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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2002

Commission file number 1-5153

Marathon Oil Corporation

(Exact name of registrant as specified in its charter)

5555 San Felipe Road, Houston, TX 77056-2723

(Address of principal executive offices)

Tel. No. (713) 629-6600

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

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 January 31, 2003: $6 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 309,863,304 shares of Marathon Oil Corporation Common Stock outstanding as of January 31, 2003.

Documents Incorporated By Reference:

Portions of the registrant’s proxy statement relating to its 2003 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 10-13 of this report.

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MARATHON OIL CORPORATION

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).

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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, include 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.

The oil and gas industry is characterized by a large number of companies, none of which is dominant within the industry, but a number of which have greater resources than Marathon. Marathon must compete with these companies for the rights to explore for oil and gas. Marathon’s expectations as to revenues, margins and income are based upon assumptions as to future prices and volumes of liquid hydrocarbons, natural gas and refined products. 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.

Marathon uses commodity-based and financial instrument related derivative instruments such as futures, forwards, swaps, and options to manage exposure to price fluctuations. While commodity-based derivative instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable movements. Levels of hedging activity vary among oil industry competitors and could affect Marathon’s competitive position with respect to those competitors.

Liquidity Factors

Marathon’s ability to finance its future business requirements through internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources is affected by the performance of its operations (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 and actions, the overall U.S. financial climate, and, in particular, with respect to borrowings, by Marathon’s outstanding debt and credit ratings by investor services.

Factors Affecting Exploration and Production Operations

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. Exploration and production (“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.

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Factors Affecting Refining, Marketing and Transportation Operations

Marathon conducts domestic refining, marketing and transportation (“RM&T”) operations primarily through its 62 percent owned consolidated subsidiary, Marathon Ashland Petroleum LLC (“MAP”). MAP refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States. The profitability of these operations depends largely on the margin between the cost of crude oil and other feedstocks refined and the selling prices of refined products. MAP is a purchaser of crude oil in order to satisfy its refinery throughput requirements. As a result, its overall profitability could be adversely affected by rising crude oil and other feedstock prices that are not recovered in the marketplace. Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, logistical capabilities and the available supply of refined products. 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. 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. RM&T 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.

Factors Affecting 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. The profitability of these operations depends largely on commodity prices, volume deliveries, margins on resale gas, and demand. 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.

Technology Factors

Longer-term projections of corporate strategy, including the viability, timing or expenditures required for capital projects, can be affected by changes in technology, especially innovations in processes used in the exploration, production or refining of hydrocarbons. While specific future changes are difficult to project, recent innovations affecting the oil industry include the development of three-dimensional seismic imaging, deepwater and horizontal drilling capabilities, and improved gas transportation and processing options.

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 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.

Prior to 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 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.

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Operating Highlights

During 2002, Marathon:

Segment and Geographic Information

For operating segment and geographic information, see Note 7 to the Consolidated Financial Statements on page F-19.

Exploration and Production

Marathon is currently conducting exploration and development activities in 10 countries. Principal exploration activities are in the United States, the United Kingdom, Angola, Canada, Equatorial Guinea and Norway. Principal development activities are in the United States, the United Kingdom, Canada, Equatorial Guinea, Gabon, Ireland, the Netherlands and Norway. Marathon is also pursuing opportunities in north and west Africa, the Middle East, southeast Asia and Russia.

At year-end 2002, Marathon was producing crude oil and/or natural gas in nine countries, including the United States. Marathon’s worldwide liquid hydrocarbon production, including Marathon’s proportionate share of equity investees’ production, decreased less than one percent from 2001 levels. Marathon’s 2002 worldwide sales of natural gas production, including Marathon’s proportionate share of equity investees’ production, decreased approximately three percent from 2001. In addition to sales of 481 net million cubic feet per day (“mmcfd”) of international natural gas production, Marathon sold 4 net mmcfd of natural gas acquired for injection and resale during 2002. In total, Marathon’s 2002 worldwide production averaged 412,000 barrels of oil equivalent (“BOE”) per day. In 2003 and 2004, Marathon’s worldwide production is expected to average between 390,000 and 395,000 BOE per day, excluding asset sales and dispositions.

