	OERB	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.

| Option	collars | January	–	December	2004 | 23	mmcfd | 2% | $7.15	-	$4.25	mcf |
| :--- | :--- | :--- | :--- | :--- |
| Swaps | January\t–\tDecember\t2004 | 50\tmmcfd | 5% | $5.02\tmcf |
| Crude\tOil |  |  |  |  |
| Option\tcollars | 2004 | 44\tmbpd | 23% | $29.67\t-\t$24.26\tbbl |

(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.

# 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\tprice\trisk | $(112) | $(95) |
| Protect\tcarrying\tvalues\tof\texcess\tinventories | (57) | (41) |
| Protect\tmargin\ton\tfixed\tprice\tsales | 5 | 11 |
| Protect\tcrack\tspread\tvalues | 6 | 1 |
| Trading\tactivities | (4) | – |
| Total\tnet\tderivative\tlosses | $(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.

# OERB	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	OERB	segment	income	were	$19	million,	$(8)	million	and	$(29)	million	for	2003,	2002	and	2001.	OERB'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.

# 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:

|  | December	31,	2003 | December	31,	2003 | December	31,	2002 | December	31,	2002 |
| :--- | :--- | :--- | :--- | :--- |
| Financial\tInstruments^(a) | Fair\nValue^(b) | Incremental\nIncrease\tin\nFair\tValue^(c) | Fair\nValue^(b) | Incremental\nIncrease\tin\nFair\tValue^(c) |
| Financial\tassets: |  |  |  |  |
| Investments\tand\tlong-term\treceivables | $186 | $– | $223 | $– |
| Interest\trate\tswap\tagreements | $4 | $16 | $12 | $8 |
| Financial\tliabilities: |  |  |  |  |
| Long-term\tdebt(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<br>to	be<br>Received | Notional<br>Amount<br>($Millions) | Swap<br>Maturity | Fair	Value<br>($Millions) |
| :--- | :--- | :--- | :--- | :--- |
| Six\tMonth\tLIBOR\t+4.226% | 6.650% | $300 | 2006 | $1 |
| Six\tMonth\tLIBOR\t+1.935% | 5.375% | $450 | 2007 | $6 |
| Six\tMonth\tLIBOR\t+3.285% | 6.850% | $400 | 2008 | $3 |
| Six\tMonth\tLIBOR\t+2.142% | 6.125% | $200 | 2012 | $(6) |

# 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	43.

# 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.

# Item	8.	Consolidated	Financial	Statements	and	Supplementary	Data

# Index	to	2003	Consolidated	Financial	Statements	and	Supplementary	Data

# 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.

President	and

Chief	Executive	Officer

Janet	F.	Clark

Senior	Vice	President	and

Chief	Financial	Officer

Albert	G.	Adkins

Vice	President–

Accounting	and	Controller

# Report	of	Independent	Auditors

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	auditing	standards	generally	accepted	in the	United	States	of	America,	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

# Consolidated	Statement	of	Income

| (Dollars	in	millions) | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Revenues\tand\tother\tincome: |  |  |  |
| Sales\tand\tother\toperating\trevenues\t(including\tconsumer\texcise\ttaxes) | $40,042 | $30,426 | $32,349 |
| Sales\tto\trelated\tparties | 921 | 869 | 447 |
| Income\tfrom\tequity\tmethod\tinvestments | 29 | 137 | 118 |
| Net\tgains\ton\tdisposal\tof\tassets | 166 | 67 | 44 |
| Gain\t(loss)\ton\townership\tchange\tin\tMarathon\tAshland\tPetroleum\tLLC | (1) | 12 | (6) |
| Other\tincome | 77 | 44 | 110 |
| Total\trevenues\tand\tother\tincome | 41,234 | 31,555 | 33,062 |
| Costs\tand\texpenses: |  |  |  |
| Cost\tof\trevenues\t(excludes\titems\tshown\tbelow) | 32,109 | 23,391 | 23,024 |
| Purchases\tfrom\trelated\tparties | 187 | 178 | 158 |
| Consumer\texcise\ttaxes | 4,285 | 4,250 | 4,404 |
| Depreciation,\tdepletion\tand\tamortization | 1,175 | 1,176 | 1,187 |
| Selling,\tgeneral\tand\tadministrative\texpenses | 946 | 839 | 714 |
| Other\ttaxes | 299 | 255 | 269 |
| Exploration\texpenses | 149 | 167 | 127 |
| Inventory\tmarket\tvaluation\tcharges\t(credits) | – | (71) | 71 |
| Total\tcosts\tand\texpenses | 39,150 | 30,185 | 29,954 |
| Income\tfrom\toperations | 2,084 | 1,370 | 3,108 |
| Net\tinterest\tand\tother\tfinancing\tcosts | 186 | 268 | 172 |
| Loss\tfrom\tearly\textinguishment\tof\tdebt | – | 53 | – |
| Minority\tinterest\tin\tincome\tof |  |  |  |
| Marathon\tAshland\tPetroleum\tLLC | 302 | 173 | 704 |
| Income\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | 1,596 | 876 | 2,232 |
| Provision\tfor\tincome\ttaxes | 584 | 369 | 827 |
| Income\tfrom\tcontinuing\toperations | 1,012 | 507 | 1,405 |
| Discontinued\toperations | 305 | (4) | (1,240) |
| Income\tbefore\tcumulative\teffect\tof\tchanges\tin\taccounting\tprinciples | 1,317 | 503 | 165 |
| Cumulative\teffect\tof\tchanges\tin\taccounting\tprinciples | 4 | 13 | (8) |
| Net\tincome | $1,321 | $516 | $157 |

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

# Income	Per	Common	Share

| (Dollars	in	millions,	except	per	share	data) | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| MARATHON\tCOMMON\tSTOCK |  |  |  |
| Income\tfrom\tcontinuing\toperations\tapplicable\tto\tCommon\tStock | $1,012 | $507 | $1,404 |
| Net\tincome\tapplicable\tto\tCommon\tStock | $1,321 | $516 | $377 |
| Per\tShare\tData |  |  |  |
| Basic\tand\tdiluted: |  |  |  |
| Income\tfrom\tcontinuing\toperations | $3.26 | $1.63 | $4.54 |
| Net\tincome | $4.26 | $1.66 | $1.22 |
| STEEL\tSTOCK |  |  |  |
| Net\tloss\tapplicable\tto\tSteel\tStock | $– | $– | $(243) |
| Per\tShare\tData |  |  |  |
| Basic: |  |  |  |
| Net\tloss | $– | $– | $ (2.73) |
| Diluted: |  |  |  |
| Net\tloss | $– | $– | $ (2.74) |

# Consolidated	Balance	Sheet

| (Dollars	in	millions)	December	31 | 2003 | 2002 |
| :--- | :--- | :--- |
| Assets |  |  |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $1,396 | $488 |
| Receivables,\tless\tallowance\tfor\tdoubtful\taccounts\tof\t$5\tand\t$6 | 2,463 | 1,807 |
| Receivables\tfrom\tUnited\tStates\tSteel | 20 | 9 |
| Receivables\tfrom\trelated\tparties | 47 | 38 |
| Inventories | 1,953 | 1,984 |
| Other\tcurrent\tassets | 161 | 153 |
| Total\tcurrent\tassets | 6,040 | 4,479 |
| Investments\tand\tlong-term\treceivables,\tless\tallowance\tfor\tdoubtful |  |  |
| accounts\tof\t$10\tand\t$14 | 1,323 | 1,634 |
| Receivables\tfrom\tUnited\tStates\tSteel | 593 | 547 |
| Property,\tplant\tand\tequipment\t–\tnet | 10,830 | 10,390 |
| Prepaid\tpensions | 181 | 201 |
| Goodwill | 256 | 274 |
| Intangibles | 118 | 119 |
| Other\tnoncurrent\tassets | 141 | 168 |
| Total\tassets | $19,482 | $17,812 |
| Liabilities |  |  |
| Current\tliabilities: |  |  |
| Accounts\tpayable | $3,352 | $2,841 |
| Payables\tto\tUnited\tStates\tSteel | 4 | 28 |
| Payables\tto\trelated\tparties | 17 | 16 |
| Payroll\tand\tbenefits\tpayable | 230 | 198 |
| Accrued\ttaxes | 247 | 307 |
| Accrued\tinterest | 85 | 108 |
| Long-term\tdebt\tdue\twithin\tone\tyear | 272 | 161 |
| Total\tcurrent\tliabilities | 4,207 | 3,659 |
| Long-term\tdebt | 4,085 | 4,410 |
| Deferred\tincome\ttaxes | 1,489 | 1,445 |
| Employee\tbenefit\tobligations | 984 | 847 |
| Asset\tretirement\tobligations | 390 | 223 |
| Payables\tto\tUnited\tStates\tSteel | 8 | 7 |
| Deferred\tcredits\tand\tother\tliabilities | 233 | 168 |
| Total\tliabilities | 11,396 | 10,759 |
| Minority\tinterest\tin\tMarathon\tAshland\tPetroleum\tLLC | 2,011 | 1,971 |
| Commitments\tand\tcontingencies | – | – |
| Stockholders'\tEquity |  |  |
| Common\tStock\tissued\t–\t312,165,978\tshares\tat\tDecember\t31,\t2003\tand |  |  |
| 2002\t(par\tvalue\t$1\tper\tshare,\tauthorized\t550,000,000\tshares) | 312 | 312 |
| Common\tStock\theld\tin\ttreasury\t–\t1,744,370\tshares\tat\tDecember\t31,\t2003 |  |  |
| and\t2,292,986\tshares\tat\tDecember\t31,\t2002 | (46) | (60) |
| Additional\tpaid-in\tcapital | 3,033 | 3,032 |
| Retained\tearnings | 2,897 | 1,874 |
| Accumulated\tother\tcomprehensive\tloss | (112) | (69) |
| Unearned\tcompensation | (9) | (7) |
| Total\tstockholders'\tequity | 6,075 | 5,082 |
| Total\tliabilities\tand\tstockholders'\tequity | $19,482 | $17,812 |

# Consolidated	Statement	of	Cash	Flows

| (Dollars	in	millions) | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Increase\t(decrease)\tin\tcash\tand\tcash\tequivalents |  |  |  |
| Operating\tactivities: |  |  |  |
| Net\tincome | $1,321 | $516 | $157 |
| Adjustments\tto\treconcile\tto\tnet\tcash\tprovided\tfrom\toperating\tactivities: |  |  |  |
| Cumulative\teffect\tof\tchanges\tin\taccounting\tprinciples | (4) | (13) | 8 |
| Loss\t(income)\tfrom\tdiscontinued\toperations | (305) | 4 | 1,240 |
| Deferred\tincome\ttaxes | 71 | 77 | (147) |
| Minority\tinterest\tin\tincome\tof\tMarathon\tAshland\tPetroleum\tLLC | 302 | 173 | 704 |
| Loss\tfrom\tearly\textinguishment\tof\tdebt | – | 53 | – |
| Depreciation,\tdepletion\tand\tamortization | 1,175 | 1,176 | 1,187 |
| Pension\tand\tother\tpostretirement\tbenefits\t–\tnet | 68 | 87 | 33 |
| Inventory\tmarket\tvaluation\tcharges\t(credits) | – | (71) | 71 |
| Exploratory\tdry\twell\tcosts | 55 | 91 | 54 |
| Net\tgains\ton\tdisposal\tof\tassets | (166) | (67) | (44) |
| Impairment\tof\tinvestments | 129 | – | – |
| Changes\tin:\tCurrent\treceivables | (671) | (103) | 124 |
| Inventories | 33 | (53) | (68) |
| Accounts\tpayable\tand\tother\tcurrent\tliabilities | 496 | 614 | (544) |
| All\tother\t–\tnet | 174 | (148) | (26) |
| Net\tcash\tprovided\tfrom\tcontinuing\toperations | 2,678 | 2,336 | 2,749 |
| Net\tcash\tprovided\tfrom\tdiscontinued\toperations | 83 | 69 | 887 |
| Net\tcash\tprovided\tfrom\toperating\tactivities | 2,761 | 2,405 | 3,636 |
| Investing\tactivities: |  |  |  |
| Capital\texpenditures | (1,892) | (1,520) | (1,533) |
| Acquisitions | (252) | (1,160) | (506) |
| Disposal\tof\tdiscontinued\toperations | 612 | 54 | (147) |
| Disposal\tof\tassets | 644 | 146 | 83 |
| Restricted\tcash\t–\twithdrawals | 146 | 91 | 67 |
| –\tdeposits | (108) | (123) | (62) |
| Investments\t–\tcontributions | (34) | (111) | (8) |
| –\tloans\tand\tadvances | (91) | – | (6) |
| –\treturns\tand\trepayments | 42 | 5 | 10 |
| All\tother\t–\tnet | (19) | – | 5 |
| Investing\tactivities\tof\tdiscontinued\toperations | (29) | (48) | (147) |
| Net\tcash\tused\tin\tinvesting\tactivities | (981) | (2,666) | (2,244) |
| Financing\tactivities: |  |  |  |
| Commercial\tpaper\tand\trevolving\tcredit\tarrangements\t–\tnet | (131) | (375) | (51) |
| Other\tdebt\t–\tborrowings | – | 1,828 | 537 |
| \t–\trepayments | (208) | (604) | (646) |
| Redemption\tof\tpreferred\tstock\tof\tsubsidiary | – | (185) | (223) |
| Preferred\tstock\trepurchased | – | (110) | – |
| Treasury\tcommon\tstock\t–\tproceeds\tfrom\tissuances | 17 | 2 | 12 |
| \t–\tpurchases | (6) | (7) | (1) |
| Dividends\tpaid\t–\tCommon\tStock | (298) | (285) | (284) |
| –\tSteel\tStock | – | – | (49) |
| –\tPreferred\tstock | – | – | (8) |
| Distributions\tto\tminority\tshareholder\tof\tMarathon\tAshland\tPetroleum\tLLC | (262) | (176) | (577) |
| Net\tcash\tprovided\tfrom\t(used\tin)\tfinancing\tactivities | (888) | 88 | (1,290) |
| Effect\tof\texchange\trate\tchanges\ton\tcash: |  |  |  |
| Continuing\toperations | 8 | 4 | (3) |
| Discontinued\toperations | 8 | – | (1) |
| Net\tincrease\t(decrease)\tin\tcash\tand\tcash\tequivalents | 908 | (169) | 98 |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 488 | 657 | 559 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $1,396 | $488 | $657 |

# Consolidated	Statement	of	Stockholders'	Equity

|  | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Preferred\tstock: |  |  |  |  |  |  |
| 6.50%\tCumulative\tConvertible: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $– | $– | $2 | – | – | 2,413 |
| Repurchased | – | – | – | – | – | (9) |
| Converted\tinto\tSteel\tStock | – | – | – | – | – | (1) |
| Exchanged\tfor\tdebt | – | – | – | – | – | (195) |
| Converted\tto\tright\tto\treceive\tcash\tat\tSeparation | – | – | (2) | – | – | (2,208) |
| Balance\tat\tend\tof\tyear | $– | $– | $– | – | – | – |
| Common\tstocks: |  |  |  |  |  |  |
| Common\tStock: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $312 | $312 | $312 | 312,166 | 312,166 | 312,166 |
| Balance\tat\tend\tof\tyear | $312 | $312 | $312 | 312,166 | 312,166 | 312,166 |
| Steel\tStock: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $– | $– | $89 | – | – | 88,767 |
| Issued\tfor: |  |  |  |  |  |  |
| Employee\tstock\tplans | – | – | – | – | – | 430 |
| Conversion\tof\tpreferred\tstock | – | – | – | – | – | 1 |
| Distributed\tto\tUnited\tStates\tSteel\tshareholders | – | – | (89) | – | – | (89,198) |
| Balance\tat\tend\tof\tyear | $– | $– | $– | – | – | – |
| Securities\texchangeable\tsolely\tinto\tCommon\tStock: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $– | $– | $– | – | – | 281 |
| Exchanged\tfor\tCommon\tStock | – | – | – | – | – | (281) |
| Balance\tat\tend\tof\tyear | $– | $– | $– | – | – | – |
| Treasury\tcommon\tstocks,\tat\tcost: |  |  |  |  |  |  |
| Common\tStock: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $(60) | $(74) | $(104) | (2,293) | (2,771) | (3,900) |
| Repurchased | (6) | (7) | (1) | (219) | (297) | (27) |
| Reissued\tfor: |  |  |  |  |  |  |
| Exchangeable\tShares | – | – | 7 | – | – | 281 |
| Employee\tstock\tplans | 20 | 19 | 24 | 768 | 727 | 875 |
| Non-employee\tdirectors\tdeferred\tcompensation\tplan | – | 2 | – | – | 48 | – |
| Balance\tat\tend\tof\tyear | $(46) | $(60) | $(74) | (1,744) | (2,293) | (2,771) |
| Steel\tStock: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $– | $– | $– | – | – | – |
| Repurchased | – | – | – | – | – | (20) |
| Reissued\tfor\temployee\tstock\tplans | – | – | – | – | – | 18 |
| Distributed\tto\tUnited\tStates\tSteel | – | – | – | – | – | 2 |
| Balance\tat\tend\tof\tyear | $– | $– | $– | – | – | – |

(Table	continued	on	next	page)

| (Dollars	in	millions) | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Additional\tpaid-in\tcapital: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $3,032 | $3,035 | $4,676 |  |  |  |
| Treasury\tCommon\tStock\treissued | 1 | (3) | 4 |  |  |  |
| Steel\tStock\tissued | – | – | 8 |  |  |  |
| Steel\tStock\tdistributed\tto\tUnited\tStates | – |  |  |  |  |  |
| Steel\tshareholders | – | – | (1,526) |  |  |  |
| Exchangeable\tShares\texchanged\tfor\tCommon\tStock | – | – | (9) |  |  |  |
|  | – | – | (118) |  |  |  |
| Balance\tat\tend\tof\tyear | $3,033 | $3,032 | $3,035 |  |  |  |
| Unearned\tcompensation: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $(7) | $(10) | $(8) |  |  |  |
| Change\tduring\tyear | $(2) | 3 | (11) |  |  |  |
| Transferred\tto\tUnited\tStates\tSteel | – | – | 9 |  |  |  |
| Balance\tat\tend\tof\tyear | $(9) | $(7) | $(10) |  |  |  |
| Retained\tearnings: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $1,874 | $1,643 | $1,847 |  |  |  |
| Net\tincome | 1,321 | 516 | 157 | $1,321 | $516 | $157 |
| Excess\tredemption\tvalue\tover\tcarrying\tvalue\tof\tpreferred\tsecurities | – | – | (20) |  |  |  |
| Dividends\tpaid\ton: |  |  |  |  |  |  |
| Preferred\tstock | – | – | (8) |  |  |  |
|  | (298) | (285) | (284) |  |  |  |
| Steel\tStock\t(per\tshare:\t$.55\tin\t2001) | – | – | (49) |  |  |  |
| Balance\tat\tend\tof\tyear | $2,897 | $1,874 | $1,643 |  |  |  |
| Accumulated\tother\tcomprehensive\tincome\t(loss)(a): |  |  |  |  |  |  |
| Minimum\tpension\tliability\tadjustments: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $(47) | $(14) | $(21) |  |  |  |
| Changes\tduring\tyear | (46) | (33) | (13) | (46) | (33) | (13) |
| Reclassified\tto\tincome | – | – | 20 | – | – | 20 |
| Balance\tat\tend\tof\tyear | $(93) | $(47) | $(14) |  |  |  |
| Foreign\tcurrency\ttranslation\tadjustments: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $(1) | $(3) | $(29) |  |  |  |
| Changes\tduring\tyear | (3) | 2 | (3) | (3) | 2 | (3) |
| Reclassified\tto\tincome | – | – | 29 | – | – | 29 |
| Balance\tat\tend\tof\tyear | $(4) | $(1) | $(3) |  |  |  |
| Deferred\tgains\t(losses)\ton\tderivative\tinstruments: |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $(21) | $51 | $– |  |  |  |
| Cumulative\teffect\tadjustment | – | – | (8) | – | – | (8) |
| Reclassification\tof\tthe\tcumulative\teffect\tadjustment\tinto\tincome | 3 | (1) | 23 | 3 | (1) | 23 |
| Changes\tin\tfair\tvalue | 62 | (36) | 34 | 62 | (36) | 34 |
| Reclassification\tto\tincome | (59) | (35) | 2 | (59) | (35) | 2 |
| Balance\tat\tend\tof\tyear | $(15) | $(21) | $51 |  |  |  |
| Total\tbalances\tat\tend\tof\tyear | $(112) | $(69) | $34 |  |  |  |
| Total\tcomprehensive\tincome |  |  |  | $1,278 | $413 | $241 |
| Total\tstockholders'\tequity | $6,075 | $5,082 | $4,940 |  |  |  |

# 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.

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	other	energy related	businesses.