The above projection of 2003 and 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, reserve estimates, reserve replacement rates, production decline rates of mature fields,

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timing of commencing production from new wells, drilling rig availability, future acquisitions or dispositions of producing properties, 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 60 percent of Marathon’s 2002 worldwide liquid hydrocarbon production and 61 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 development potential.

During 2002, Marathon drilled 19 gross (12 net) exploratory wells of which 12 gross (8 net) wells encountered hydrocarbons. Of these 12 wells, 2 gross (1 net) wells were temporarily suspended or are in the process of completing.

Exploration expenditures in the United States during the three-year period ended December 31, 2002 totaled $535 million, of which $184 million was incurred in 2002. Development expenditures in the United States during the three-year period ended December 31, 2002, including Marathon’s 85 percent equity interest in the development expenditures of MKM Partners L. P. (“MKM”), totaled $950 million, of which $295 million was incurred in 2002.

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

Gulf of Mexico – During 2002, Marathon’s Gulf of Mexico production averaged 62,500 net barrels per day (“bpd”) of liquid hydrocarbons and 103 net mmcfd of natural gas, representing 50 percent and 14 percent of Marathon’s total U.S. liquid hydrocarbon and natural gas production, respectively. Liquid hydrocarbon and natural gas production decreased by 9,100 net bpd and by 8 net mmcfd, respectively, from the prior year, mainly due to adverse weather from tropical storms Isidore and Lili, well interventions and natural field decline. At year-end 2002, Marathon held interests in 10 producing fields and 17 platforms, of which 7 platforms are operated by Marathon.

Production from Marathon’s interests in the deepwater Gulf of Mexico accounted for approximately 93 percent of its total Gulf of Mexico production in 2002. Major components of Marathon’s deepwater portfolio include the Marathon-operated Ewing Bank 873, 917, and 963 and the outside-operated Green Canyon 244, Viosca Knoll 786 and Mississippi Canyon 348.

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 2002, Marathon had interests in 155 blocks in the Gulf of Mexico, including 122 in the deepwater area. In 2003, Marathon plans to drill, or complete drilling operations on, three or four deepwater wells, including continued appraisal of the Neptune discovery.

The Neptune 3 discovery, located in Atwater Valley Block 617, was drilled to a total depth of 18,643 feet and encountered approximately 150 feet of net pay in two primary intervals. The well is located on the southern portion of the structure and is on trend with the Neptune 1 and 2 wells drilled several years ago on Blocks 575 and 574, respectfully, which were also successful. The Neptune 4 well, located in Block 573 along the northern portion of the structure, did not encounter hydrocarbons and was temporarily abandoned in early January 2003. Marathon holds a 30 percent working interest in the five blocks comprising the Neptune unit. Further appraisal drilling of Neptune is anticipated in 2003 to determine commerciality.

The Ozona Deep discovery, located in Garden Banks Block 515 was appraised with the drilling of two sidetrack wells in 2002 and was determined to be a smaller, more complicated hydrocarbon accumulation than anticipated. Determination of commerciality is ongoing. Marathon is operator and has a 68 percent working interest.

The Camden Hills field, located in the deepwater Gulf of Mexico on Mississippi Canyon Block 348, was discovered in August 1999. It has been developed as a part of the Canyon Express project, which links wells of the Aconcagua, Kings Peak and Camden Hills gas fields, approximately 150 miles southeast of New Orleans, tying to Williams’ Canyon Station platform on Main Pass 261 through the Canyon Express pipeline infrastructure. The Marathon operated Camden Hills startup in October 2002 sets the world record water depth for production at 7,209 feet, flowing through the world’s third longest gas gathering line at 57 miles. The Camden Hills wells

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achieved their designed peak gross rate of 100 mmcfd in November 2002. Marathon is operator of the Camden Hills field with a 50 percent interest and also has a 10 percent interest in the Canyon Express pipeline infrastructure.

Alaska – Marathon’s primary focus in Alaska is the expansion of its natural gas business through exploration, development and marketing. Marathon’s production from Alaska averaged 166 net mmcfd of natural gas in 2002, compared with 179 net mmcfd in 2001. The decrease in 2002 from 2001 is primarily due to mild temperatures in the first and fourth quarters that reduced local utility demands.

During 2002, Marathon completed successful drilling operations on four wells in Alaska. Included in this program was one well related to the natural gas discovery at the Ninilchik unit on the Kenai peninsula, approximately 35 miles south of Kenai, Alaska. Two wells are scheduled for drilling in 2003, in anticipation of first production on or before January 1, 2004. Additional drilling will occur to fully assess and develop the Ninilchik unit.

Marathon is operator of the Ninilchik unit with a 60 percent interest. Marathon and a co-venturer have formed Kenai Kachemak Pipeline Company LLC to transport natural gas from the Ninilchik unit and other potential southern Kenai peninsula gas prospects for sales into the existing Cook Inlet natural gas infrastructure.

New Mexico – Production in New Mexico, primarily from the Indian Basin field, averaged 17,300 net bpd and 137 net mmcfd in 2002, compared with 15,000 net bpd and 150 net mmcfd in 2001. The increase in liquid hydrocarbon production was primarily due to ongoing development of the Indian Basin field and was preceded by the expansion in 2000 of Marathon’s Indian Basin gas plant. Gas production was down primarily as a result of the disposition of certain properties in the San Juan Basin.

In 2002, eight Marathon operated development wells were completed in the Indian Basin field targeting both oil and gas, focused in the eastern area of the field. These new wells, combined with several recompletions of existing gas wells, increased gross oil production from 6,500 bpd to over 9,000 bpd. These wells also helped keep gas production relatively flat in 2002, ending the year at 165 gross mmcfd from Marathon-operated wells. In 2003, seven new well completions and several recompletions are planned in the east Indian Basin area targeting both oil and gas.

Oklahoma – Gas production for 2002 averaged 108 net mmcfd representing 15 percent of Marathon’s total U.S. gas production, compared with 124 net mmcfd in 2001. The decrease in gas production was primarily due to the natural field decline in Knox Morrow.

In 2002, Marathon’s southern Anadarko Basin exploration efforts concentrated on the western extension of the Cement field Sycamore/Springer play as well as the Granite Wash/Cisco prospects located in the Marlow field. Exploration drilling efforts resulted in four discoveries.

Marathon drilled or participated in the drilling of 14 development wells to further develop the 1998 Granite Wash discovery in western Oklahoma. Current net production from the Granite Wash area stands at approximately 24 mmcfd. In 2003, Granite Wash development will continue as Marathon plans to participate in the drilling of ten additional development wells.

Southern Oklahoma’s 2002 development efforts focused on Springer/Sycamore development in the Cement field. Marathon participated in the drilling of eleven Springer/Sycamore development wells in 2002. Total Springer/Sycamore production in the Cement field is currently 29 net mmcfd. In 2003, Marathon plans to continue its Cement Springer/Sycamore development by drilling, or participating in the drilling of seven additional wells. Development plans for 2003 include participation in the drilling of six wells targeting Cisco/Hoxbar development in the Marlow field, located in Stephens County, Oklahoma. Development drilling of an Arbuckle test began late in the year and will continue into early 2003.

Texas – Onshore production for 2002 averaged 15,892 net bpd of liquid hydrocarbons and 84 net mmcfd of natural gas, representing 13 percent of Marathon’s total U.S. liquid hydrocarbon and 11 percent of natural gas production. Liquid production volumes decreased by 1,506 net bpd from 2001 levels and gas volumes decreased by 27 net mmcfd from 2001 levels. The volume decreases were due to property dispositions and natural field decline.