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.

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

•	 Other	Energy	Related	Businesses	("OERB")—markets	and	transports	its	own	and	third-party	natural	gas,	crude	oil	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,

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	OERB 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.

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.

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\tincome\tapplicable\tto\tCommon\tStock |  |  |  |
| As\treported | $1,321 | $516 | $377 |
| Add:\tStock-based\temployee\tcompensation\texpense\tincluded\tin\treported\tnet\tincome,\tnet\tof\trelated\ttax\teffects | 23 | 5 | 5 |
| Deduct:\tTotal\tstock-based\temployee\tcompensation\texpense\tdetermined\tunder\tfair\tvalue\tmethod\tfor\tall\tawards,\tnet\tof |  |  |  |
| related\ttax\teffects | (17) | (16) | (11) |
| Pro\tforma\tnet\tincome\tapplicable\tto\tCommon\tStock | $1,327 | $505 | $371 |
| Basic\tand\tdiluted\tnet\tincome\tper\tshare |  |  |  |
| –\tAs\treported | $4.26 | $1.66 | $1.22 |
| –\tPro\tforma | $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\tgrant-date\texercise\tprice\tper\tshare | $25.58 | $28.12 | $32.52 |
| Expected\tannual\tdividends\tper\tshare | $.97 | $.92 | $.92 |
| Expected\tlife\tin\tyears | 5 | 5 | 5 |
| Expected\tvolatility | 34% | 35% | 34% |
| Risk\tfree\tinterest\trate | 3.0% | 4.5% | 4.9% |
| Weighted-average\tgrant-date\tfair\tvalue\tof\toptions\tgranted\tduring\tthe\tyear,\tas\tcalculated\tfrom\tabove | $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.

# 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:

(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

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.

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.

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:

# 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.

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\trelated\tto\tdebt\tand\tother\tobligations\tfor\twhich\tUnited\tStates\tSteel\thas\tassumed\tresponsibility\tfor\trepayment | $20 | $9 |
| Noncurrent: |  |  |
| Receivables\trelated\tto\tdebt\tand\tother\tobligations\tfor\twhich\tUnited\tStates\tSteel\thas\tassumed\tresponsibility\tfor\trepayment\t(a) | $593 | $547 |
| Payables: |  |  |
| Current: |  |  |
| Income\ttax\tsettlement\tand\trelated\tinterest\tpayable | $4 | $28 |
| Noncurrent: |  |  |
| Reimbursements\tpayable\tunder\tnonqualified\temployee\tbenefit\tplans | $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\tinvestees: |  |  |  |
| Pilot\tTravel\tCenters\tLLC\t(PTC) | 635 | 645 | 210 |
| Other | 28 | 6 | – |
| Total | $921 | $869 | $447 |

Purchases	from	related	parties	were	as	follows:

Payables	to	related	parties	were	as	follows:

| Payables	to	related	parties	were	as	follows: |  |  |
| :--- | :--- | :--- |
| (In\tmillions)\tDecember\t31 | 2003 | 2002 |
| Ashland | $1 | $3 |
| Equity\tinvestees | 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:

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.

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

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\tand\tother\tincome | $41,257 | $31,648 |
| Income\tfrom\tcontinuing\toperations | 1,005 | 502 |
| Net\tincome | 1,314 | 511 |
| Per\tshare\tamounts\tapplicable\tto\tCommon\tStock |  |  |
| Income\tfrom\tcontinuing\toperations\t–\tbasic\tand\tdiluted | 3.24 | 1.63 |
| Net\tincome\t–\tbasic\tand\tdiluted | 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.

| (Dollars	in	millions,	except	per	share	data) | Basic | Diluted | Basic | Diluted | Basic | Diluted |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| COMMON\tSTOCK |  |  |  |  |  |  |
| Income\tfrom\tcontinuing\toperations | $1,012 | $1,012 | $507 | $507 | $1,405 | $1,405 |
| Excess\tredemption\tvalue\tof\tpreferred\tsecurities | – | – | – | – | (1) | (1) |
| Income\tfrom\tcontinuing\toperations\tapplicable\tto\tCommon |  |  |  |  |  |  |
| Stock | 1,012 | 1,012 | 507 | 507 | 1,404 | 1,404 |
| Expenses\tincluded\tin\tincome\tfrom\tcontinuing\toperations |  |  |  |  |  |  |
| applicable\tto\tSteel\tStock | – | – | – | – | 41 | 41 |
| Income\t(loss)\tfrom\tdiscontinued\toperations | 305 | 305 | (4) | (4) | (1,071) | (1,071) |
| Expenses\tincluded\tin\tloss\ton\tdisposition\tof |  |  |  |  |  |  |
| United\tStates\tSteel\tapplicable\tto\tSteel\tStock | – | – | – | – | 11 | 11 |
| Cumulative\teffect\tof\tchange\tin\taccounting\tprinciple | 4 | 4 | 13 | 13 | (8) | (8) |
| Net\tincome\tapplicable\tto\tCommon\tStock | $1,321 | $1,321 | $516 | $516 | $377 | $377 |
| Shares\tof\tcommon\tstock\toutstanding\t(thousands): |  |  |  |  |  |  |
| Average\tnumber\tof\tcommon\tshares\toutstanding | 310,129 | 310,129 | 309,792 | 309,792 | 309,150 | 309,150 |
| Effect\tof\tdilutive\tsecurities\t–\tstock\toptions | – | 197 | – | 159 | – | 360 |
| Average\tcommon\tshares\tincluding\tdilutive\teffect | 310,129 | 310,326 | 309,792 | 309,951 | 309,150 | 309,510 |
| Per\tshare: |  |  |  |  |  |  |
| Income\tfrom\tcontinuing\toperations | $3.26 | $3.26 | $1.63 | $1.63 | $4.54 | $4.54 |
| Income\t(loss)\tfrom\tdiscontinued\toperations | $.99 | $.99 | $(.01) | $(.01) | $(3.46) | $(3.46) |
| Cumulative\teffect\tof\tchange\tin\taccounting\tprinciple | $.01 | $.01 | $.04 | $.04 | $(.03) | $(.03) |
| Net\tincome | $4.26 | $4.26 | $1.66 | $1.66 | $1.22 | $1.22 |
| STEEL\tSTOCK |  |  |  |  |  |  |
| Loss\tfrom\tdiscontinued\toperations | $– | $– | $– | $– | $(169) | $(169) |
| Expenses\tincluded\tin\tloss\tfrom\tcontinuing\toperations\tapplicable |  |  |  |  |  |  |
| to\tSteel\tStock | – | – | – | – | (41) | (41) |
| Expenses\tincluded\tin\tloss\ton\tdisposition\tof\tUnited\tStates\tSteel |  |  |  |  |  |  |
| applicable\tto\tSteel\tStock | – | – | – | – | (11) | (11) |
| Preferred\tstock\tdividends | – | – | – | – | (8) | (8) |
| Loss\ton\tredemption\tof\tpreferred\tsecurities | – | – | – | – | (14) | (14) |
| Net\tloss\tapplicable\tto\tSteel\tStock | $– | $– | $– | $– | $(243) | $(243) |
| Shares\tof\tcommon\tstock\toutstanding\t(thousands):\nAverage\tcommon\tshares\tincluding\tdilutive\teffect | – | – | – | – | 89,058 | 89,058 |
| Per\tshare: |  |  |  |  |  |  |
| Loss\tfrom\tdiscontinued\toperations | $– | $– | $– | $– | $(1.90) | $(1.90) |
| Net\tloss | $– | $– | $– | $– | $(2.73) | $(2.74) |

# 8.	Segment	Information

| (In	millions) | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Refined\tproducts | $24,092 | $19,729 | $20,841 |
| Merchandise | 2,395 | 2,521 | 2,506 |
| Liquid\thydrocarbons | 10,500 | 6,517 | 6,502 |
| Natural\tgas | 3,796 | 2,362 | 2,801 |
| Transportation\tand\tother\tproducts | 180 | 166 | 146 |
| Total | $40,963 | $31,295 | $32,796 |

# The	following	represents	information	by	operating	segment:

# Geographic	Area:

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

| (In	millions) | Year | Within<br>Geographic	Areas | Between<br>Geographic	Areas | Between<br>Geographic	Areas | Total |  | Assets^(a) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| United\tStates | 2003 | $\t\t\t\t39,377 | $– |  | $\t\t\t\t39,377 |  | $8,061 |
|  | 2002 | 29,930 | – |  | 29,930 |  | 7,904 |
|  | 2001 | 31,468 | – |  | 31,468 |  | 8,033 |
| Canada | 2003 | 413 | \t\t\t\t1,218 |  | 1,631 |  | 24 |
|  | 2002 | 265 | 917 |  | 1,182 |  | 485 |
|  | 2001 | 364 | 871 |  | 1,235 |  | 498 |
| United\tKingdom | 2003 | 849 | – |  | 849 |  | 1,215 |
|  | 2002 | 916 | – |  | 916 |  | 1,316 |
|  | 2001 | 848 | – |  | 848 |  | 1,534 |
| Equatorial\tGuinea | 2003 | 119 | – |  | 119 |  | 1,656 |
|  | 2002 | 82 | – |  | 82 |  | 1,018 |
|  | 2001 | – | – |  | – |  | – |
| Other\tForeign\tCountries | 2003 | 205 | 134 |  | 339 |  | 1,049 |
|  | 2002 | 102 | 153 |  | 255 |  | 1,144 |
|  | 2001 | 116 | 134 |  | 250 |  | 474 |
| Eliminations | 2003 | – | (1,352 | ) | (1,352 | ) | – |
|  | 2002 | – | (1,070 | ) | (1,070 | ) | – |
|  | 2001 | – | (1,005 | ) | (1,005 | ) | – |
| Total | 2003 | $40,963 | $– |  | $40,963 |  | $\t\t\t\t12,005 |
|  | 2002 | 31,295 | – |  | 31,295 |  | 11,867 |
|  | 2001 | 32,796 | – |  | 32,796 |  | 10,539 |

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

# 9.	Other	Items

# Net	interest	and	other	financing	costs

# 10.	Income	Taxes

Provisions	(credits)	for	income	taxes	were:

| (In	millions) | Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Federal | $280 | $95 | $375 | $105 | $(26) | $79 | $706 | $(96) | $610 |
| State\tand\tlocal | 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\trate\tapplied\tto\tincome\tbefore\tincome\ttaxes | $559 | $307 | $781 |
| Effects\tof\tforeign\toperations: |  |  |  |
| Remeasurement\tof\tdeferred\ttaxes\tdue\tto\tlegislated\tchanges(a) | – | 61 | – |
| All\tother,\tincluding\tforeign\ttax\tcredits | (7) | (12) | (16) |
| State\tand\tlocal\tincome\ttaxes\tafter\tfederal\tincome\ttax\teffects | 35 | 34 | 66 |
| Credits\tother\tthan\tforeign\ttax\tcredits | (6) | (11) | (9) |
| Effects\tof\tpartially\towned\tcompanies | (6) | (6) | (5) |
| Adjustment\tof\tprior\tyears'\tfederal\tincome\ttaxes | 17 | (1) | 3 |
| Other | (8) | (3) | 7 |
| Total\tprovisions | $584 | $369 | $827 |

| (In	millions)	December	31 | 2003 | 2002 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Net\toperating\tloss\tcarryforwards\t(expiring\tin\t2021) | $– | $6 |
| Capital\tloss\tcarryforwards\t(expiring\tin\t2008) | 67 | – |
| State\ttax\tloss\tcarryforwards\t(expiring\tin\t2004\tthrough\t2021) | 131 | 150 |
| Foreign\ttax\tloss\tcarryforwards(a) | 479 | 442 |
| Expected\tfederal\tbenefit\tfor: |  |  |
| Crediting\tcertain\tforeign\tdeferred\tincome\ttaxes | 307 | 331 |
| Deducting\tstate\tand\tforeign\tdeferred\tincome\ttaxes | 45 | 54 |
| Employee\tbenefits | 301 | 259 |
| Contingencies\tand\tother\taccruals | 179 | 172 |
| Investments\tin\tsubsidiaries\tand\tequity\tinvestees | 96 | 50 |
| Other | 126 | 121 |
| Valuation\tallowances: |  |  |
| Federal | (67) | – |
| State | (73) | (78) |
| Foreign | (436) | (404) |
| Total\tdeferred\ttax\tassets(b) | 1,155 | 1,103 |
| Deferred\ttax\tliabilities: |  |  |
| Property,\tplant\tand\tequipment | 2,014 | 1,947 |
| Inventory | 317 | 358 |
| Prepaid\tpensions | 96 | 78 |
| Other | 145 | 141 |
| Total\tdeferred\ttax\tliabilities | 2,572 | 2,524 |
| Net\tdeferred\ttax\tliabilities | $\t\t\t\t1,417 | $\t\t\t\t1,421 |

(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.

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

| Other	current	assets | $37 | $– |
| :--- | :--- | :--- |
| Other\tnoncurrent\tassets | 35 | 35 |
| Liabilities: |  |  |
| Accrued\ttaxes | – | 11 |
| Deferred\tincome\ttaxes | 1,489 | 1,445 |
| Net\tdeferred\ttax\tliabilities | $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<br>Transformation<br>Charges	(Gain) | Non-Cash<br>Charges	(Gain) | Cash<br>Payments | Accrued	Liabilities<br>Balance	at<br>December	31,	2003 |
| :--- | :--- | :--- | :--- | :--- |
| Employee\tseverance\tand\ttermination\tbenefits | $25 | $– | $13 | $12 |
| Pension\tplan\tcurtailment\tloss | 6 | 6 | – | – |
| Relocation\tcosts | 5 | – | – | 5 |
| Fixed\tasset\trelated\tcosts | 4 | 2 | 1 | 1 |
| Retiree\thealth\tcare\tplan\tcurtailment\tgain | (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\thydrocarbons\tand\tnatural\tgas |  | $674 | $689 |
| Refined\tproducts\tand\tmerchandise |  | 1,151 | 1,186 |
| Supplies\tand\tsundry\titems |  | 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.

# 13.	Investments	and	Long-Term	Receivables

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

| Summarized	financial	information	of	investees	accounted	for	by	the	equity	method	of	accounting	follows: |  |  |  |
| :--- | :--- | :--- | :--- |
| (In\tmillions) | 2003 | 2002 | 2001 |
| Income\tdata\t–\tyear: |  |  |  |
| Revenues\tand\tother\tincome | $7,006 | $5,541 | $2,824 |
| Operating\tincome | 435 | 329 | 332 |
| Net\tincome | 319 | 264 | 257 |
| Balance\tsheet\tdata\t–\tDecember\t31: |  |  |  |
| Current\tassets | $619 | $537 |  |
| Noncurrent\tassets | 3,727 | 3,732 |  |
| Current\tliabilities | 641 | 548 |  |
| Noncurrent\tliabilities | 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\taccumulated\tdepreciation,\tdepletion\tand\tamortization |  | 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.

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<br>and<br>Production | Refining,	Marketing<br>and<br>Transportation | Total |
| :--- | :--- | :--- | :--- |
| Balance\tas\tof\tJanuary\t1,\t2002 | $75 | $21 | $96 |
| Goodwill\tacquired\tduring\tthe\tyear | 178 | – | 178 |
| Balance\tas\tof\tDecember\t31,\t2002 | $253 | $21 | $274 |
| Purchase\tprice\tadjustment | (3) | – | (3) |
| Goodwill\tallocated\tto\tsale\tof\twestern\tCanada\toperations | (15) | – | (15) |
| Balance\tas\tof\tDecember\t31,\t2003 | $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<br>Amount | Accumulated<br>Amortization | Net	Carrying<br>Amount |
| :--- | :--- | :--- | :--- |
| Amortized\tintangible\tassets |  |  |  |
| Branding\tagreements | $53 | $19 | $34 |
| Elba\tIsland\tdelivery\trights | 42 | 2 | 40 |
| Other | 40 | 23 | 17 |
| Total | $135 | $44 | $91 |
| Unamortized\tintangible\tassets |  |  |  |
| Unrecognized\tprior\tservice\tcosts | $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.