In east Texas, Marathon drilled 15 wells in the Mimms Creek field with drilling operations continuing at year-end. The 2002 drilling program has resulted in Mimms Creek’s net production increasing from 5 mmcfd to a peak of 11 mmcfd. Current net production in the Mimms Creek field is 9 mmcfd.

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In the James Lime play, Marathon drilled six wells in the Bridges East field. In 2003, two more wells are projected to be drilled.

Wyoming – Liquid hydrocarbon production for 2002 averaged 22,800 net bpd compared with 24,600 net bpd in 2001, representing 18 percent of Marathon’s total U.S. liquid hydrocarbon production. Average gas production increased to 125 net mmcfd in 2002, compared to 90 net mmcfd in 2001, as a result of additional coal bed natural gas wells coming on line in the Powder River Basin (“PRB”) and the acquisition of additional interests in coal bed natural gas wells in the PRB.

In early 2001, Marathon completed the acquisition of Pennaco Energy Inc., creating a new core area of coal bed natural gas production in the 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. This area remains one of the most active onshore natural gas plays in the continental U.S. During 2002, Marathon drilled approximately 164 net wells. Development activity together with acquisitions increased proved year-end 2002 reserves of coal bed natural gas to 417 net bcf as compared to year-end 2001 reserves of approximately 256 net bcf. For 2002, annualized production rates of coal bed natural gas were 79 net mmcfd, an increase of 32 net mmcfd from a year earlier. The December 2002 rate averaged 91 net mmcfd. The 2003 plan is currently estimated to include the drilling of 400 to 500 net coal bed natural gas wells in the PRB.

International

Europe

U.K. North Sea – Marathon’s primary asset in the U.K. North Sea is in the Brae area 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. Production from the Brae area averaged 20,100 net bpd of liquid hydrocarbons in 2002, compared with 21,700 net bpd in 2001. The decrease resulted from the natural decline in existing fields partially offset by successful development and remedial well work.

Marathon’s total Brae gas sales from all sources averaged 198 net mmcfd in 2002, compared with 242 net mmcfd in 2001. Of these totals, 194 mmcfd and 234 mmcfd was Brae-area gas in 2002 and 2001, respectively, and 4 mmcfd and 8 mmcfd was gas acquired for injection and subsequent resale in 2002 and 2001, respectively. The decrease resulted from decreased allocated capacity on the Scottish Area Gas Evacuation (“SAGE”) system due to the Beryl field coming on line.

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.

The strategic location of the Brae A, Brae B and East Brae platforms and pipeline infrastructure has generated third-party processing and transportation business since 1986. Currently, there are 18 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 SAGE system. The other 50 percent is owned by the Beryl group. The SAGE pipeline provides transportation for Brae and Beryl area gas and has a total wet gas capacity of approximately 1.0 bcfd. 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.

Marathon is continuing its development of the Brae area. During 2002, Marathon participated in a successful Central Brae well. The well was completed as a producer from the Brae B platform in February 2002. An additional Central Brae well, drilled from the Brae B platform, is planned for 2003.

In August 2002, the Braemar development in which Marathon has a 28 percent interest was sanctioned. The development is comprised of a single subsea well development tied back to the East Brae platform. First oil from the field is scheduled for October 2003. In August 2002, a 16-inch pipeline link, Linkline, between the Marathon

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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 sold to the Miller group for their water alternating gas project in the Miller field.

As part of an ongoing rationalization of the European Business Unit, Marathon reduced its U.K. leasehold interests from 34 blocks at the start of 2002 to 24 blocks as of December 31, 2002.

U.K. Atlantic Margin – Marathon has a non-operated interest averaging approximately 30 percent in the Foinhaven area. This is made up of a 28 percent interest in the main Foinhaven field, 47 percent of East Foinhaven and 20 percent of the single well T35 accumulation.

Production from the Foinaven fields averaged 31,000 net bpd and 9 net mmcfd in 2002, compared to 24,000 net bpd in 2001. Sales of Foinaven-associated gas via the West of Shetland pipeline system commenced in April 2002. All sales are to the outside-operated Magnus group. Full Foinaven export rates of gross 50 mmcfd were achieved in November after Magnus commissioned their gas injection compressor.

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 81 net mmcfd in 2002, compared with 79 net mmcfd in 2001.

In fourth quarter 2002, Marathon announced it will be drilling and developing an additional subsea gas well in the Kinsale Head area. The Greensand subsea gas well, which is expected to be drilled in 2003, is designed to enhance the productivity of the main Kinsale Head natural gas producing Greensand reservoir. The well will target the southwestern part of the reservoir that is not being adequately drained by existing Kinsale Head platform wells.

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. This agreement will result in Marathon providing capacity to process and transport between 60 mmcfd to 100 mmcfd of Seven Heads gas and enhances the value and utilization of Marathon’s Kinsale Head infrastructure.

During 2001, a petroleum lease was issued for the Corrib field in License 2/93, located 40 miles off the west coast of Ireland. The development will consist of six subsea wells, tied back to a processing terminal onshore via a 20-inch pipeline. Final planning approval for the onshore terminal is expected by the end of the first quarter of 2003. With approximately two years of onshore and offshore construction activities thereafter, production startup is targeted for first quarter of 2005. Marathon has an 18 percent non-operating interest in the Corrib field.

Norway – In the Norwegian North Sea, total net production averaged 800 bpd and 15 mmcfd in 2002. In 2000, Marathon participated in a project to modify the Heimdal platform to a processing and transportation center for third-party business. 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 prospect exists on this license and it is planned to drill in late 2003 or early 2004.

Following the successful acquisition of a 20 percent interest in license PL102, the Norwegian government approved the outside-operated Byggve/Skirne gas-condensate field plan of development. This two well development will be 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 via the Gasled, Statpipe or Vesterled systems.

Marathon also obtained interests in licenses PL088, PL150 and PL203 through acquisitions in 2001 and 2002. Ownership is currently 50 percent in licenses PL088 and PL150, and 65 percent in license PL203. Marathon obtained operatorship of the PL203 license from the Norwegian government in June 2002 and established an office in Stavanger, Norway. To further delineate and evaluate these licenses, two exploration wells are expected to be drilled on PL203 and one on PL088 in 2003.

In the Norwegian North Sea, between the Heimdal field and the U.K. North Sea Brae area, Marathon is evaluating the exploration potential on three additional licenses (PL025, PL187 and PL204) where Marathon holds interests of between 10 and 30 percent.

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Netherlands – Marathon’s 50 percent equity method interest in CLAM Petroleum B. V. (“CLAM”) provides a five percent entitlement in the production from 25 gas fields, which provided sales of 25 net mmcfd of natural gas in 2002, compared with 31 net mmcfd in 2001. The decrease was mainly due to a planned shutdown to install and commission new export compression modules. In 2002, CLAM participated in four development wells and four exploration wells in the Dutch sector of the North Sea.

Independent of its interest in CLAM, Marathon holds a 24 percent working interest in the A-15 Block in the Dutch sector of the North Sea. Evaluation of the exploration potential is expected to continue during 2003.

West Africa

Equatorial Guinea—During 2002, in two separate transactions, Marathon acquired interests in the Alba field 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 owned a combined 52 percent working interest in the Alba production sharing contract (“Alba PSC”) and a net 43 percent interest in an onshore liquefied petroleum gas processing plant through an equity method investee. Additionally, Marathon acquired a 45 percent net interest in an onshore methanol production plant through an equity method investee, which is reported in the Other Energy Related Business (“OERB”) segment.

On June 20, 2002, Marathon acquired 100 percent of the outstanding stock of Globex Energy, Inc. (“Globex”) for $155 million. Globex owned an additional 11 percent working interest in the Alba PSC and an additional net 9 percent interest in the onshore liquefied petroleum gas processing plant.