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.

| (In	millions)	December	31 | Assets^(a) | (Liabilities)^(a) | Assets^(a) | (Liabilities)^(a) |
| :--- | :--- | :--- | :--- | :--- |
| Commodity\tInstruments |  |  |  |  |
| Fair\tValue\tHedges(b): |  |  |  |  |
| OTC\tcommodity\tswaps | $17 | $(1) | $5 | $– |
| Cash\tFlow\tHedges(c): |  |  |  |  |
| Exchange-traded\tcommodity\tfutures | $– | $– | $3 | $(1) |
| OTC\tcommodity\tswaps | 20 | (26) | 3 | (2) |
| OTC\tcommodity\toptions | 2 | (23) | 12 | (53) |
| Non-Hedge\tDesignation: |  |  |  |  |
| Exchange-traded\tcommodity\tfutures | $94 | $(98) | $24 | $(58) |
| Exchange-traded\tcommodity\toptions | 5 | (11) | 9 | (11) |
| OTC\tcommodity\tswaps | 61 | (38) | 54 | (32) |
| OTC\tcommodity\toptions | 5 | (4) | 13 | (9) |
| Nontraditional\tInstruments(d) | $70 | $(90) | $91 | $(39) |
| Financial\tInstruments |  |  |  |  |
| Fair\tValue\tHedges: |  |  |  |  |
| OTC\tinterest\trate\tswaps(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).

# 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:

| (In	millions)	December	31 | Fair<br>Value | Carrying<br>Amount | Fair<br>Value | Carrying<br>Amount |
| :--- | :--- | :--- | :--- | :--- |
| Financial\tassets: |  |  |  |  |
| Cash\tand\tcash\tequivalents | $1,396 | $1,396 | $488 | $488 |
| Receivables | 2,510 | 2,510 | 1,845 | 1,845 |
| Receivables\tfrom\tUnited\tStates\tSteel | 549 | 613 | 382 | 556 |
| Investments\tand\tlong-term\treceivables | 186 | 117 | 223 | 149 |
| Total\tfinancial\tassets | $4,641 | $4,636 | $2,938 | $3,038 |
| Financial\tliabilities: |  |  |  |  |
| Accounts\tpayable | $3,369 | $3,369 | $2,857 | $2,857 |
| Payables\tto\tUnited\tStates\tSteel | 12 | 12 | 35 | 35 |
| Accrued\tinterest | 85 | 85 | 108 | 108 |
| Long-term\tdebt\t(including\tamounts\tdue\twithin\tone\tyear) | 4,740 | 4,181 | 5,008 | 4,486 |
| Total\tfinancial\tliabilities | $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.

# 20.	Long-Term	Debt

| (In	millions)	December	31 | 2003 | 2002 |
| :--- | :--- | :--- |
| Marathon\tOil\tCorporation: |  |  |
| Revolving\tcredit\tfacility\tdue\t2005(a) | $– | $– |
| Commercial\tpaper(a) | – | 100 |
| 9.625%\tnotes\tdue\t2003 | – | 150 |
| 7.200%\tnotes\tdue\t2004 | 251 | 300 |
| 6.650%\tnotes\tdue\t2006 | 300 | 300 |
| 5.375%\tnotes\tdue\t2007(b) | 450 | 450 |
| 6.850%\tnotes\tdue\t2008 | 400 | 400 |
| 6.125%\tnotes\tdue\t2012(b) | 450 | 450 |
| 6.000%\tnotes\tdue\t2012(b) | 400 | 400 |
| 6.800%\tnotes\tdue\t2032(b) | 550 | 550 |
| 9.375%\tdebentures\tdue\t2012 | 163 | 163 |
| 9.125%\tdebentures\tdue\t2013 | 271 | 271 |
| 9.375%\tdebentures\tdue\t2022 | 81 | 81 |
| 8.500%\tdebentures\tdue\t2023 | 123 | 123 |
| 8.125%\tdebentures\tdue\t2023 | 229 | 229 |
| 6.570%\tpromissory\tnote\tdue\t2006(b) | 15 | 21 |
| Series\tA\tMedium\tterm\tnotes\tdue\t2022 | 3 | 3 |
| 2033(c) | 494 | 494 |
| Sale-leaseback\tfinancing\tdue\t2003\t–\t2012(d) | 76 | 81 |
| Capital\tlease\tobligation\tdue\t2012(e) | 59 | – |
| Consolidated\tsubsidiaries: |  |  |
| All\tother\tobligations,\tincluding\tcapital\tlease\tobligations\tdue\t2004\t–\t2018 | 47 | 6 |
| Total(f)(g) | 4,362 | 4,572 |
| Unamortized\tdiscount | (9) | (13) |
| Fair\tvalue\tadjustments\ton\tnotes\tsubject\tto\thedging(h) | 4 | 12 |
| Amounts\tdue\twithin\tone\tyear | (272) | (161) |
| Long-term\tdebt\tdue\tafter\tone\tyear | $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.

# 21.	Deferred	Credits	and	Other	Liabilities

Deferred	credits	and	other	liabilities	included	the	following:

# 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	83/4%	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.

# 23.	Supplemental	Cash	Flow	Information

| (In	millions) | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Net\tcash\tprovided\tfrom\toperating\tactivities\tfrom\tcontinuing\toperations\tincluded: |  |  |  |
| Interest\tand\tother\tfinancing\tcosts\tpaid\t(net\tof\tamount\tcapitalized) | $254 | $258 | $165 |
| Income\ttaxes\tpaid\tto\ttaxing\tauthorities | 537 | 173 | 437 |
| Income\ttax\tsettlements\tpaid\tto\tUnited\tStates\tSteel | 16 | 7 | 819 |
| Commercial\tpaper\tand\trevolving\tcredit\tarrangements–net: |  |  |  |
| Commercial\tpaper\t–\tissued | $4,733 | $10,669 | $389 |
| –\trepayments | (4,833) | (10,569) | (465) |
| Credit\tagreements\t–\tborrowings | 3 | 3,700 | 925 |
| –\trepayments | (34) | (4,175) | (750) |
| Ashland\tcredit\tagreements\t–\tborrowings | 182 | 266 | 112 |
| –\trepayments | (182) | (266) | (112) |
| Other\tcredit\tarrangements\t–\tnet | – | – | (150) |
| Total | $(131) | $(375) | $(51) |
| Non\tcash\tinvesting\tand\tfinancing\tactivities: |  |  |  |
| Common\tStock\tissued\tfor\tdividend\treinvestment\tand\temployee\tstock\tplans | $4 | $9 | $23 |
| Common\tStock\tissued\tfor\tExchangeable\tShares | – | – | 9 |
| Capital\texpenditures\tfor\twhich\tpayment\thas\tbeen\tdeferred | – | – | 29 |
| Asset\tretirement\tcosts\tcapitalized | 61 | – | – |
| Liabilities\tassumed\tin\tconnection\twith\tcapital\texpenditures | – | 10 | – |
| Debt\tpayments\tassumed\tby\tUnited\tStates\tSteel | 5 | 4 | – |
| Capital\tlease\tobligations: |  |  |  |
| Asset\tacquired | 41 | – | – |
| Assumed\tby\tUnited\tStates\tSteel | 59 | – | – |
| Disposal\tof\tassets: |  |  |  |
| Exchange\tof\tSteel\tStock\tfor\tnet\tinvestment\tin\tUnited\tStates\tSteel | – | – | 1,615 |
| Exchange\tof\toil\tand\tgas\tproducing\tproperties\tfor\tPowder\tRiver\tBasin\tassets | – | 42 |  |
| Notes\treceived\tin\tasset\tdisposal\ttransactions | – | 5 | – |
| Liabilities\tassumed\tin\tacquisitions: |  |  |  |
| KMOC | 107 | – | – |
| Equatorial\tGuinea\tinterests | – | 179 | – |
| Pennaco | – | – | 309 |
| Net\tassets\tcontributed\tto\tjoint\tventures | 42 | – | 571 |
| Joint\tventure\tdissolution | 212 | – | – |
| Preferred\tstocks\texchanged\tfor\tdebt | – | – | 49 |
| Liabilities\tassumed\tby\tbuyer\tof\tdiscontinued\toperations | 212 | – | – |

# 24.	Pensions	and	Other	Postretirement	Benefits

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

| (In	millions) | U.S. | Int'l | U.S. | Int'l^(a) |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Change\tin\tbenefit\tobligations |  |  |  |  |  |  |
| Benefit\tobligations\tat\tJanuary\t1 | $455 | $156 | $430 |  | $433 | $374 |
| Service\tcost | 23 | 7 | 17 |  | 6 | 5 |
| Interest\tcost | 31 | 11 | 27 |  | 27 | 25 |
| Plan\tamendment | – | – | – |  | (97) | – |
| Actuarial\tlosses | 64 | 93 | 7 |  | 52 | 55 |
| Curtailments | 1 | – | – |  | (4) | – |
| Benefits\tpaid | (34) | (5) | (26) |  | (30) | (26) |
| Benefit\tobligations\tat\tDecember\t31 | $540 | $262 | $455 |  | $387 | $433 |
| Change\tin\tplan\tassets |  |  |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tJanuary\t1 | $413 | $104 | $502 |  |  |  |
| Actual\treturn\ton\tplan\tassets | 81 | 32 | (48) |  |  |  |
| Employer\tcontribution | – | 8 | – |  |  |  |
| Trustee\tdistributions(b) | – | – | (18) |  |  |  |
| Benefits\tpaid\tfrom\tplan\tassets | (31) | (5) | (23) |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tDecember\t31 | $463 | $139 | $413 |  |  |  |
| Funded\tstatus\tof\tplans\tat\tDecember\t31(c) | $(77) | $(123) | $(42) | $ (48) | $(387) | $(433) |
| Unrecognized\tnet\ttransition\tasset | (4) | – | (6) | – | – | – |
| Unrecognized\tprior\tservice\tcosts\t(benefits) | 20 | – | 27 | – | (81) | (3) |
| Unrecognized\tnet\tlosses | 230 | 114 | 216 | 48 | 162 | 122 |
| Prepaid\t(accrued)\tbenefit\tcost | $169 | $(9) | $195 | $– | $(306) | $(314) |
| Amounts\trecognized\tin\tthe\tstatement\tof\tfinancial\tposition: |  |  |  |  |  |  |
| Prepaid\tbenefit\tcost | $181 | $– | $201 | $– | $– | $– |
| Accrued\tbenefit\tliability | (21) | (93) | (20) | (32) | (306) | (314) |
| Accumulated\tother\tcomprehensive\tincome(d) | 9 | 84 | 14 | 32 | – | – |
| Prepaid\t(accrued)\tbenefit\tcost | $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

| U.S. | Int'l | U.S. | Int'l |
| :--- | :--- | :--- | :--- |
| $ (35) | (262) | $ (26) | $ (143) |
| (21) | (233) | (19) | (127) |
| – | 139 | – | 95 |

(d) Excludes	income	tax	effects.

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

| (In	millions) | 2003 | 2002 | 2003 | 2002 |
| :--- | :--- | :--- | :--- | :--- |
| Change\tin\tbenefit\tobligations |  |  |  |  |
| Benefit\tobligations\tat\tJanuary\t1 | $831 | $727 | $295 | $216 |
| Service\tcost | 64 | 49 | 15 | 11 |
| Interest\tcost | 59 | 47 | 19 | 15 |
| Actuarial\tlosses | 144 | 49 | 21 | 56 |
| Benefits\tpaid | (47) | (41) | (4) | (3) |
| Benefit\tobligations\tat\tDecember\t31 | $1,051 | $831 | $346 | $295 |
| Change\tin\tplan\tassets |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tJanuary\t1 | $356 | $440 |  |  |
| Actual\treturn\ton\tplan\tassets | 75 | (43) |  |  |
| Employer\tcontribution | 89 | – |  |  |
| Benefits\tpaid\tfrom\tplan\tassets | (47) | (41) |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tDecember\t31 | $473 | $356 |  |  |
| Funded\tstatus\tof\tplans\tat\tDecember\t31(a) | (578) | $(475) | $(346) | $(295) |
| Unrecognized\tnet\ttransition\tasset | (3) | (5) | – | – |
| Unrecognized\tprior\tservice\tcosts\t(credits) | 21 | 22 | (33) | (40) |
| Unrecognized\tnet\tlosses | 411 | 323 | 98 | 82 |
| Accrued\tbenefit\tcost | $(149) | $(135) | $(281) | $(253) |
| Amounts\trecognized\tin\tthe\tstatement\tof\tfinancial\tposition: |  |  |  |  |
| Accrued\tbenefit\tliability | $(248) | $(197) | $(281) | $(253) |
| Intangible\tasset | 23 | 24 | – | – |
| Accumulated\tother\tcomprehensive\tloss(b) | 76 | 38 | – | – |
| Accrued\tbenefit\tcost | $(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:

|  | 2003 | 2002 |
| :--- | :--- | :--- |
| Projected\tbenefit\tobligations | $ (1,051) | $ (831) |
| Accumulated\tbenefit\tobligations | (721) | (553) |
| Fair\tvalue\tof\tplan\tassets | 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.

|  | 2003 |  | 2002 | 2001 | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tmillions) | U.S. | Int'l |  |  |  |  |  |
| Components\tof\tnet\tperiodic\tbenefit\tcost |  |  |  |  |  |  |  |
| Service\tcost | $87 | $7 | $66 | $55 | $21 | $16 | $14 |
| Interest\tcost | 90 | 11 | 74 | 68 | 46 | 40 | 42 |
| Expected\treturn\ton\tplan\tassets | (84) | (7) | (100) | (107) | – | – | – |
| Amortization\t–\tnet\ttransition\tgain | (4) | – | (4) | (4) | – | – | – |
| –\tprior\tservice\tcosts\t(credits) | 5 | – | 5 | 5 | (10) | (8) | (7) |
| –\tactuarial\tloss | 32 | 5 | 7 | – | 12 | 4 | 4 |
| Multi-employer\tand\tother\tplans(a) | 2 | – | 7 | 5 | 2 | 2 | – |
| Curtailment\tand\ttermination\tlosses\t(gains) | 6(b) | 1 | – | 3 | (16)(b) | – | – |
| Net\tperiodic\tbenefit\tcost(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.

# 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:

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-<br>Point	Increase | 1-Percentage-<br>Point	Decrease |
| :--- | :--- | :--- |
| Effect\ton\ttotal\tof\tservice\tand\tinterest\tcost\tcomponents | $12 | $(9) |
| Effect\ton\tother\tpostretirement\tbenefit\tobligations | 104 | (84) |

# Plan	Assets

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

(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.

# 25.	Stock-Based	Compensation	Plans

The	following	is	a	summary	of	stock	option	activity:

| 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\tDecember\t31,\t2001 | 6,730,105 | 28.62 |
| Granted | 1,763,500 | 28.12 |
| Exercised | (242,155) | 27.58 |
| Canceled | (186,840) | 24.50 |
| Balance\tDecember\t31,\t2002 | 8,064,610 | 28.70 |
| Granted | 1,729,800 | 25.58 |
| Exercised | (642,265) | 24.48 |
| Canceled | (145,765) | 30.27 |
| Balance\tDecember\t31,\t2003(b) | 9,006,380 | 28.33 |

(a) 	 Weighted-average	exercise	price.

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

(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.

(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.

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.

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<br>Lease<br>Obligations | Operating<br>Lease<br>Obligations |
| :--- | :--- | :--- |
| 2004 | $29 | $108 |
| 2005 | 20 | 80 |
| 2006 | 26 | 67 |
| 2007 | 34 | 38 |
| 2008 | 26 | 31 |
| Later\tyears | 127 | 131 |
| Sublease\trentals | – | (77) |
| Total\tminimum\tlease\tpayments | 262 | $378 |
| Less\timputed\tinterest\tcosts | 81 |  |
| Present\tvalue\tof\tnet\tminimum\tlease\tpayments\tincluded\tin\tlong-term\tdebt | $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\trental | $182(a) | $196(a) | $159 |
| Contingent\trental | 15 | 13 | 13 |
| Sublease\trentals | (9) | (11) | (11) |
| Net\trental\texpense | $188 | $198 | $161 |

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

# 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:

|  |  | Maximum	Potential |
| :--- | :--- | :--- |
|  |  | Undiscounted\tPayments |
|  |  | as\tof\tDecember\t31, |
| (In\tmillions) | Term | 2003^(m) |
| Indebtedness\tof\tequity\tinvestees: |  |  |
| LOCAP\tcommercial\tpaper(a) | Perpetual-Loan\tBalance\tVaries | $23 |
| LOOP\tSeries\t1991A\tNotes(a) | 2008 | 7 |
| LOOP\tSeries\t1992A\tNotes(a) | 2008 | 34 |
| LOOP\tSeries\t1992B\tNotes(a) | 2004 | 9 |
| LOOP\tSeries\t1997\tNotes(a) | 2017 | 13 |
| LOOP\trevolving\tcredit\tagreement(a) | Perpetual-Loan\tBalance\tVaries | 25 |
| LOOP\tSeries\t2003(a) | 2004-2023 | 81 |
| Centennial\tPipeline\tNotes(b) | 2008-2024 | 70 |
| Centennial\tPipeline\trevolving\tcredit\tagreement(b) | 2004-Loan\tBalance\tVaries | 5 |
| Miscellaneous | Varies | 2 |
| Other: |  |  |
| United\tStates\tSteel/PRO-TEC\tCoating\tCompany\t(c) | 2004-2008 | 14 |
| United\tStates\tSteel/Clairton\t1314B(c) | 2004-2012 | 610 |
| Centennial\tPipeline\tcatastrophic\tevent(d) | Indefinite | 50 |
| Alliance\tPipeline(e) | 2004-2015 | 67 |
| Kenai\tKochemak\tPipeline\tLLC(f) | 2004-2017 | 15 |
| Pilot\tTravel\tCenters\tSurety\tBonds(g) | (g) | 10 |
| Corporate\tassets(h) | (h) | 14 |
| Canada(i) | Indefinite | 568 |
| Globex(j) | 2004-2006 | 16 |
| Yates(k) | Indefinite | 228 |
| Mobile\ttransportation\tequipment\tleases(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

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.

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.

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.