The existing production facilities include two offshore platforms, five wells and an onshore condensate stabilization plant. These facilities currently produce gross hydrocarbon volumes of 22,000 bpd of condensate and 130 mmcfd of gas.

The government of Equatorial Guinea approved the Alba PSC phase 2 development plan. The phase 2 development plan increases gross production capacity and expands the condensate recovery and LPG facilities to increase liquids processing capabilities. The first phase of additional development targeted for the Alba field is known as phase 2A. The project includes two new shallow water platforms, twelve new production and gas injection wells, pipelines and expansion of onshore condensate processing facilities and gas reinjection compression on Bioko Island. It is expected to increase gross condensate production to 46,000 (26,000 net) bpd. Gas not used in methanol production or fuel will be moved offshore for reinjection at a rate of approximately 600 gross mmcfd. The government of Equatorial Guinea approved the 2A project in September 2002. Construction of this project has commenced, with startup scheduled for fourth quarter of 2003. The second phase of additional development is known as phase 2B. This project is scheduled to further ramp up production in fourth quarter of 2004. The project includes a new LPG cryogenic gas plant and associated storage, marine terminal and fractionation equipment for propane and heavier gas components. This addition will accommodate additional gross production of 8,000 (4,000 net) bpd of condensate and 13,000 (7,500 net) bpd of LPG. Design work for this phase commenced during 2002 and the plan of development for phase 2B received government approval at the end of 2002. Future development of the Alba field is being considered to monetize the gas.

As a result of these acquisitions and the approval of the phase 2 development plan, Marathon added 305 million BOE to its proved reserves.

In 2002, Marathon drilled two development wells and acquired a three-dimensional (“3-D”) seismic survey in preparation for the production ramp-up associated with the phase 2 development of the Alba field. Production averaged 8,500 net bpd and 53 net mmcfd in 2002. The 2003 drilling program is scheduled for a total of six wells. Exploration plans for 2003 include the drilling of up to four wells, one of which will be a deeper test of the Alba field.

Gabon – Marathon is operator of the Tchatamba South, Tchatamba West and Marin fields with a 56 percent working interest. Production in Gabon averaged 16,700 net bpd of liquid hydrocarbons in 2002, compared with 16,000 net bpd in 2001.

In 2002, Marathon installed a 44-kilometer pipeline from the Tchatamba field to the outside-operated Cap Lopez pipeline system onshore and began producing oil into that line in December. The leased floating storage and offloading facility was released in January 2003, improving long-term reliability of export operations. Also in 2002, Marathon installed production facilities for the development of the Azile reservoir. The first completion in the Azile reservoir is scheduled for the first quarter of 2003. A development well is targeted for the Madiela reservoir for the first quarter of 2003.

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Angola – In May 1999, Marathon was awarded working interests of 10 percent each in Blocks 31 and 32 offshore Angola. In September 2002, Marathon was awarded an additional 20 percent working interest in Block 32. Marathon participated in the first ultra-deepwater discovery offshore Angola in Block 31. The discovery, the Plutao 1-A, was drilled to a depth of 14,607 feet in 6,628 feet of water and tested 5,357 bpd through a 48/64 inch choke. Two exploration wells are planned for 2003 in Block 31. In Block 32, Marathon and co-venturers drilled the Gindungo 1 well to a depth of 15,665 feet in 4,756 feet of water. Plans are to test two zones in this well. One or two additional wells are planned for 2003 in Block 32.

Other International

Australia—Through the Globex acquisition, Marathon acquired a 13 percent working interest in the Stag field and three exploration blocks offshore western Australia. Current net production averages approximately 1,600 net bpd.

Canada – Net production in Canada averaged 4,300 bpd and 104 mmcfd in 2002, compared with 11,000 bpd and 123 mmcfd in 2001. The decline in production was related to divestitures of non-core conventional oil and gas and all heavy oil assets during 2001. Marathon’s onshore Canadian exploration efforts are concentrated in two areas of western Canada.