# Selected	Quarterly	Financial	Data	(Unaudited)

| (In	millions,	except	per	share	data) | 4th	Qtr. | 3rd	Qtr. | 2nd	Qtr. | 1st	Qtr. | 4th	Qtr. | 3rd	Qtr. | 2nd	Qtr. | 1st	Qtr. |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Revenues | $11,034 | $10,253 | $9,643 | $10,033 | $8,478 | $8,397 | $8,034 | $6,386 |
| Income\tfrom\toperations | 353 | 658 | 526 | 547 | 370 | 360 | 467 | 173 |
| Income\tfrom\tcontinuing\toperations | 199 | 293 | 235 | 285 | 196 | 81 | 172 | 58 |
| Income\t(loss)\tfrom\tdiscontinued\toperations | 286 | (12) | 13 | 18 | (2) | 6 | (4) | (4) |
| Income\tbefore\tcumulative\teffect\tof\tchanges\tin\taccounting |  |  |  |  |  |  |  |  |
| principle | 485 | 281 | 248 | 303 | 194 | 87 | 168 | 54 |
| Net\tincome | 485 | 281 | 248 | 307 | 194 | 87 | 168 | 67 |
| Common\tStock\tdata: |  |  |  |  |  |  |  |  |
| Net\tincome | 485 | 281 | 248 | 307 | 194 | 87 | 168 | 67 |
| –\tPer\tshare\t–\tbasic\tand\tdiluted | 1.57 | .90 | .80 | .99 | .62 | .28 | .54 | .22 |
| Dividends\tpaid\tper\tshare | .25 | .25 | .23 | .23 | .23 | .23 | .23 | .23 |
| Price\trange\tof\tCommon\tStock(a): |  |  |  |  |  |  |  |  |
| –\tLow | 28.91 | 25.01 | 22.56 | 20.20 | 19.00 | 21.30 | 25.71 | 27.08 |
| –\tHigh | 33.37 | 29.42 | 27.00 | 24.04 | 23.05 | 26.65 | 29.82 | 30.02 |

# Principal	Unconsolidated	Investees	(Unaudited)

| Alba	Plant	LLC | Cayman	Islands | 52%(a) | Liquified	Petroleum	Gas |
| :--- | :--- | :--- | :--- |
| Atlantic\tMethanol\tProduction\tCompany,\tLLC | United\tStates | 45% | Methanol\tProduction |
| Centennial\tPipeline\tLLC | United\tStates | 50%(b) | Pipeline\t&amp;\tStorage\tFacility |
| Kenai\tKachemak\tPipeline,\tLLC | United\tStates | 60%(a) | Natural\tGas\tTransmission |
| Kenai\tLNG\tCorporation | United\tStates | 30% | Natural\tGas\tLiquification |
| LLC\tJV\tChernogorskoye | Russian\tFederation | 22% | Oil\tand\tGas\tProduction |
| LOCAP\tLLC | United\tStates | 50%(b) | Pipeline\t&amp;\tStorage\tFacilities |
| LOOP\tLLC | United\tStates | 47%(b) | Offshore\tOil\tPort |
| Manta\tRay\tOffshore\tGathering\tCompany,\tLLC | United\tStates | 24% | Natural\tGas\tTransmission |
| Minnesota\tPipe\tLine\tCompany | United\tStates | 33%(b) | Pipeline\tFacility |
| Nautilus\tPipeline\tCompany,\tLLC | United\tStates | 24% | Natural\tGas\tTransmission |
| Odyssey\tPipeline\tLLC | United\tStates | 29% | Pipeline\tFacility |
| Pilot\tTravel\tCenters\tLLC | United\tStates | 50%(b) | Travel\tCenters |
| Poseidon\tOil\tPipeline\tCompany,\tLLC | United\tStates | 28% | Crude\tOil\tTransportation |
| Southcap\tPipe\tLine\tCompany | United\tStates | 22%(b) | Crude\tOil\tTransportation |

(a) Represents	a	noncontrolling	interest.

(b) Represents	the	ownership	interest	held	by	MAP.

# Supplementary	Information	on	Oil	and	Gas	Producing	Activities	(Unaudited)

The	Supplementary	Information	on	Oil	and	Gas	Producing	Activities	is	presented	in	accordance	with	Statement	of	Financial	Accounting	Standards	No.	69, "Disclosures	about	Oil	and	Gas	Producing	Activities".	Included	as	supplemental	information	are	capitalized	costs	related	to	oil	and	gas	producing	activities,	costs incurred	in	oil	and	gas	property	acquisition,	exploration	and	development	activities	and	results	of	operations	for	oil	and	gas	producing	activities.	These	tables	include excess	purchase	price	associated	with	equity	investments	and	reflect	data	related	only	to	oil	and	gas	producing	activities.	Supplemental	information	is	also	provided	for estimated	quantities	of	proved	oil	and	gas	reserves,	standardized	measure	of	discounted	future	net	cash	flows	relating	to	proved	oil	and	gas	reserve	quantities	and	a summary	of	changes	therein.

The	supplemental	information	for	consolidated	subsidiaries	is	disclosed	by	the	following	geographic	areas:	the	United	States;	Europe,	which	primarily	includes activities	in	the	United	Kingdom,	Ireland	and	Norway;	West	Africa,	which	primarily	includes	activities	in	Angola,	Equatorial	Guinea	and	Gabon;	and	Other International,	which	includes	activities	in	Nova	Scotia,	Russian	Federation	and	other	international	locations	outside	of	Europe	and	West	Africa.	Equity	Investees	include Marathon's	equity	share	of	the	oil	and	gas	producing	activities	of	companies	that	are	accounted	for	by	the	equity	method.	This	includes	Alba	Plant	LLC,	CLAM Petroleum	B.V,	Kenai	Kachemak	Pipeline,	LLC,	LLC	JV	Chernogorskoye	and	MKM	Partners	L.P.	No	oil	or	gas	reserves	are	attributed	to	ownership	in	Alba	Plant	LLC or	Kenai	Kachemak	Pipeline,	LLC.

# Capitalized	Costs	and	Accumulated	Depreciation,	Depletion	and	Amortization

| (In	millions)													December	31 | United<br>States | Europe | West<br>Africa | Other<br>Int'l. | Continuing<br>Operations | Discontinued<br>Operations |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| 2003(a) |  |  |  |  |  |  |
| Capitalized\tcosts: |  |  |  |  |  |  |
| Proved\tproperties | $6,158 | $5,288 | $1,147 | $119 | $12,712 | $– |
| Unproved\tproperties | 615 | 301 | 326 | 268 | 1,510 | – |
| Total | 6,773 | 5,589 | 1,473 | 387 | 14,222 | – |
| Accumulated\tdepreciation,\tdepletion\tand\tamortization |  |  |  |  |  |  |
| Proved\tproperties | 4,128 | 3,922 | 144 | 17 | 8,211 | – |
| Unproved\tproperties | 37 | – | 9 | – | 46 | – |
| Total | 4,165 | 3,922 | 153 | 17 | 8,257 | – |
| Net\tcapitalized\tcosts | $2,608 | $1,667 | $1,320 | $370 | $5,965 | $– |
| 2002 |  |  |  |  |  |  |
| Capitalized\tcosts: |  |  |  |  |  |  |
| Proved\tproperties | $6,032 | $5,116 | $792 | $41 | $11,981 | $769 |
| Unproved\tproperties | 653 | 197 | 287 | 20 | 1,157 | 65 |
| Total | 6,685 | 5,313 | 1,079 | 61 | 13,138 | 834 |
| Accumulated\tdepreciation,\tdepletion\tand\tamortization: |  |  |  |  |  |  |
| Proved\tproperties | 3,933 | 3,641 | 101 | 11 | 7,686 | 354 |
| Unproved\tproperties | 34 | 1 | 9 | – | 44 | 2 |
| Total | 3,967 | 3,642 | 110 | 11 | 7,730 | 356 |
| Net\tcapitalized\tcosts | $2,718 | $1,671 | $969 | $50 | $5,408 | $478 |

Marathon's	share	of	equity	investee's	net	capitalized	costs	was	$276	million	and	$574	million	at	December	31,	2003	and	2002,	respectively.	The	decrease	from 2003	primarily	reflects	the	disposition	of	CLAM	Petroleum	B.V.	and	the	dissolution	of	MKM	Partners,	L.P.

(a) Includes	capitalized	asset	retirement	costs	and	the	associated	accumulated	amortization.

# Costs	Incurred	for	Property	Acquisition,	Exploration	and	Development (a)

| (In	millions) | United<br>States | Europe | West<br>Africa | Other<br>Int'l. | Consolidated | Equity<br>Investees | Continuing<br>Operations | Discontinued<br>Operations |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| 2003 |  |  |  |  |  |  |  |  |
| Property\tacquisition: |  |  |  |  |  |  |  |  |
| Proved | $1 | $1 | $– | $66 | $68 | $11 | $79 | $– |
| Unproved | 5 | 3 | 1 | 244 | 253 | – | 253 | – |
| Exploration | 114 | 35 | 53 | 29 | 231 | – | 231 | 17 |
| Development | 266 | 148 | 352 | 33 | 799 | 114 | 913 | 26 |
| Capitalized\tasset\tretirement\tcosts(b) | 9 | 47 | 3 | 14 | 73 | – | 73 | – |
| 2002 |  |  |  |  |  |  |  |  |
| Property\tacquisition: |  |  |  |  |  |  |  |  |
| Proved | $– | $– | $341 | $24 | $365 | $67 | $432 | $– |
| Unproved | 2 | 105 | 294 | 2 | 403 | 92 | 495 | – |
| Exploration | 184 | 10 | 24 | 40 | 258 | 4 | 262 | 27 |
| Development | 273 | 100 | 126 | 1 | 500 | 41 | 541 | 39 |
| 2001 |  |  |  |  |  |  |  |  |
| Property\tacquisition: |  |  |  |  |  |  |  |  |
| Proved | $ 231 | $– | $– | $– | $231 | $– | $231 | $1 |
| Unproved | 395 | 24 | 69 | 3 | 491 | – | 491 | 19 |
| Exploration | 190 | 20 | 7 | 25 | 242 | 8 | 250 | 31 |
| Development | 356 | 205 | 3 | – | 564 | 19 | 583 | 49 |

(a) Includes	costs	incurred	whether	capitalized	or	expensed.

(b) Includes	the	effect	of	foreign	currency	fluctuations,	and	excludes	$161	million	cumulative	effect	of	adopting	SFAS	No.	143.

# CONTINUED

# Results	of	Operations	for	Oil	and	Gas	Producing	Activities

| (In	millions) | United<br>States | Europe | West<br>Africa | Other<br>Int'l. | Consolidated | Equity<br>Investees | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| 2003:\tRevenues\tand\tother\tincome: |  |  |  |  |  |  |  |
| Sales | $1,081 | $662 | $139 | $43 | $1,925 | $86 | $2,011 |
| Transfers | 1,120 | 20 | 127 | 24 | 1,291 | – | 1,291 |
| Other\tincome^(a) | (88) | 65 | (1) | – | (24) | (16) | (40) |
| Total\trevenues | 2,113 | 747 | 265 | 67 | 3,192 | 70 | 3,262 |
| Expenses: |  |  |  |  |  |  |  |
| Production\tcosts | (410) | (136) | (55) | (53) | (654) | (24) | (678) |
| Transportation\tcosts^(b) | (120) | (32) | (5) | (3) | (160) | (2) | (162) |
| Exploration\texpenses | (88) | (18) | (15) | (27) | (148) | – | (148) |
| Depreciation,\tdepletion\tand\tamortization^(c)\t(d) | (437) | (227) | (42) | (12) | (718) | (16) | (734) |
| Impairments | (3) | – | – | – | (3) | – | (3) |
| Administrative\texpenses | (43) | (17) | (4) | (36) | (100) | – | (100) |
| Total\texpenses | (1,101) | (430) | (121) | (131) | (1,783) | (42) | (1,825) |
| Other\tproduction-related\tincome\t(losses)^(e) | 1 | 26 | – | – | 27 | 1 | 28 |
| Results\tbefore\tincome\ttaxes^(f) | 1,013 | 343 | 144 | (64) | 1,436 | 29 | 1,465 |
| Income\ttaxes\t(credits)^(g) | 352 | 122 | 4 | (27) | 451 | 11 | 462 |
| Results\tof\tcontinuing\toperations | $661 | $221 | $140 | $(37) | $985 | $18 | $1,003 |
| Results\tof\tdiscontinued\toperations | $– | $– | $– | $41 | $41 | $– | $41 |
| 2002:\tRevenues\tand\tother\tincome: |  |  |  |  |  |  |  |
| Sales | $538 | $720 | $86 | $10 | $1,354 | $115 | $1,469 |
| Transfers | 1,210 | 34 | 128 | – | 1,372 | – | 1,372 |
| Other\tincome^(a) | 21 | – | – | 2 | 23 | – | 23 |
| Total\trevenues | 1,769 | 754 | 214 | 12 | 2,749 | 115 | 2,864 |
| Expenses: |  |  |  |  |  |  |  |
| Production\tcosts | (365) | (145) | (48) | (5) | (563) | (32) | (595) |
| (b) |  |  |  |  |  |  |  |
| Transportation\tcosts | (106) | (34) | (2) | – | (142) | (1) | (143) |
| Exploration\texpenses | (130) | (10) | (9) | (18) | (167) | – | (167) |
| Depreciation,\tdepletion\tand\tamortization | (436) | (251) | (41) | (2) | (730) | (25) | (755) |
| Impairments | (13) | – | – | – | (13) | – | (13) |
| Administrative\texpenses | (41) | (29) | (2) | (38) | (110) | – | (110) |
| Contract\tsettlement | (15) | – | – | – | (15) | – | (15) |
| Total\texpenses | (1,106) | (469) | (102) | (63) | (1,740) | (58) | (1,798) |
| (e) |  |  |  |  |  |  |  |
| Other\tproduction-related\tincome\t(losses) | 1 | (4) | – | – | (3) | 1 | (2) |
| (f) |  |  |  |  |  |  |  |
| Results\tbefore\tincome\ttaxes | 664 | 281 | 112 | (51) | 1,006 | 58 | 1,064 |
| (g) |  |  |  |  |  |  |  |
| Income\ttaxes\t(credits) | 237 | 87 | 36 | (18) | 342 | 20 | 362 |
| Results\tof\tcontinuing\toperations | $427 | $194 | $76 | $(33) | $664 | $38 | $702 |
| Results\tof\tdiscontinued\toperations | $– | $– | $– | $(16) | $(16) | $– | $(16) |
| 2001:\tRevenues\tand\tother\tincome: |  |  |  |  |  |  |  |
| Sales | $871 | $706 | $8 | $1 | $1,586 | $49 | $1,635 |
| Transfers | 1,235 | – | 134 | – | 1,369 | 69 | 1,438 |
| (a) |  |  |  |  |  |  |  |
| Other\tincome | 68 | – | – | – | 68 | – | 68 |
| Total\trevenues | 2,174 | 706 | 142 | 1 | 3,023 | 118 | 3,141 |
| Expenses: |  |  |  |  |  |  |  |
| Production\tcosts | (349) | (114) | (26) | (2) | (491) | (34) | (525) |
| (b) |  |  |  |  |  |  |  |
| Transportation\tcosts | (97) | (52) | (1) | – | (150) | (1) | (151) |
| Exploration\texpenses | (90) | (8) | (5) | (26) | (129) | – | (129) |
| Depreciation,\tdepletion\tand\tamortization | (458) | (272) | (35) | – | (765) | (13) | (778) |
| Impairments | – | – | – | (1) | (1) | – | (1) |
| Administrative\texpenses | (38) | (4) | (2) | (52) | (96) | – | (96) |
| Total\texpenses | (1,032) | (450) | (69) | (81) | (1,632) | (48) | (1,680) |
| Other\tproduction-related\tincome\t(losses)^(e) | 3 | (24) | – | – | (21) | 1 | (20) |
| Results\tbefore\tincome\ttaxes^(f)\nIncome\ttaxes\t(credits)^(g) | 1,145 | 232 | 73 | (80) | 1,370 | 71 | 1,441 |
|  | 389 | 69 | 26 | (26) | 458 | 25 | 483 |
| Results\tof\tcontinuing\toperations | $756 | $163 | $47 | $(54) | $912 | $46 | $958 |
| Results\tof\tdiscontinued\toperations | $– | $– | $– | $(91) | $(91) | $– | $(91) |

(a) Includes	net	gains	(losses)	on	asset	dispositions	and,	in	2001,	gain	on	lease	resolution	with	U.S.	Government.

(b) Includes	the	cost	to	prepare	and	move	liquid	hydrocarbons	and	natural	gas	to	their	points	of	sale.

(c) Excludes	the	cumulative	effect	on	net	income	of	the	adoption	of	SFAS	No.	143.

(d) Includes	accretion	of	interest	on	asset	retirement	obligations.

(e) Includes	revenues,	net	of	associated	costs,	from	third-party	activities	that	are	an	integral	part	of	Marathon's	production	operations	which	may	include	the	processing	and/or	transportation	of	third-party	production, and	the	purchase	and	subsequent	resale	of	gas	utilized	in	reservoir	management.

(f) Includes	items	not	allocated	to	the	E&P	segment	and	the	results	of	using	derivative	instruments	to	manage	commodity	and	foreign	currency	risks.	Excludes	corporate	overhead,	interest,	currency	gains	and	losses, non-operating	items	included	in	income	from	equity	method	investments	and	E&P	segment	items	not	related	to	oil	and	gas	producing	activities.

(g) Computed	by	adjusting	results	before	income	taxes	by	permanent	differences	and	multiplying	the	result	by	the	35%	statutory	rate	and	adjusting	for	applicable	tax	credits

The	following	reconciles	results	for	oil	and	gas	producing	activities	from	continuing	operations	to	E&P	segment	income:

| (In	millions) | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- |
| Results\tbefore\tincome\ttaxes | $1,465 | $1,064 | $1,441 |
| Items\texcluded\tfrom\tresults\tfor\toil\tand\tgas\tproducing\tactivities: |  |  |  |
| Marketing\texpenses\tand\ttechnology\tcosts | (3) | (13) | (17) |
| Nonoperating\titems\tincluded\tin\tincome\tfrom\tequity\tmethod\tinvestments | (9) | (6) | (11) |
| Other | (5) | 2 | (3) |
| Items\tnot\tallocated\tto\tE&amp;P\tsegment\tincome: |  |  |  |
| Gain\ton\tasset\tdisposition | (85) | (24) | – |
| Contract\tsettlement |  | 15 | – |
| Gain\ton\toffshore\tlease\tresolution\twith\tU.S.\tgovernment | – | – | (59) |
| Loss\ton\tjoint\tventure\tdissolution | 124 | – | – |
| E&amp;P\tsegment\tincome | $1,487 | $1,038 | $1,351 |

# Average	Production	Costs(a)

|  | United<br>States | Europe | West<br>Africa | Other<br>Int'l. | Consolidated | Equity<br>Investees | Continuing<br>Operations |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| 2003 | $4.92 | $ 4.35 | $3.98 | $14.56 | $4.95 | $8.37 | $5.03 |
| 2002 | 4.17 | 4.03 | 3.81 | 14.95 | 3.90 | 6.92 | 4.22 |
| 2001 | 3.70 | 3.18 | 4.54 | — | 3.62 | 6.29 | 3.72 |

(a) Computed	using	production	costs,	excluding	transportation	costs,	as	disclosed	in	the	Results	of	Operations	for	Oil	and	Gas	Activities	and	as	defined	by	the	Securities	and	Exchange	Commission.	Natural	gas volumes	were	converted	to	barrels	of	oil	equivalent	(BOE)	using	a	conversion	factor	of	six	mcf	of	natural	gas	to	one	barrel	of	oil.

# Average	Sales	Prices

|  | United<br>States | Europe | West<br>Africa | Other<br>Int'l. | Consolidated | Equity<br>Investees | Continuing<br>Operations | Discontinued<br>Operations |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (excluding\tderivative\tgains\tand\tlosses) |  |  |  |  |  |  |  |  |
| 2003:\tLiquid\thydrocarbons\t(per\tbbl) | $26.92 | $28.50 | $26.29 | $18.33 | $26.72 | $25.91 | $26.70 | $28.96 |
| Natural\tgas\t(per\tmcf)(a) | 4.53 | 3.32 | .25 | – | 3.96 | 3.70 | 3.96 | 5.43 |
| 2002:\tLiquid\thydrocarbons\t(per\tbbl) | $22.18 | $24.40 | $22.62 | $26.98 | $22.86 | $24.59 | $22.93 | $23.29 |
| Natural\tgas\t(per\tmcf)(a) | 2.87 | 2.66 | .24 | – | 2.69 | 3.05 | 2.70 | 3.30 |
| 2001:\tLiquid\thydrocarbons\t(per\tbbl) | $20.62 | $23.49 | $24.36 | $– | $21.65 | $23.41 | $21.73 | $21.26 |
| Natural\tgas\t(per\tmcf)(a) | 3.69 | 2.77 | – | – | 3.43 | 3.39 | 3.42 | 4.17 |
| (including\tderivative\tgains\tand\tlosses) |  |  |  |  |  |  |  |  |
| 2003:\tLiquid\thydrocarbons\t(per\tbbl) | $26.09 | $27.27 | $26.29 | $18.33 | $25.96 | $25.75 | $25.96 | $28.96 |
| Natural\tgas\t(per\tmcf)(a) | 4.31 | 2.63 | .25 | – | 3.62 | 3.70 | 3.63 | 5.43 |
| 2002:\tLiquid\thydrocarbons\t(per\tbbl) | $21.83 | $24.53 | $22.62 | $26.98 | $22.68 | $24.59 | $22.76 | $23.39 |
| Natural\tgas\t(per\tmcf)(a) | 3.05 | 2.82 | .24 | – | 2.84 | 3.05 | 2.84 | 3.30 |
| 2001:\tLiquid\thydrocarbons\t(per\tbbl) | $21.00 | $23.49 | $24.36 | $– | $21.90 | $23.41 | $21.97 | $21.26 |
| Natural\tgas\t(per\tmcf)(a) | 3.92 | 2.77 | – | – | 3.59 | 3.39 | 3.59 | 4.17 |

(a) Excludes	the	resale	of	purchased	gas	utilized	in	reservoir	management.

# Estimated	Quantities	of	Proved	Oil	and	Gas	Reserves

Marathon's	estimated	net	proved	liquid	hydrocarbon	(oil,	condensate,	and	natural	gas	liquids)	and	gas	reserves	and	the	changes	thereto	for	the	years	2003,	2002	and 2001	are	shown	in	the	following	tables.	Estimates	of	the	proved	reserves	have	been	prepared	by	internal	asset	teams	including	reservoir	engineers	and	geoscience professionals,	except	the	estimated	proved	gas	reserves	for	the	U.S.	Powder	River	Basin	that	are	estimated	by	the	independent	petroleum	consultants	of	Netherland, Sewell	and	Associates,	Inc.	Reserve	estimates	are	periodically	reviewed	by	the	Corporate	Reserves	Group	to	assure	that	rigorous	professional	standards	and	the	reserves definitions	prescribed	by	the	U.S.	Securities	and	Exchange	Commission	(SEC)	are	consistently	applied	throughout	the	company.

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	changes,	either	positively	or	negatively,	as additional	information	becomes	available	and	contractual,	economic	and	political	conditions	change.

Marathon's	net	proved	reserve	estimates	have	been	adjusted	as	necessary	to	reflect	all	contractual	agreements,	royalty	obligations	and	interests	owned	by	others	at the	time	of	the	estimate.	Only	reserves	that	are	estimated	to	be	recovered	during	the	term	of	the	current	contract,	unless	there	is	a	clear	and	consistent	history	of	contract extension,	have	been	included	in	the	proved	reserve	estimate.	Reserves	from	properties	governed	by	Production	Sharing	Contracts	have	been	calculated	using	the "economic	interest"	method	prescribed	by	the	SEC.	Reserves	that	are	not	currently	considered	proved,	that	may	result	from	extensions	of	currently	proved	areas,	or	that may	result	from	applying	secondary	or	tertiary	recovery	processes	not	yet	tested	and	determined	to	be	economic,	are	excluded.	Purchased	natural	gas	utilized	in reservoir	management	and	subsequently	resold	is	also	excluded.	Marathon	does	not	have	any	quantities	of	oil	and	gas	reserves	subject	to	long-term	supply	agreements with	foreign	governments	or	authorities	in	which	Marathon	acts	as	producer.

Proved	developed	reserves	are	the	quantities	of	oil	and	gas	expected	to	be	recovered	through	existing	wells	with	existing	equipment	and	operating	methods.	In some	cases,	proved	undeveloped	reserves	may	require	substantial	new	investments	in	additional	wells	and	related	facilities.	Production	volumes	shown	are	sales volumes,	net	of	any	products	consumed	during	production	activities.

| (Millions	of	barrels) | United<br>States | Europe | West^(a)<br>Africa | Other<br>Int'l | Consolidated | Equity<br>Investees | Continuing<br>Operations | Discontinued<br>Operations |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Liquid\tHydrocarbons |  |  |  |  |  |  |  |  |
| Proved\tdeveloped\tand\tundeveloped |  |  |  |  |  |  |  |  |
| reserves: |  |  |  |  |  |  |  |  |
| Beginning\tof\tyear\t–\t2001 | 458 | 108 | 23 | – | 589 | – | 589 | 128 |
| Purchase\tof\treserves\tin\tplace(b) | 8 | – | – | – | 8 | – | 8 | – |
| Exchange\tof\treserves\tin\tplace(c) | (191) | – | – | – | (191) | 191 | – | – |
| Revisions\tof\tprevious\testimates | 14 | (3) | – | – | 11 | (3) | 8 | – |
| Improved\trecovery | 13 | – | – | – | 13 | – | 13 | – |
| Extensions,\tdiscoveries\tand\tother |  |  |  |  |  |  |  |  |
| additions | 12 | – | – | – | 12 | – | 12 | 1 |
| Production | (46) | (17) | (6) | – | (69) | (4) | (73) | (4) |
| Sales\tof\treserves\tin\tplace(b) | – | – | – | – | – | – | – | (112) |
| End\tof\tyear\t–\t2001 | 268 | 88 | 17 | – | 373 | 184 | 557 | 13 |
| Purchase\tof\treserves\tin\tplace(b) | – | – | 107 | 3 | 110 | – | 110 | – |
| Revisions\tof\tprevious\testimates | 16 | 4 | 1 | – | 21 | 2 | 23 | – |
| Improved\trecovery | 2 | – | – | – | 2 | – | 2 | – |
| Extensions,\tdiscoveries\tand\tother |  |  |  |  |  |  |  |  |
| additions | 4 | 3 | 87 | – | 94 | – | 94 | – |
| Production | (42) | (19) | (9) | – | (70) | (3) | (73) | (2) |
| Sales\tof\treserves\tin\tplace(b) | (3) | – | – | – | (3) | – | (3) | (1) |
| End\tof\tyear\t–\t2002 | 245 | 76 | 203 | 3 | 527 | 183 | 710 | 10 |
| Purchase\tof\treserves\tin\tplace(b) | – | – | – | 64 | 64 | 2 | 66 | – |
| Exchange\tof\treserves\tin\tplace(d) | 173 | – | – | – | 173 | (173) | – | – |
| Revisions\tof\tprevious\testimates | – | (4) | 25 | 11 | 32 | – | 32 | – |
| Improved\trecovery | 4 | – | – | 4 | 8 | – | 8 | – |
| Extensions,\tdiscoveries\tand\tother |  |  |  |  |  |  |  |  |
| additions | 10 | 2 | – | 14 | 26 | – | 26 | – |
| Production | (39) | (15) | (10) | (4) | (68) | (2) | (70) | (1) |
| Sales\tof\treserves\tin\tplace(b) | (183) | – | – | (3) | (186) | (8) | (194) | (9) |
| End\tof\tyear\t–\t2003 | 210 | 59 | 218 | 89 | 576 | 2 | 578 | – |
| Proved\tdeveloped\treserves: |  |  |  |  |  |  |  |  |
| Beginning\tof\tyear\t–\t2001 | 414 | 74 | 18 | – | 506 | – | 506 | 39 |
| End\tof\tyear\t–\t2001 | 243 | 69 | 14 | – | 326 | 178 | 504 | 11 |
| End\tof\tyear\t–\t2002 | 226 | 63 | 113 | 2 | 404 | 177 | 581 | 9 |
| End\tof\tyear\t–\t2003 | 193 | 47 | 120 | 31 | 391 | 2 | 393 | – |

(a) Consists	of	estimated	reserves	from	properties	governed	by	production	sharing	contracts.

(b) The	net	positive	or	negative	balance	of	proved	reserves	acquired	or	relinquished	in	property	trades	within	the	same	geographic	area	is	reported	within	purchases	of	reserves	in	place	or	sales	of	reserves	in	place, respectively.

(c) Reserves	represent	the	contribution	of	certain	mineral	interests	to	MKM	Partners	L.P.,	a	joint	venture	accounted	for	under	the	equity	method	of	accounting.

(d) Reserves	represent	the	transfer	of	certain	mineral	interests	upon	the	dissolution	of	MKM	Partners	L.P.

# Estimated	Quantities	of	Proved	Oil	and	Gas	Reserves	(continued)

| (Billions	of	cubic	feet) | United<br>States | Europe | West^(a)<br>Africa | Consolidated | Equity<br>Investees | Continuing<br>Operations | Discontinued<br>Operations |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Natural\tGas |  |  |  |  |  |  |  |
| Proved\tdeveloped\tand\tundeveloped\treserves: |  |  |  |  |  |  |  |
| Beginning\tof\tyear\t–\t2001 | 1,914 | 614 | – | 2,528 | 89 | 2,617 | 477 |
| Purchase\tof\treserves\tin\tplace^(b) | 223 | – | – | 223 | – | 223 | – |
| Revisions\tof\tprevious\testimates | (267) | (12) | – | (279) | (27) | (306) | 3 |
| Improved\trecovery | 10 | – | – | 10 | – | 10 | – |
| Extensions,\tdiscoveries\tand\tother\tadditions | 210 | 126 | – | 336 | – | 336 | 48 |
| Production^(c) | (289) | (113) | – | (402) | (11) | (413) | (45) |
| Sales\tof\treserves\tin\tplace^(b) | (8) | – | – | (8) | – | (8) | (84) |
| End\tof\tyear\t–\t2001 | 1,793 | 615 | – | 2,408 | 51 | 2,459 | 399 |
| Purchase\tof\treserves\tin\tplace^(b) | – | – | 571 | 571 | – | 571 | 9 |
| Revisions\tof\tprevious\testimates | 48 | 4 | – | 52 | 3 | 55 | (20) |
| Improved\trecovery | – | – | – | – | – | – | – |
| Extensions,\tdiscoveries\tand\tother\tadditions | 156 | 46 | 101 | 303 | 14 | 317 | 32 |
| Production^(c) | (272) | (103) | (19) | (394) | (9) | (403) | (38) |
| Sales\tof\treserves\tin\tplace^(b) | (1) | – | – | (1) | – | (1) | (3) |
| End\tof\tyear\t–\t2002 | 1,724 | 562 | 653 | 2,939 | 59 | 2,998 | 379 |
| Purchase\tof\treserves\tin\tplace^(b) | 7 | – | – | 7 | – | 7 | – |
| Revisions\tof\tprevious\testimates | 20 | (7) | 36 | 49 | 1 | 50 | – |
| Improved\trecovery | – | – | – | – | – | – | – |
| Extensions,\tdiscoveries\tand\tother\tadditions | 161 | 24 | – | 185 | – | 185 | 8 |
| Production^(c) | (267) | (95) | (24) | (386) | (5) | (391) | (27) |
| Sales\tof\treserves\tin\tplace^(b) | (10) | – | – | (10) | (55) | (65) | (360) |
| End\tof\tyear\t–\t2003 | 1,635 | 484 | 665 | 2,784 | – | 2,784 | – |
| Proved\tdeveloped\treserves: |  |  |  |  |  |  |  |
| Beginning\tof\tyear\t–\t2001 | 1,421 | 563 | – | 1,984 | 52 | 2,036 | 381 |
| End\tof\tyear\t–\t2001 | 1,308 | 473 | – | 1,781 | 32 | 1,813 | 308 |
| End\tof\tyear\t–\t2002 | 1,206 | 408 | 552 | 2,166 | 36 | 2,202 | 290 |
| End\tof\tyear\t–\t2003 | 1,067 | 421 | 528 | 2,016 | – | 2,016 | – |

(c) Excludes	the	resale	of	purchased	gas	utilized	in	reservoir	management.

# Standardized	Measure	of	Discounted	Future	Net	Cash	Flows	and	Changes	Therein	Relating	to	Proved	Oil	and	Gas	Reserves

Estimated	discounted	future	net	cash	flows	and	changes	therein	were	determined	in	accordance	with	Statement	of	Financial	Accounting	Standards	No.	69.	Certain information	concerning	the	assumptions	used	in	computing	the	valuation	of	proved	reserves	and	their	inherent	limitations	are	discussed	below.	Marathon	believes	such information	is	essential	for	a	proper	understanding	and	assessment	of	the	data	presented.

Future	cash	inflows	are	computed	by	applying	year-end	prices	of	oil	and	gas	relating	to	Marathon's	proved	reserves	to	the	year-end	quantities	of	those	reserves.

Future	price	changes	are	considered	only	to	the	extent	provided	by	contractual	arrangements	in	existence	at	year-end.

The	assumptions	used	to	compute	the	proved	reserve	valuation	do	not	necessarily	reflect	Marathon's	expectations	of	actual	revenues	to	be	derived	from	those reserves	or	their	present	worth.	Assigning	monetary	values	to	the	estimated	quantities	of	reserves,	described	on	the	preceding	page,	does	not	reduce	the	subjective	and ever-changing	nature	of	such	reserve	estimates.

Additional	subjectivity	occurs	when	determining	present	values	because	the	rate	of	producing	the	reserves	must	be	estimated.	In	addition	to	uncertainties	inherent in	predicting	the	future,	variations	from	the	expected	production	rate	also	could	result	directly	or	indirectly	from	factors	outside	of	Marathon's	control,	such	as unintentional	delays	in	development,	environmental	concerns,	changes	in	prices	or	regulatory	controls.

The	reserve	valuation	assumes	that	all	reserves	will	be	disposed	of	by	production.	However,	if	reserves	are	sold	in	place	or	subjected	to	participation	by	foreign governments,	additional	economic	considerations	also	could	affect	the	amount	of	cash	eventually	realized.

Future	development	and	production,	transportation	and	administrative	costs	are	computed	by	estimating	the	expenditures	to	be	incurred	in	developing	and producing	the	proved	oil	and	gas	reserves	at	the	end	of	the	year,	based	on	year-end	costs	and	assuming	continuation	of	existing	economic	conditions.

Future	income	tax	expenses	are	computed	by	applying	the	appropriate	year-end	statutory	tax	rates,	with	consideration	of	future	tax	rates	already	legislated,	to	the future	pretax	net	cash	flows	relating	to	Marathon's	proved	oil	and	gas	reserves.	Permanent	differences	in	oil	and	gas	related	tax	credits	and	allowances	are	recognized. Discount	was	derived	by	using	a	discount	rate	of	10	percent	a	year	to	reflect	the	timing	of	the	future	net	cash	flows	relating	to	proved	oil	and	gas	reserves.