In south central Alberta, the success of Marathon’s drilling program exceeds ninety percent. The wells are shallow and the geologic setting is such that each well has several reservoir objectives. For 2003, 35 core area step-out wells are planned.

The second area of focus in western Canada is in the Milo Lake area of northern British Columbia. During 2002 and 2001, Marathon drilled two successful wells. The 2003 program includes plans to finish the installation of production facilities and pipelines, tie-in the two successful wells, startup production and drill three additional prospects.

In addition to three existing leases, Marathon was awarded two additional offshore Nova Scotia deepwater exploration licenses in 2002. Marathon has a 100 and 50 percent interest in exploration licenses (“EL”) 2410 and 2411, respectively. Marathon sold its 34 percent interest in EL 2384 (Torbrook) in 2002. This brings Marathon’s total offshore Nova Scotia exploration license acreage to 1.3 million gross acres, positioning Marathon as a major player in the developing deepwater Atlantic Canada Gas Province. One deepwater gas discovery well was drilled in 2002 in EL 2377 (Annapolis). It is anticipated that one to two deepwater wells will be drilled on Annapolis in 2003, and that an extensive 3-D seismic survey will be acquired on EL 2410 (Cortland) and EL 2411 (Empire) licenses.

The above discussions include forward-looking statements concerning various projects, drilling plans, expected production and sales levels, reserves and 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, license relinquishments 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, 2002, Marathon’s net proved liquid hydrocarbon and natural gas reserves, including its proportionate share of equity investees’ net proved reserves, totaled approximately 1.3 billion BOE, of which 56 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.) On a BOE basis, excluding dispositions, Marathon replaced 262 percent of its 2002 worldwide oil and gas production. Including dispositions, Marathon replaced 259 percent of worldwide oil and gas production.

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The table below 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

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-40 through F-42. Marathon has filed reports with the U.S. Department of Energy (“DOE”) for the years 2001 and 2000 disclosing the year-end estimated oil and gas reserves. Marathon will file a similar report for 2002. 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.

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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 241 bcf of natural gas over the remaining life of these contracts. 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 155 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:

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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, 2002.

Gross and Net Wells

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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)

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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, 2002:

Gross and Net Acreage

Refining, Marketing and Transportation

RM&T operations are primarily conducted by MAP and its subsidiaries, including its wholly owned subsidiaries, Speedway SuperAmerica LLC and Marathon Ashland Pipe Line LLC. Marathon holds a 62 percent interest in MAP and Ashland Inc. holds the remaining 38 percent interest.

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, 2002:

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 and Catlettsburg to Robinson where excess reforming capacity is available; gas oil may be moved from Robinson to Detroit and Catlettsburg 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.

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During 2002, MAP’s refineries processed 906,000 bpd of crude oil and 148,000 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

Planned maintenance activities requiring temporary shutdown of certain refinery operating units (“turnarounds”) are periodically performed at each refinery. MAP completed major turnarounds at its Robinson and St. Paul Park refineries in the fourth quarter of 2002.

The Garyville, Louisiana coker unit project achieved mechanical completion in October 2001 and was operating at full production capacity by mid-December 2001. To supply this new unit, MAP entered into a multi-year contract with P.M.I. Comercio Internacional, S.A. de C.V., an affiliate of Petroleos Mexicanos S.A., to purchase approximately 90,000 bpd of heavy Mayan crude oil. The contract was increased to approximately 100,000 bpd in July 2002.

At its Catlettsburg, Kentucky refinery, MAP has initiated a multi-year $350 million 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 reduce the refinery’s total gasoline pool sulfur below 30 parts per million, thereby eliminating the need for additional low sulfur gasoline compliance investments at the refinery. The project is expected to be completed in late 2003.