# Standardized	Measure	of	Discounted	Future	Net	Cash	Flows	Relating	to	Proved	Oil	and	Gas	Reserves	(continued)

| (In	millions) | United<br>States | Europe | West<br>Africa | Other<br>Int'l. | Consolidated | Equity<br>Investees | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2003: |  |  |  |  |  |  |  |
| Future\tcash\tinflows | $13,331 | $3,955 | $4,471 | $1,593 | $23,350 | $35 | $23,385 |
| Future\tproduction,\ttransportation\tand\tadministrative |  |  |  |  |  |  |  |
| costs | (4,919) | (1,050) | (1,161) | (827) | (7,957) | (19) | (7,976) |
| Future\tdevelopment\tcosts | (758) | (435) | (175) | (229) | (1,597) | (1) | (1,598) |
| Future\tincome\ttax\texpenses | (2,612) | (870) | (780) | (163) | (4,425) | (5) | (4,430) |
| Future\tnet\tcash\tflows | 5,042 | 1,600 | 2,355 | 374 | 9,371 | 10 | 9,381 |
| 10%\tannual\tdiscount\tfor\testimated\ttiming\tof\tcash\tflows | (1,789) | (301) | (1,112) | (168) | (3,370) | (2) | (3,372) |
| Standardized\tmeasure\tof\tdiscounted\tfuture\tnet\tcash\nflows\trelating\tto\tproved\toil\tand\tgas\treserves(a) | $3,253 | $1,299 | $1,243 | $206 | $6,001 | $8 | $6,009 |
| December\t31,\t2002: |  |  |  |  |  |  |  |
| Future\tcash\tinflows | $12,994 | $4,256 | $4,136 | $83 | $21,469 | $5,652 | $27,121 |
| Future\tproduction,\ttransportation\tand\tadministrative |  |  |  |  |  |  |  |
| costs | (5,103) | (1,218) | (1,097) | (30) | (7,448) | (1,465) | (8,913) |
| Future\tdevelopment\tcosts | (650) | (351) | (324) | (4) | (1,329) | (333) | (1,662) |
| Future\tincome\ttax\texpenses | (2,440) | (989) | (753) | (27) | (4,209) | (1,150) | (5,359) |
| Future\tnet\tcash\tflows | 4,801 | 1,698 | 1,962 | 22 | 8,483 | 2,704 | 11,187 |
| 10%\tannual\tdiscount\tfor\testimated\ttiming\tof\tcash\tflows | (1,639) | (444) | (954) | (5) | (3,042) | (2,212) | (5,254) |
| Standardized\tmeasure\tof\tdiscounted\tfuture\tnet\tcash |  |  |  |  |  |  |  |
| flows\trelating\tto\tproved\toil\tand\tgas\treserves(a) | $3,162 | $1,254 | $1,008 | $17 | $5,441 | $492 | $5,933 |
| Standardized\tmeasure\tof\tdiscounted\tfuture\tnet\tcash |  |  |  |  |  |  |  |
| flows\trelating\tto\tdiscontinued\toperations | $– | $– | $– | $384 | $384 | $– | $384 |
| December\t31,\t2001: |  |  |  |  |  |  |  |
| Future\tcash\tinflows | $8,210 | $3,601 | $307 | $– | $12,118 | $3,456 | $15,574 |
| Future\tproduction,\ttransportation\tand\tadministrative |  |  |  |  |  |  |  |
| costs | (2,848) | (1,407) | (111) | – | (4,366) | (1,198) | (5,564) |
| Future\tdevelopment\tcosts | (661) | (364) | (40) | – | (1,065) | (178) | (1,243) |
| Future\tincome\ttax\texpenses | (1,480) | (572) | (51) | – | (2,103) | (468) | (2,571) |
| Future\tnet\tcash\tflows | 3,221 | 1,258 | 105 | – | 4,584 | 1,612 | 6,196 |
| 10%\tannual\tdiscount\tfor\testimated\ttiming\tof\tcash\tflows | (1,086) | (267) | (15) | – | (1,368) | (1,400) | (2,768) |
| Standardized\tmeasure\tof\tdiscounted\tfuture\tnet\tcash |  |  |  |  |  |  |  |
| flows\trelating\tto\tproved\toil\tand\tgas\treserves(a) | $2,135 | $991 | $90 | $– | $3,216 | $212 | $3,428 |
| Standardized\tmeasure\tof\tdiscounted\tfuture\tnet\tcash |  |  |  |  |  |  |  |
| flows\trelating\tto\tdiscontinued\toperations | $– | $– | $– | $172 | $172 | $– | $172 |

(a) Excludes	$(26)	million,	$(5)	million	and	$59	million	of	discounted	future	net	cash	flows	from	the	effects	of	hedging	transactions	for	2003,	2002	and	2001,	respectively.

# Summary	of	Changes	in	Standardized	Measure	of	Discounted	Future	Net	Cash	Flows	Relating	to	Proved	Oil	and	Gas	Reserves

| (In	millions) | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Sales\tand\ttransfers\tof\toil\tand\tgas\tproduced, |  |  |  |  |  |  |  |  |  |
| net\tof\tproduction,\ttransportation,\tand |  |  |  |  |  |  |  |  |  |
| administrative\tcosts | $(2,487) | $(1,983) | $(2,274) | $(49) | $(75) | $(84) | $(2,536) | $(2,058) | $(2,358) |
| Net\tchanges\tin\tprices\tand\tproduction, |  |  |  |  |  |  |  |  |  |
| transportation\tand\tadministrative\tcosts |  |  |  |  |  |  |  |  |  |
| related\tto\tfuture\tproduction | 1,178 | 2,795 | (7,281) | – | 348 | (130) | 1,178 | 3,143 | (7,411) |
| Extensions,\tdiscoveries\tand\timproved |  |  |  |  |  |  |  |  |  |
| recovery,\tless\trelated\tcosts | 618 | 1,032 | 592 | – | 15 | – | 618 | 1,047 | 592 |
| Development\tcosts\tincurred\tduring\tthe |  |  |  |  |  |  |  |  |  |
| period | 802 | 499 | 564 | 20 | 33 | 19 | 822 | 532 | 583 |
| Changes\tin\testimated\tfuture\tdevelopment |  |  |  |  |  |  |  |  |  |
| costs | (478) | (297) | (346) | 10 | (89) | (15) | (468) | (386) | (361) |
| Revisions\tof\tprevious\tquantity\testimates | 348 | 311 | (236) | – | 11 | (39) | 348 | 322 | (275) |
| Net\tchanges\tin\tpurchases\tand\tsales\tof |  |  |  |  |  |  |  |  |  |
| minerals\tin\tplace | (531) | 737 | 173 | (97) | – | – | (628) | 737 | 173 |
| Net\tchange\tin\texchanges\tof\tminerals\tin\tplace | 403 | – | (357) | (403) | – | 357 | – | – | – |
| Accretion\tof\tdiscount | 807 | 417 | 1,081 | 6 | 25 | 57 | 813 | 442 | 1,138 |
| Net\tchange\tin\tincome\ttaxes | 65 | (1,288) | 2,501 | 29 | (152) | 123 | 94 | (1,440) | 2,624 |
| Timing\tand\tother | (165) | 2 | 45 | – | 164 | (144) | (165) | 166 | (99) |
| Net\tchange\tfor\tthe\tyear | 560 | 2,225 | (5,538) | (484) | 280 | 144 | 76 | 2,505 | (5,394) |
| Beginning\tof\tyear | 5,441 | 3,216 | 8,754 | 492 | 212 | 68 | 5,933 | 3,428 | 8,822 |
| End\tof\tyear | $6,001 | $5,441 | $3,216 | $8 | $492 | $212 | $6,009 | $5,933 | $3,428 |
| Net\tchange\tfor\tthe\tyear\tfrom\tdiscontinued |  |  |  |  |  |  |  |  |  |
| operations | $(384) | $212 | $(1,280) | $– | $– | $– | $(384) | $212 | $(1,280) |

# Five-Year	Operating	Summary

|  | 2003 | 2002 | 2001 | 2000 | 1999 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Net\tLiquid\tHydrocarbon\tProduction\t(thousands\tof\tbarrels\tper\tday)\t^(a) |  |  |  |  |  |
| United\tStates\t(by\tbusiness\tunit) |  |  |  |  |  |
| Northern | 26 | 28 | 29 | 30 | 28 |
| Southern | 81 | 89 | 98 | 101 | 117 |
| Total\tUnited\tStates | 107 | 117 | 127 | 131 | 145 |
| International |  |  |  |  |  |
| Australia | 1 | 1 | – | – | – |
| Egypt | – | – | – | 1 | 5 |
| Equatorial\tGuinea | 12 | 8 | – | – | – |
| Gabon | 15 | 17 | 16 | 16 | 9 |
| Norway | 1 | 1 | – | – | – |
| United\tKingdom | 40 | 51 | 46 | 29 | 31 |
| Russian\tFederation | 9 | – | – | – | – |
| Total\tInternational | 78 | 78 | 62 | 46 | 45 |
| Consolidated | 185 | 195 | 189 | 177 | 190 |
| Equity\tinvestee | 6 | 8 | 9 | 11 | 1 |
| Total\tContinuing\tOperations | 191 | 203 | 198 | 188 | 191 |
| Discontinued\tOperations | 3 | 4 | 11 | 19 | 17 |
| Worldwide\tTotal | 194 | 207 | 209 | 207 | 208 |
| Natural\tgas\tliquids\tincluded\tin\tabove | 18 | 20 | 19 | 22 | 19 |
| (a) |  |  |  |  |  |
| Net\tNatural\tGas\tProduction\t(millions\tof\tcubic\tfeet\tper\tday) |  |  |  |  |  |
| United\tStates\t(by\tbusiness\tunit) |  |  |  |  |  |
| Northern | 392 | 405 | 397 | 363 | 341 |
| Southern | 340 | 340 | 396 | 368 | 414 |
| Total\tUnited\tStates | 732 | 745 | 793 | 731 | 755 |
| International |  |  |  |  |  |
| Egypt | – | – | – | – | 13 |
| Equatorial\tGuinea | 66 | 53 | – | – | – |
| Ireland | 62 | 81 | 79 | 115 | 132 |
| Norway | 16 | 15 | 5 | – | 26 |
| United\tKingdom\t–\tequity | 184 | 203 | 234 | 212 | 168 |
| (b) |  |  |  |  |  |
| –\tother | 23 | 4 | 8 | 11 | 16 |
| Total\tInternational | 351 | 356 | 326 | 338 | 355 |
| Consolidated | 1,083 | 1,101 | 1,119 | 1,069 | 1,110 |
| Equity\tinvestee | 13 | 25 | 31 | 29 | 36 |
| Total\tContinuing\tOperations | 1,096 | 1,126 | 1,150 | 1,098 | 1,146 |
| Discontinued\tOperations | 74 | 104 | 123 | 143 | 150 |
| Worldwide\tTotal | 1,170 | 1,230 | 1,273 | 1,241 | 1,296 |
| Average\tSales\tPrices^(c) |  |  |  |  |  |
| Liquid\tHydrocarbons\t(dollars\tper\tbarrel) |  |  |  |  |  |
| United\tStates | $ 26.92 | $ 22.18 | $ 20.62 | $ 25.55 | $ 16.01 |
| International | 26.45 | 23.86 | 23.74 | 27.72 | 17.43 |
| Consolidated | 26.72 | 22.86 | 21.65 | 26.12 | 16.35 |
| Equity\tinvestee | 25.91 | 24.59 | 23.41 | 29.64 | 22.46 |
| Total\tContinuing\tOperations | 26.70 | 22.93 | 21.73 | 26.32 | 16.38 |
| Discontinued\tOperations | 28.96 | 23.29 | 21.26 | 24.28 | 16.23 |
| Worldwide | 26.73 | 22.94 | 21.71 | 26.14 | 16.37 |
| Natural\tGas\t(dollars\tper\tthousand\tcubic\tfeet) |  |  |  |  |  |
| United\tStates | $4.53 | $2.87 | $3.69 | $3.49 | $2.07 |
| International | 2.77 | 2.30 | 2.78 | 2.57 | 2.04 |
| Consolidated | 3.96 | 2.69 | 3.42 | 3.20 | 2.06 |
| Equity\tinvestee | 3.70 | 3.05 | 3.39 | 2.75 | 1.87 |
| Total\tContinuing\tOperations | 3.95 | 2.70 | 3.42 | 3.18 | 2.05 |
| Discontinued\tOperations | 5.43 | 3.30 | 4.17 | 3.89 | 2.35 |
| Worldwide | 4.05 | 2.75 | 3.49 | 3.27 | 2.09 |
| Net\tProved\tReserves\tat\tyear-end\t(developed\tand\tundeveloped) |  |  |  |  |  |
| Liquid\tHydrocarbons\t(millions\tof\tbarrels) |  |  |  |  |  |
| United\tStates | 210 | 245 | 268 | 458 | 520 |
| International | 366 | 292 | 118 | 259 | 277 |
| Consolidated | 576 | 537 | 386 | 717 | 797 |
| Equity\tinvestee | 2 | 183 | 184 | – | 77 |
| Total | 578 | 720 | 570 | 717 | 874 |
| Developed\treserves\tas\t%\tof\ttotal\tnet\treserves | 68% | 82% | 90% | 76% | 81% |
| Natural\tGas\t(billions\tof\tcubic\tfeet) |  |  |  |  |  |
| United\tStates | 1,635 | 1,724 | 1,793 | 1,914 | 2,057 |
| International | 1,149 | 1,594 | 1,014 | 1,091 | 1,607 |
| Consolidated | 2,784 | 3,318 | 2,807 | 3,005 | 3,664 |
| Equity\tinvestee | – | 59 | 51 | 89 | 123 |
| Total | 2,784 | 3,377 | 2,858 | 3,094 | 3,787 |
| Developed\treserves\tas\t%\tof\ttotal\tnet\treserves | 72% | 74% | 74% | 78% | 75% |

(a) Amounts	reflect	production	after	royalties,	excluding	the	UK,	Ireland	and	the	Netherlands	where	amounts	are	shown	before	royalties.

(b) Represents	gas	acquired	for	injection	and	subsequent	resale.

(c) Prices	exclude	derivative	gains	and	losses.

# Five-Year	Operating	Summary	CONTINUED

|  | 2003^(a) | 2002^(a) | 2001^(a) | 2000^(a) | 1999^(a	) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Refinery\tOperations\t(thousands\tof\tbarrels\tper\tday) |  |  |  |  |  |
| In-use\tcrude\toil\tcapacity\tat\tyear-end | 935 | 935 | 935 | 935 | 935 |
| Refinery\truns\t–\tcrude\toil\trefined | 917 | 906 | 929 | 900 | 888 |
| –\tother\tcharge\tand\tblend\tstocks | 138 | 148 | 143 | 141 | 139 |
| In-use\tcrude\toil\tcapacity\tutilization\trate | 98% | 97% | 99% | 96% | 95% |
| Source\tof\tCrude\tProcessed\t(thousands\tof\tbarrels\tper\tday) |  |  |  |  |  |
| United\tStates | 422 | 433 | 403 | 400 | 349 |
| Canada | 122 | 114 | 115 | 102 | 92 |
| Middle\tEast\tand\tAfrica | 266 | 232 | 347 | 346 | 363 |
| Other\tInternational | 107 | 127 | 64 | 52 | 84 |
| Total | 917 | 906 | 929 | 900 | 888 |
| Refined\tProduct\tYields\t(thousands\tof\tbarrels\tper\tday) |  |  |  |  |  |
| Gasoline | 567 | 581 | 581 | 552 | 566 |
| Distillates | 284 | 285 | 286 | 278 | 261 |
| Propane | 21 | 21 | 22 | 20 | 22 |
| Feedstocks\tand\tspecial\tproducts | 93 | 80 | 69 | 74 | 66 |
| Heavy\tfuel\toil | 24 | 20 | 39 | 43 | 43 |
| Asphalt | 72 | 72 | 76 | 74 | 69 |
| Total | 1,061 | 1,059 | 1,073 | 1,041 | 1,027 |
| Refined\tProduct\tSales\tVolumes\t(thousands\tof\tbarrels\tper\tday)^(b) |  |  |  |  |  |
| Gasoline | 776 | 773 | 748 | 746 | 714 |
| Distillates | 365 | 346 | 345 | 352 | 331 |
| Propane | 21 | 22 | 21 | 21 | 23 |
| Feedstocks\tand\tspecial\tproducts | 97 | 82 | 71 | 69 | 66 |
| Heavy\tfuel\toil | 24 | 20 | 41 | 43 | 43 |
| Asphalt | 74 | 75 | 78 | 75 | 74 |
| Total | 1,357 | 1,318 | 1,304 | 1,306 | 1,251 |
| Matching\tbuy/sell\tvolumes\tincluded\tin\tabove | 64 | 71 | 45 | 52 | 45 |
| Refined\tProducts\tSales\tVolumes\tby\tClass\tof\tTrade\n\t(as\ta\t%\tof\ttotal\tsales\tvolumes) |  |  |  |  |  |
| Wholesale\t&amp;\tSpot\tmarket\t–\tindependent\tprivate-brand |  |  |  |  |  |
| –\tmarketers\tand\tconsumers | 71% | 69% | 66% | 65% | 66% |
| Marathon\tand\tAshland\tbrand\tjobbers\tand\tdealers | 13 | 13 | 13 | 12 | 11 |
| Speedway\tSuperAmerica\tretail\toutlets | 16 | 18 | 21 | 23 | 23 |
| Total | 100% | 100% | 100% | 100% | 100% |
| Refined\tProducts\t(dollars\tper\tbarrel) |  |  |  |  |  |
| Average\tsales\tprice | $38.55 | $32.26 | $34.54 | $38.24 | $24.59 |
| Average\tcost\tof\tcrude\toil\tthroughput | 29.77 | 25.41 | 23.47 | 29.07 | 18.66 |
| (c) |  |  |  |  |  |
| Refining\tand\tWholesale\tMarketing\tMargin \t(dollars\tper\tgallon) | $.0601 | $.0387 | $.1167 | $.0788 | $.0353 |
| Refined\tProduct\tMarketing\tOutlets\tat\tyear-end |  |  |  |  |  |
| MAP\toperated\tterminals | 88 | 86 | 87 | 89 | 91 |
| Retail\t–\tMarathon\tand\tAshland\tbrand | 3,885 | 3,822 | 3,800 | 3,728 | 3,482 |
| (d) |  |  |  |  |  |
| –\tSpeedway\tSuperAmerica | 1,775 | 2,006 | 2,104 | 2,148 | 2,346 |
| (d) |  |  |  |  |  |
| Speedway\tSuperAmerica |  |  |  |  |  |
| Gasoline\t&amp;\tdistillates\tsales\t(millions\tof\tgallons) | 3,332 | 3,604 | 3,572 | 3,732 | 3,610 |
| Gasoline\t&amp;\tdistillates\tgross\tmargin\t(dollars\tper\tgallon) | $.1229 | $.1007 | $.1206 | $.1261 | $.1274 |
| Merchandise\tsales\t(millions) | $2,244 | $2,380 | $2,253 | $2,160 | $1,917 |
| Merchandise\tgross\tmargin\t(millions) | $555 | $576 | $527 | $510 | $500 |
| Petroleum\tInventories\tat\tyear-end\t(thousands\tof\tbarrels) |  |  |  |  |  |
| Crude\toil,\traw\tmaterials\tand\tnatural\tgas\tliquids | 31,862 | 32,600 | 32,741 | 33,884 | 34,470 |
| Refined\tproducts | 37,650 | 37,729 | 36,310 | 34,386 | 32,853 |
| (e) |  |  |  |  |  |
| Pipelines\t(miles\tof\tcommon\tcarrier\tpipelines) |  |  |  |  |  |
| Crude\tOil\t–\tgathering\tlines | 68 | 200 | 271 | 419 | 557 |
| –\ttrunklines | 4,105 | 4,459 | 4,511 | 4,623 | 4,720 |
| Products\t\t\t–\ttrunklines | 3,861 | 3,732 | 2,847 | 2,834 | 2,856 |
| Total | 8,034 | 8,391 | 7,629 | 7,876 | 8,133 |
| Pipeline\tBarrels\tHandled\t(millions)^(f) |  |  |  |  |  |
| Crude\tOil\t–\tgathering\tlines | 12.7 | 14.1 | 16.3 | 22.7 | 30.4 |
| –\ttrunklines | 583.3 | 575.7 | 570.6 | 563.6 | 545.7 |
| Products\t\t\t–\ttrunklines | 371.3 | 367.6 | 345.6 | 329.7 | 331.9 |
| Total | 967.3 | 957.4 | 932.5 | 916.0 | 908.0 |
| River\tOperations |  |  |  |  |  |
| Barges–\towned/leased | 155 | 150 | 156 | 158 | 169 |
| Boats–\towned/leased | 7 | 7 | 8 | 7 | 8 |

(a) Statistics	include	100%	of	MAP.

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

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

(d) Excludes	travel	centers	contributed	to	Pilot	Travel	Centers	LLC.	Periods	prior	to	September	1,	2001	have	been	restated.

(e) Pipelines	for	downstream	operations	also	include	non-common	carrier,	leased	and	equity	investees.

(f) Pipeline	barrels	handled	on	owned	common	carrier	pipelines,	excluding	equity	investees.

# Five-Year	Selected	Financial	Data

| (Dollars	in	millions,	except	as	noted) | 2003 | 2002 | 2001 | 2000 | 1999 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Revenues\tand\tOther\tIncome |  |  |  |  |  |
| Revenues\tby\tproduct: |  |  |  |  |  |
| Refined\tproducts | $ 24,092 | $ 19,729 | $ 20,841 | $ 22,513 | $ 15,143 |
| Merchandise | 2,395 | 2,521 | 2,506 | 2,441 | 2,194 |
| Liquid\thydrocarbons | 10,500 | 6,517 | 6,502 | 6,697 | 4,490 |
| Natural\tgas | 3,796 | 2,362 | 2,801 | 2,317 | 1,344 |
| Transportation\tand\tother\tproducts | 180 | 166 | 146 | 151 | 187 |
| Total\trevenues | 40,963 | 31,295 | 32,796 | 34,119 | 23,358 |
| Gain\t(loss)\ton\townership\tchange\tin\tMAP | (1) | 12 | (6) | 12 | 17 |
| Other^(a) | 272 | 248 | 272 | (645) | 92 |
| Total\trevenues\tand\tother\tincome | $ 41,234 | $ 31,555 | $ 33,062 | $ 33,486 | $ 23,467 |
| Income\tFrom\tOperations |  |  |  |  |  |
| Exploration\tand\tproduction |  |  |  |  |  |
| Domestic | $1,128 | $687 | $1,122 | $1,110 | $494 |
| International | 359 | 351 | 229 | 305 | 95 |
| E&amp;P\tsegment\tincome | 1,487 | 1,038 | 1,351 | 1,415 | 589 |
| Refining,\tmarketing\tand\ttransportation | 770 | 356 | 1,914 | 1,273 | 611 |
| Other\tenergy\trelated\tbusinesses | 73 | 78 | 62 | 43 | 61 |
| Segment\tincome | 2,330 | 1,472 | 3,327 | 2,731 | 1,261 |
| Items\tnot\tallocated\tto\tsegments: |  |  |  |  |  |
| Administrative\texpenses | (227) | (194) | (187) | (154) | (120) |
| Gain\t(loss)\ton\tdisposal\tof\tassets | 106 | 24 | – | 124 | – |
| Joint\tventure\tformation\tcharges | – | – | – | (931) | – |
| Inventory\tmarket\tvaluation\tadjustments | – | 71 | (71) | – | 551 |
| Gain\t(loss)\ton\townership\tchange\tin\tMAP | (1) | 12 | (6) | 12 | 17 |
|  | – | – | – | (5) | (16) |
| Loss\ton\tdissolution\tof\tMKM\tPartners\tL.P. | (124) | – | – | – | – |
| Other\titems | – | (15) | 45 | (70) | (21) |
| Income\tfrom\toperations | 2,084 | 1,370 | 3,108 | 1,707 | 1,672 |
| Minority\tinterest\tin\tincome\tof\tMAP | 302 | 173 | 704 | 498 | 447 |
| Net\tinterest\tand\tother\tfinancing\tcosts | 186 | 321 | 172 | 238 | 285 |
| Provision\tfor\tincome\ttaxes | 584 | 369 | 827 | 536 | 319 |
| Income\tFrom\tContinuing\tOperations | $1,012 | $507 | $1,405 | $435 | $621 |
| Per\tcommon\tshare\t–\tbasic\t(in\tdollars) | 3.26 | 1.63 | 4.54 | 1.40 | 2.00 |
| –\tdiluted\t(in\tdollars) | 3.26 | 1.63 | 4.54 | 1.40 | 2.00 |
| Net\tIncome | 1,321 | 516 | 377 | 432 | 654 |
| Per\tcommon\tshare\t–\tbasic\t(in\tdollars) | 4.26 | 1.66 | 1.22 | 1.39 | 2.11 |
| –\tdiluted\t(in\tdollars) | 4.26 | 1.66 | 1.22 | 1.39 | 2.11 |
| Balance\tSheet\tPosition\tat\tyear-end |  |  |  |  |  |
| Current\tassets | $6,040 | $4,479 | 4,411 | $4,985 | $4,081 |
| Net\tinvestment\tin\tUnited\tStates\tSteel | – | – | – | 1,919 | 2,056 |
| Net\tproperty,\tplant\tand\tequipment | 10,830 | 10,390 | 9,552 | 9,346 | 10,261 |
| Total\tassets | 19,482 | 17,812 | 16,129 | 17,151 | 17,730 |
| Short-term\tdebt | 272 | 161 | 215 | 228 | 48 |
| Other\tcurrent\tliabilities | 3,935 | 3,498 | 3,253 | 3,784 | 3,096 |
| Long-term\tdebt | 4,085 | 4,410 | 3,432 | 1,937 | 3,320 |
| Minority\tinterest\tin\tMAP | 2,011 | 1,971 | 1,963 | 1,840 | 1,753 |
| Common\tstockholders'\tequity | 6,075 | 5,082 | 4,940 | 6,764 | 6,856 |
| Cash\tFlow\tData—Continuing\tOperations |  |  |  |  |  |
| Net\tcash\tfrom\toperating\tactivities | $2,678 | $2,336 | $2,749 | $2,947 | $1,891 |
| Capital\texpenditures | 1,892 | 1,520 | 1,533 | 1,296 | 1,255 |
| Disposal\tof\tassets | 644 | 146 | 83 | 550 | 371 |
| Dividends\tpaid | 298 | 285 | 284 | 274 | 257 |
| Dividends\tpaid\tper\tshare | .96 | .92 | .92 | .88 | .84 |
| Employee\tData |  |  |  |  |  |
| Marathon: |  |  |  |  |  |
| Total\temployment\tcosts | $1,560 | $1,481 | $1,498 | $1,474 | $1,421 |
| Average\tnumber\tof\temployees | 27,677 | 28,237 | 30,791 | 31,515 | 33,086 |
| Number\tof\tpensioners\tat\tyear-end | 3,291 | 3,122 | 3,105 | 3,255 | 3,402 |
| Speedway\tSuperAmerica\tLLC: |  |  |  |  |  |
| (Included\tin\tMarathon\ttotals) |  |  |  |  |  |
| Total\temployment\tcosts | $464 | $480 | $496 | $489 | $452 |
| Average\tnumber\tof\temployees | 17,911 | 18,943 | 21,449 | 21,649 | 22,801 |
| Number\tof\tpensioners\tat\tyear-end | 234 | 214 | 205 | 211 | 209 |
| Stockholder\tData\tat\tyear-end |  |  |  |  |  |
| Number\tof\tcommon\tshares\toutstanding\t(in\tmillions) | 310.4 | 309.9 | 309.4 | 308.3 | 311.8 |
| Registered\tshareholders\t(in\tthousands) | 61.9 | 66.4 | 69.7 | 65.0 | 71.4 |
| Market\tprice\tof\tcommon\tstock | $33.09 | $21.29 | $30.00 | $27.75 | $24.69 |

(a) Includes	income	from	equity	method	investments,	net	gains	(losses)	on	disposal	of	assets	and	other	income.

# Item	9.	Changes	in	and	Disagreements	With	Accountants	on	Accounting	and	Financial	Disclosure

None.

# Item	9A.	Controls	and	Procedures

# Disclosure	Controls	and	Procedures

An	evaluation	of	the	effectiveness	of	the	design	and	operation	of	our	disclosure	controls	and	procedures	(as	defined	in	Rules	13a-15(e)	and	15d-15(e)	under	the Securities	and	Exchange	Act	of	1934)	was	carried	out	under	the	supervision	and	with	the	participation	of	Marathon's	management,	including	our	Chief	Executive Officer	and	Chief	Financial	Officer.	As	of	the	end	of	the	period	covered	by	this	report	based	upon	that	evaluation,	the	Chief	Executive	Officer	and	Chief	Financial Officer	concluded	that	the	design	and	operation	of	these	disclosure	controls	and	procedures	were	effective,	and	that	there	were	no	significant	changes	in	our	internal controls	or	in	other	factors	that	could	significantly	affect	internal	controls	subsequent	to	the	date	of	their	evaluation.

# Internal	Controls

As	of	the	end	of	the	period	covered	by	this	report,	Marathon's	management,	along	with	the	participation	of	the	Chief	Executive	Officer	and	Chief	Financial	Officer, conducted	an	evaluation	of	the	effectiveness	of	Marathon's	internal	controls	over	financial	reporting.	Based	on	that	evaluation,	there	have	been	no	significant	changes	in such	internal	controls	or	in	other	factors	that	could	have	significantly	affected	those	controls,	including	any	corrective	actions	with	regard	to	significant	deficiencies	and material	weaknesses.	Marathon	believes	that	its	existing	financial	and	operational	controls	and	procedures	are	adequate.

Marathon	reviews	and	modifies	its	financial	and	operational	controls	on	an	ongoing	basis	to	ensure	that	those	controls	are	adequate	to	address	changes	in	its business	as	it	evolves.	Marathon	believes	that	its	existing	financial	and	operational	controls	and	procedures	are	adequate.

# Item	10.	Directors	and	Executive	Officers	of	The	Registrant

Information	concerning	the	directors	of	Marathon	required	by	this	item	is	incorporated	by	reference	to	the	material	appearing	under	the	heading	"Election	of Directors"	in	Marathon's	Proxy	Statement	dated	March	8,	2004,	for	the	2004	Annual	Meeting	of	stockholders.

Marathon's	Board	of	Directors	has	established	the	Audit	Committee	and	determined	our	"Audit	Committee	Financial	Expert."	The	information	required	to	be disclosed	is	incorporated	by	reference	to	the	material	appearing	under	the	sub-heading	"Audit	Committee"	located	under	the	heading	"The	Board	of	Directors	and Governance	Matters"	in	Marathon's	Proxy	Statement	dated	March	8,	2004,	for	the	2004	Annual	Meeting	of	Stockholders.

Marathon	has	adopted	a	Code	of	Ethics	for	Senior	Financial	Officers.	It	is	available	on	our	website	at	www.marathon.com/Code_Ethics_Sr_Finan_Off/.

# Executive	Officers	of	the	Registrant

The	executive	officers	of	Marathon	or	its	subsidiaries	and	their	ages	as	of	February	1,	2004,	are	as	follows:

Paul	C.	Reinbolt 48 Vice	President,	Finance	and	Treasurer

William	F.	Schwind,	Jr. 59 Vice	President,	General	Counsel	and	Secretary

With	the	exception	of	Mr.	Cazalot,	Mr.	Behrman,	Ms.	Clark,	Mr.	Kaplan	and	Mr.	Lowden	mentioned	above,	all	of	the	executive	officers	have	held	responsible management	or	professional	positions	with	Marathon	or	its	subsidiaries	for	more	than	the	past	five	years.

Mr.	Cazalot	joined	Marathon	Oil	Company	as	president	in	March	2000.	In	January	of	2002,	he	was	appointed	president	and	chief	executive	officer	of	Marathon	Oil Corporation.	Prior	to	joining	Marathon,	Mr.	Cazalot	served	from	1999	to	2000	as	vice	president	of	Texaco	Inc.	and	president	of	Texaco's	worldwide	production operations.

Prior	to	joining	Marathon	in	September	2000,	Mr.	Behrman	served	from	1996	as	exploration	manager	for	Vastar	Resources	Inc.'s	Gulf	of	Mexico	deepwater division.	During	2000,	Mr.	Behrman	assumed	the	additional	responsibilities	of	acting-vice	president	of	exploration	and	land.

Ms.	Clark	joined	Marathon	in	January	2004	as	senior	vice	president	and	chief	financial	officer.	Prior	to	joining	Marathon,	she	was	employed	by	Nuevo	Energy Company	from	2001	to	December	2003,	with	her	most	recent	position	as	senior	vice	president	and	chief	financial	officer.	Prior	to	her	employment	with	Nuevo	Energy Company,	Ms.	Clark	served	as	executive	vice	president	of	corporate	development	and	administration	for	Santa	Fe	Snyder	Corporation.

Mr.	Kaplan	joined	Marathon	in	December	2003	as	vice	president,	major	projects.	Prior	to	joining	Marathon,	he	was	employed	by	Foster	Wheeler	Corporation	since 2001,	with	his	most	recent	position	as	director	of	LNG	for	Foster	Wheeler's	Houston	office.	Prior	thereto	and	since	1995,	he	served	Triton	Energy	Ltd.	(merged	with Amerada	Hess	Corporation)	as	technical	manager	for	the	Thai-Malaysian	development	and	as	project	manager	for	the	Ceiba	field	FPSO	development,	offshore Equatorial	Guinea.

Prior	to	joining	Marathon	Oil	Company	in	December	2000,	Mr.	Lowden	was	employed	by	Premier	Oil	plc	since	1987,	with	his	most	recent	position	as	director	of commercial	and	business	development	responsible	for	international	business.

# Item	11.	Executive	Compensation

Information	required	by	this	item	is	incorporated	by	reference	to	the	material	appearing	under	the	heading	"Executive	Compensation	and	Other	Information"	in Marathon's	Proxy	Statement	dated	March	8,	2004,	for	the	2004	Annual	Meeting	of	stockholders.

# Item	12.	Security	Ownership	of	Certain	Beneficial	Owners	and	Management

Information	required	by	this	item	is	incorporated	by	reference	to	the	material	appearing	under	the	headings,	"Security	Ownership	of	Certain	Beneficial	Owners"	and "Security	Ownership	of	Directors	and	Executive	Officers"	in	Marathon's	Proxy	Statement	dated	March	8,	2004,	for	the	2004	Annual	Meeting	of	stockholders.

The	following	table	provides	information	as	of	December	31,	2003,	with	respect	to	shares	of	the	Company's	common	stock	that	may	be	issued	under	the Company's	existing	equity	compensation	plans:

# Equity	Compensation	Plan	Information

| Plan	category | Number	of	securities	to	be<br>issued	upon	exercise	of<br>outstanding	options,<br>warrants	and	rights | Weighted-average<br>exercise	price	of<br>outstanding	options,<br>warrants	and	rights | Number	of	securities	remaining<br>available	for	future	issuance<br>under	equity	compensation<br>plans	(excluding	securities<br>reflected	in	column	(a)) |
| :--- | :--- | :--- | :--- |
| Equity\tcompensation\tplans |  |  |  |
| approved\tby\tstockholders | 9,007,861(1) | $28.33 | 18,249,939(2) |
| Equity\tcompensation\tplans\tnot |  |  |  |
| approved\tby\tstockholders(3) | 57,243(4) | N/A | – |
| Total | 9,065,104(1) | $28.33 | 18,249,939(2) |

(1) This	number	includes	1,715,200	stock	options	outstanding	under	the	2003	Incentive	Compensation	Plan	(the	"Incentive	Plan")	and	7,291,180	stock	options	outstanding	under	the	1990	Stock	Plan.	This	number	also includes	1,481	phantom	shares	that	have	been	credited	to	non-employee	directors	pursuant	to	the	non-employee	director	deferred	compensation	program	established	under	the	Incentive	Plan.	When	a	non-employee director	leaves	the	Board,	he	or	she	will	be	issued	actual	shares	of	Marathon	common	stock	in	place	of	the	phantom	shares.	The	weighted-average	exercise	price	shown	in	column	(b)	does	not	take	these	phantom shares	into	account.

(2) This	number	includes	shares	available	for	issuance	under	the	Incentive	Plan	and	the	1990	Stock	Plan	as	of	December	31,	2003.	Under	the	Incentive	Plan,	18,027,399	shares	remain	available	for	issuance,	of	which	no more	than	8,242,599	shares	may	be	issued	for	awards	other	than	stock	options	or	stock	appreciation	rights.	In	addition,	shares	related	to	grants	that	are	forfeited,	terminated,	cancelled,	expire	unexercised,	or	settled in	such	manner	that	all	or	some	of	the	shares	are	not	issued	to	a	participant	shall	immediately	become	available	for	issuance.	Under	the	1990	Stock	Plan,	222,540	shares	remain	available	for	issuance,	all	of	which	may be	issued	in	the	form	of	performance	shares.	The	shares	available	under	the	1990	Stock	Plan	will	be	granted	to	certain	officers	only	if	the	Company	exceeds	targeted	performance	levels.

(3) This	row	reflects	awards	made	under	the	Deferred	Compensation	Plan	for	Non-Employee	Directors	prior	to	April	30,	2003.	Since	that	date,	all	stock-related	awards	have	been	made	under	the	Incentive	Plan.	No	new stock-related	grants	will	be	made	under	the	Deferred	Compensation	Plan	for	Non-Employee	Directors.

(4) This	number	represents	phantom	shares	that	were	awarded	to	non-employee	directors	under	the	Deferred	Compensation	Plan	for	Non-Employee	Directors	prior	to	April	30,	2003.	When	a	non-employee	director leaves	the	Board,	he	or	she	will	be	issued	actual	shares	of	Marathon	common	stock	in	place	of	the	phantom	shares.

# Item	13.	Certain	Relationships	and	Related	Transactions

Information	required	by	this	item	is	incorporated	by	reference	to	the	material	appearing	under	the	heading	"Certain	Relationships	and	Related	Party	Transactions" in	Marathon's	Proxy	Statement	dated	March	8,	2004,	for	the	2004	Annual	Meeting	of	stockholders.

# Item	14.	Principal	Accounting	Fees	and	Services

Information	required	by	this	item	is	incorporated	by	reference	to	the	material	appearing	under	the	heading	"Information	Regarding	the	Independent	Public	Auditor's Fees,	Services	and	Independence"	in	Marathon's	Proxy	Statement	dated	March	8,	2004,	for	the	2004	Annual	Meeting	of	stockholders.

# PART	IV

# Item	15.	Exhibits,	Financial	Statement	Schedules,	and	Reports	on	Form	8-K

# A.	Documents	Filed	as	Part	of	the	Report

1.	Financial	Statements	(see	Part	II,	Item	8.	of	this	report	regarding	financial	statements).

# 2.	Financial	Statement	Schedules.

Financial	Statement	Schedules	listed	under	SEC	rules	but	not	included	in	this	report	are	omitted	because	they	are	not	applicable	or	the	required information	is	contained	in	the	financial	statements	or	notes	thereto.

Schedule	II—Valuation	and	Qualifying	Accounts	is	provided	on	page	66.

3.	Lists	of	Exhibits:

# Exhibit	No.

# 2.	Plan	of	Acquisition,	Reorganization,	Arrangement,	Liquidation	or	Succession

(a) Holding	Company	Reorganization	Agreement,	dated	as	of	July	1,	2001,	by and	among	USX	Corporation,	USX	Holdco,	Inc.	and	United	States	Steel LLC.

(b) Agreement	and	Plan	of	Reorganization,	dated	as	of	July	31,	2001,	by	and between	USX	Corporation	and	United	States	Steel	LLC.

# 3.	Articles	of	Incorporation	and	Bylaws

(a) Restated	Certificate	of	Incorporation	of	Marathon	Oil	Corporation.

(b) By-laws	of	Marathon	Oil	Corporation.

# 4.	Instruments	Defining	the	Rights	of	Security	Holders,	Including	Indentures

# (a) Five	Year	Credit	Agreement	dated	as	of	November	30,	2000.

(b) Rights	Agreement	between	USX	Corporation	and	ChaseMellon Shareholder	Services,	L.L.C.,	as	Rights	Agent,	dated	as	of	September	28, 1999.

Incorporated	by	reference	to	Exhibit	2.1	to	USX	Corporation's	Registration Statement	on	Form	S-4	filed	September	7,	2001	(Registration.	No.	333- 69090).

Incorporated	by	reference	to	Exhibit	3(a)	to	Marathon	Oil	Corporation's Form	10-K	for	the	year	ended	December	31,	2001.

Incorporated	by	reference	to	Exhibit	3(b)	to	Marathon	Oil	Corporation's Form	10-K	for	the	year	ended	December	31,	2002.

Incorporated	by	reference	to	Exhibit	4(a)	to	USX	Corporation's	Form	10-K for	the	year	ended	December	31,	2000.

Incorporated	by	reference	to	Exhibit	4.6	to	Post-Effective	Amendment	No. 2	to	Marathon	Oil	Corporation's	Registration	Statement	on	Form	S-3 filed	on	February	6,	2002	(Registration	No.	333-88797).

(c) First	Amendment	to	Rights	Agreement	between	USX	Corporation,	USX Holdco,	Inc.	(to	be	renamed	USX	Corporation),	and	Mellon	Investor Services	LLC	(formerly	known	as	ChaseMellon	Shareholder	Services, L.L.C),	as	Rights	Agent,	dated	as	of	July	2,	2001.

(d) Second	Amendment	to	Rights	Agreement	between	USX	Corporation	(to	be renamed	Marathon	Oil	Corporation)	and	National	City	Bank,	as	Rights Agent,	dated	as	of	December	31,	2001.

(e) Third	Amendment	to	Rights	Agreement	between	Marathon	Oil	Corporation and	National	City	Bank,	as	Rights	Agent,	dated	as	of	January	29,	2003.

Incorporated	by	reference	to	Exhibit	4.4	to	Marathon	Oil	Corporation's Form	8-K	dated	January	29,	2003	(filed	January	31,	2003).

(f) Senior	Indenture	dated	February	26,	2002	between	Marathon	Oil Corporation	and	JPMorgan	Chase	Bank,	as	Trustee.

(g) Senior	Indenture	dated	June	14,	2002	among	Marathon	Global	Funding Corporation,	Issuer,	Marathon	Oil	Corporation,	Guarantor,	and	JPMorgan Chase	Bank,	Trustee.

Incorporated	by	reference	to	Exhibit	4.1	to	Marathon	Oil	Corporation's Form	8-K	dated	June	18,	2002	(filed	June	21,	2002).

(h) Senior	Supplemental	Indenture	No.	1	dated	as	of	September	5,	2003	among Marathon	Global	Funding	Corporation,	Issuer,	Marathon	Oil	Corporation, Guarantor	and	JPMorgan	Chase	Bank,	Trustee	to	the	Indenture	dated	as	of June	14,	2002.

Incorporated	by	reference	to	Exhibit	4.1	to	Marathon	Oil	Corporation's Form	10-Q	for	the	quarter	ended	September	30,	2003.

(i) Pursuant	to	CFR	229.601(b)(4)(iii),	instruments	with	respect	to	long-term debt	issues	have	been	omitted	where	the	amount	of	securities	authorized under	such	instruments	does	not	exceed	10%	of	the	total	consolidated	assets of	Marathon.	Marathon	hereby	agrees	to	furnish	a	copy	of	any	such instrument	to	the	Commission	upon	its	request.

# 10.	Material	Contracts

# (a) Marathon	Oil	Corporation	2003	Incentive	Compensation	Plan,	Effective January	1,	2003.

Incorporated	by	reference	to	Appendix	C	to	Marathon	Oil	Corporation's Definitive	Proxy	Statement	on	Schedule	14A	filed	March	10,	2003.

# (b) Marathon	Oil	Corporation	1990	Stock	Plan,	As	Amended	and	Restated Effective	January	1,	2002.

Incorporated	by	reference	to	Exhibit	10(a)	to	Marathon	Oil	Corporation's Form	10-K	for	the	year	ended	December	31,	2001.

# (c) Marathon	Oil	Corporation	Deferred	Compensation	Plan	for	Non-Employee Directors,	Amended	and	Restated	as	of	January	1,	2002.

Incorporated	by	reference	to	Exhibit	10.1	to	Marathon	Oil	Corporation's Amendment	No.	1	to	Form	10-Q/A	for	the	quarter	ended	September	30, 2002.

(e) Completion	and	Retention	Agreement,	dated	as	of	August	8,	2001,	among USX	Corporation,	United	States	Steel	LLC	and	Thomas	J.	Usher.

(f) Amendment	No.	1	to	the	Completion	and	Retention	Agreement	dated January	29,	2003,	effective	January	1,	2003,	among	Marathon	Oil Corporation,	United	States	Steel	Corporation	and	Thomas	J.	Usher.

(g) Letter	Agreement	relating	to	restricted	stock	under	Marathon	Oil Corporation's	1990	Stock	Plan,	dated	December	6,	2002,	between Marathon	Oil	Corporation	and	Thomas	J.	Usher.

# (h) Agreement	between	Marathon	Oil	Company	and Clarence	P.	Cazalot,	Jr.,	executed	February	28,	2000.

(i) Letter	Agreement	between	Marathon	Oil	Company	and	Janet	F.	Clark, executed	December	9,	2003.

(j) Letter	Agreement	between	Marathon	Oil	Company	and	Steven	J.	Lowden, executed	September	17,	2000.

(k) Letter	Agreement	between	Marathon	Oil	Company	and	Philip	G.	Behrman, executed	September	19,	2000.

(l) Letter	Agreement	between	USX	Corporation	and	John	T.	Mills,	executed September	25,	2000.

Incorporated	by	reference	to	Exhibit	10(i)	to	Marathon	Oil	Corporation's Form	10-K	for	the	year	ended	December	31,	2002.

Incorporated	by	reference	to	Exhibit	10(j)	to	Marathon	Oil	Corporation's Form	10-K	for	the	year	ended	December	31,	2002.

# Filed	herewith.

Incorporated	by	reference	to	Exhibit	10(k)	to	Marathon	Oil	Corporation's Form	10-K	for	the	year	ended	December	31,	2001.

Incorporated	by	reference	to	Exhibit	10(m)	to	Marathon	Oil	Corporation's Form	10-K	for	the	year	ended	December	31,	2001.

# (m) Consulting	Services	Agreement	between	Marathon	Oil	Corporation	and John	T.	Mills,	executed	January	5,	2004.

# (n) Amended	and	Restated	Limited	Liability	Company	Agreement	of	Marathon Ashland	Petroleum	LLC,	dated	as	of	December	31,	1998.

(o) Put/Call,	Registration	rights	and	Standstill	Agreement	dated	as	of	January 1,	1998	among	Marathon	Oil	Company,	USX	Corporation,	Ashland	Inc. and	Marathon	Ashland	petroleum	LLC.

(p) Amendment	No.	1	dated	as	of	December	31,	1998	to	Put/Call,	Registration Rights	and	Standstill	Agreement	of	Marathon	Ashland	Petroleum	LLC dated	as	of	January	1,	1998.

(q) Tax	Sharing	Agreement	between	USX	Corporation	(renamed	Marathon	Oil Corporation)	and	United	States	Steel	LLC	(converted	into	United	States Steel	Corporation)	dated	as	of	December	31,	2001.

(r) Financial	Matters	Agreement	between	USX	Corporation	(renamed Marathon	Oil	Corporation)	and	United	States	Steel	LLC	(converted	into United	States	Steel	Corporation)	dated	December	31,	2001.

(s) Insurance	Assistance	Agreement	between	USX	Corporation	(renamed Marathon	Oil	Corporation)	and	United	States	Steel	LLC	(converted	into United	States	Steel	Corporation)	dated	as	of	December	31,	2001.

(t) License	Agreement	between	USX	Corporation	(renamed	Marathon	Oil Corporation)	and	United	States	Steel	LLC	(converted	into	United	States Steel	Corporation)	dated	as	of	December	31,	2001.

Incorporated	by	reference	to	Exhibit	99.3	to	Marathon	Oil	Corporation's Form	8-K	dated	December	31,	2001	(filed	January	3,	2002).

# 12.1 	 Computation	of	Ratio	of	Earnings	to	Combined	Fixed	Charges	and	Preferred	Stock	Dividends

# 12.2 	 Computation	of	Ratio	of	Earnings	to	Fixed	Charges

# 14. 	 Code	of	Ethics	for	Senior	Financial	Officers

# 21. List	of	Significant	Subsidiaries

# 23. 	 Consent	of	Independent	Accountants

31.1 	 Certification	of	President	and	Chief	Executive	Officer	pursuant	to	Exchange	Act	Rules	Rule	13(a)-14	and	15(d)-14,	as	adopted pursuant	to	Section	302	of	the	Sarbanes-Oxley	Act	of	2002.

31.2 	 Certification	of	Chief	Financial	Officer	pursuant	to	Exchange	Act	Rules	Rule	13(a)-14	and	15(d)-14,	as	adopted	pursuant	to	Section	302 of	the	Sarbanes-Oxley	Act	of	2002.

32.1 	 Certification	of	President	and	Chief	Executive	Officer	pursuant	to	18	U.S.C.	Section	1350,	as	adopted	pursuant	to	Section	906	of	the Sarbanes-Oxley	Act.

32.2 	 Certification	of	Chief	Financial	Officer	pursuant	to	18	U.S.C.	Section	1350,	as	adopted	pursuant	to	Section	906	of	the	Sarbanes-Oxley Act.

# B.	Reports	on	Form	8-K

Form	8-K	dated	October	23,	2003	(filed	October	23,	2003),	reporting	under	Item	12.	Disclosure	of	Results	of	Operations	and	Financial	Condition,	that	Marathon Oil	Corporation	is	furnishing	information	for	the	October	23,	2003	press	release	titled	"Marathon	Oil	Corporation	Reports	Third	Quarter	2003	Results."

Form	8-K	dated	December	4,	2003	(filed	December	4,	2003),	reporting	under	Item	9.	Regulation	FD	Disclosure,	that	Marathon	Oil	Corporation	is	furnishing information	for	the	December	4,	2003	press	release	titled	"Marathon	Appoints	Janet	F.	Clark	as	Senior	Vice	President	and	Chief	Financial	Officer."

Form	8-K	dated	January	27,	2004	(filed	January	27,	2004),	reporting	under	Item	12.	Disclosure	of	Results	of	Operations	and	Financial	Condition,	that	Marathon Oil	Corporation	is	furnishing	information	for	the	January	27,	2004	press	release	titled	"Marathon	Oil	Corporation	Reports	Fourth	Quarter	and	Year	End	2003 Results."

# Report	of	Independent	Auditors	on

# Financial	Statement	Schedule

Our	audit	of	the	consolidated	financial	statements	referred	to	in	our	report	dated	February	25,	2004	appearing	in	the	2003	Annual	Report	of	Marathon	Oil Corporation	(which	report	and	consolidated	financial	statements	are	included	in	this	Annual	Report	on	Form	10-K)	also	included	an	audit	of	the	financial	statement schedule	listed	in	Item	15(a)(2)	of	this	Form	10-K.	In	our	opinion,	this	financial	statement	schedule	presents	fairly,	in	all	material	respects,	the	information	set	forth therein	when	read	in	conjunction	with	the	related	consolidated	financial	statements.

Houston,	Texas

# Schedule	II—Valuation	and	Qualifying	Accounts

| (In	millions) | Balance	at<br>Beginning	of<br>Period | Charged	to<br>Cost	and<br>Expenses | Charged<br>to	Other<br>Accounts | Deductions^(a) | Balance	at<br>End	of<br>Period |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Year\tended\tDecember\t31,\t2003 |  |  |  |  |  |
| Reserves\tdeducted\tin\tthe\tbalance\tsheet\tfrom\tthe |  |  |  |  |  |
| assets\tto\twhich\tthey\tapply: |  |  |  |  |  |
| Allowance\tfor\tdoubtful\taccounts\tcurrent | $6 | $10 | $– | $11 | $5 |
| Allowance\tfor\tdoubtful\taccounts\tnoncurrent | 14 | 2 | – | 6 | 10 |
| Tax\tvaluation\tallowances: |  |  |  |  |  |
| Federal | – | – | 67(b) | – | 67 |
| State | 78 | – | – | 5 | 73 |
| Foreign | 404 | – | 57(c) | 25 | 436 |
| Year\tended\tDecember\t31,\t2002 |  |  |  |  |  |
| Reserves\tdeducted\tin\tthe\tbalance\tsheet\tfrom\tthe |  |  |  |  |  |
| assets\tto\twhich\tthey\tapply: |  |  |  |  |  |
| Allowance\tfor\tdoubtful\taccounts\tcurrent | $4 | $13 | $– | $11 | $6 |
| Allowance\tfor\tdoubtful\taccounts\tnoncurrent | 4 | 10 | – | – | 14 |
| Inventory\tmarket\tvaluation\treserve | 72 | – | – | 72 | – |
| Tax\tvaluation\tallowances: |  |  |  |  |  |
| State | 76 | – | 2(c) | – | 78 |
| Foreign | 285 | – | 119(c) | – | 404 |
| Year\tended\tDecember\t31,\t2001 |  |  |  |  |  |
| Reserves\tdeducted\tin\tthe\tbalance\tsheet\tfrom\tthe |  |  |  |  |  |
| assets\tto\twhich\tthey\tapply: |  |  |  |  |  |
| Allowance\tfor\tdoubtful\taccounts\tcurrent | $3 | $21 | $– | $20 | $4 |
| Allowance\tfor\tdoubtful\taccounts\tnoncurrent | – | 4 | – | – | 4 |
| Inventory\tmarket\tvaluation\treserve | – | 72 | – | – | 72 |
| Tax\tvaluation\tallowances: |  |  |  |  |  |
| State | 16 | 7 | 53(d) | – | 76 |
| Foreign | 252 | – | 43(c) | 10 | 285 |

(a) Deductions	for	the	allowance	for	doubtful	accounts	and	long-term	receivables	include	amounts	written	off	as	uncollectible,	net	of	recoveries.	Deductions	in	the	inventory	market	valuation	reserve	reflect	increases	in market	prices	and	inventory	turnover,	resulting	in	noncash	credits	to	costs	and	expenses.	Deductions	in	the	state	tax	valuation	allowance	is	due	to	expiring	net	operating	losses.	Deductions	in	the	foreign	tax	valuation allowance	for	2003	relate	to	the	sale	of	the	exploration	and	production	operations	in	western	Canada.	Deductions	in	the	foreign	tax	valuation	allowance	for	2001	reflect	changes	in	the	amount	of	deferred	taxes expected	to	be	realized,	resulting	in	credits	to	the	provision	for	income	taxes.

(b) Reflects	valuation	allowance	established	for	deferred	tax	assets	generated	in	the	current	period,	resulting	from	excess	capital	losses	related	to	the	sale	of	exploration	and	production	operations	in	western	Canada.

(c) Reflects	valuation	allowances	established	for	deferred	tax	assets	generated	in	the	current	period,	primarily	related	to	net	operating	losses.

(d) The	increase	in	the	valuation	allowance	is	related	to	net	operating	losses	previously	attributed	to	United	States	Steel	which	were	retained	by	Marathon	in	connection	with	the	Separation.	The	transfer	of	net	operating losses	and	the	related	valuation	allowance	was	recorded	as	a	capital	transaction	with	United	States	Steel.

# SIGNATURES

Pursuant	to	the	requirements	of	the	Securities	and	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	registrant	and in	the	capacity	indicated	on	March	8,	2004.

# Vice	President,	Accounting	and	Controller

Signature Title /s/	THOMAS	J.	USHER Thomas	J.	Usher Chairman	of	the	Board	and	Director /s/	CLARENCE	P.	CAZALOT,	JR. Clarence	P.	Cazalot,	Jr. President	&	Chief	Executive	Officer	and	Director /s/	JANET	F.	CLARK Janet	F.	Clark Senior	Vice	President	and	Chief	Financial	Officer /s/	ALBERT	G.	ADKINS Albert	G.	Adkins Vice	President,	Accounting	and	Controller /s/	CHARLES	F.	BOLDEN,	JR. Charles	F.	Bolden,	Jr. Director /s/	DAVID	A.	DABERKO David	A.	Daberko Director /s/	WILLIAM	L.	DAVIS William	L.	Davis Director /s/	SHIRLEY	ANN	JACKSON Shirley	Ann	Jackson Director /s/	PHILLIP	LADER Phillip	Lader Director /s/	CHARLES	R.	LEE Charles	R.	Lee Director /s/	DENNIS	H.	REILLEY Dennis	H.	Reilley Director /s/	SETH	E.	SCHOFIELD Seth	E.	Schofield Director

/s/	DOUGLAS	C.	YEARLEY

Director

Douglas	C.	Yearley

# GLOSSARY	OF	CERTAIN	DEFINED	TERMS

The	following	definitions	apply	to	terms	used	in	this	document:



Question: what were total distillates sales in millions for the three year period ? 365 346 345
Calculation:   table_row = [365, 346, 345] # row labeled distillates
 a = sum(table_row) 
Answer: 1056