Marketing

In 2002, MAP’s refined product sales volumes (excluding matching buy/sell transactions) totaled 19.1 billion gallons (1,247,000 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 about 68 percent of MAP’s refined product sales volumes in 2002. Approximately 48 percent of MAP’s gasoline volumes and 90 percent of its distillate volumes were sold on a wholesale or spot market basis to independent unbranded customers or other wholesalers in 2002.

About 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 10 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.

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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

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, 2002, MAP supplied petroleum products to about 3,800 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 a wholly owned MAP subsidiary, Speedway SuperAmerica LLC (“SSA”). As of December 31, 2002, this subsidiary had 2,006 retail outlets in 13 states that sold petroleum products and convenience-store merchandise and services, primarily under the brand names “Speedway” and “SuperAmerica”. Excluding the former SSA travel centers contributed to Pilot Travel Centers LLC (“PTC”) in 2001, SSA’s revenues from the sale of convenience-store merchandise totaled $2.4 billion in 2002, compared with $2.3 billion in 2001. 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.

PTC, a joint venture with Pilot Corporation (“Pilot”), is the largest operator of travel centers in the United States with about 225 locations in 34 states. The travel centers offer diesel fuel, gasoline and a variety of other services, including on-premises brand name restaurants. PTC provides MAP with the opportunity to participate in the travel center business on a nationwide basis. Pilot and MAP each own a 50 percent interest in PTC.

On February 27, 2003, PTC purchased 60 retail travel centers including fuel inventory, merchandise and supplies. The 60 locations are in 15 states, primarily in the Midwest, Southeast and Southwest regions of the country.

During 2002, SSA sold all of its convenience stores in Tennessee and Louisiana and most of its stores in Georgia. On February 7, 2003, SSA announced the signing of a definitive agreement to sell all 193 of its convenience stores located in Florida, South Carolina, North Carolina and Georgia for $140 million plus store inventory. The transaction is anticipated to close in the second quarter of 2003, subject to any necessary regulatory approvals and customary closing conditions. MAP’s retail marketing strategy is focused on SSA’s Midwest operations, additional growth in 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 2002, MAP’s net purchases of U.S. produced crude oil for refinery input averaged 433,000 bpd, including a net 44,000 bpd from Marathon. In 2002, Canada was the source for 13 percent or 114,000 bpd of crude oil processed and other foreign sources supplied 39 percent or 359,000 bpd of the crude oil processed by MAP’s refineries, including approximately 215,000 bpd from the Middle East. This crude was acquired from various foreign national oil companies, producing companies and traders.

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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, 2002, MAP owned, leased or had an ownership interest in approximately 3,410 miles of crude oil trunk lines and 3,732 miles of product trunk lines. MAP owned 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.

As of December 31, 2002, MAP had a 33 percent ownership interest in Centennial Pipeline LLC, and Marathon Ashland Pipe Line LLC has been designated operator of the pipeline. The Centennial Pipeline system that connects Gulf Coast refineries with the Midwest market has the initial design capacity to transport approximately 210,000 barrels per day of refined petroleum products and began deliveries of refined products in April 2002.

On February 10, 2003, MAP increased its ownership in Centennial Pipeline LLC from 33 percent to 50 percent and as of that date, Centennial Pipeline LLC is owned 50 percent each by MAP and TE Products Pipeline Company, Limited Partnership.

A MAP subsidiary, Ohio River Pipe Line LLC (“ORPL”), is building a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company, and the pipeline will be an interstate common carrier pipeline. The pipeline is currently known as Cardinal Products Pipeline and is expected to initially move approximately 50,000 barrels per day of refined petroleum into the central Ohio region. ORPL has secured all of the rights-of-way required to build the pipeline, and final permits required to build the pipeline have been approved. Construction on the pipeline began in August 2002, with startup of the pipeline expected midyear 2003.

MAP’s eighty-six 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, start-up of a pipeline project and the disposition of SSA stores. Some factors that could potentially cause actual results for the refinery and pipeline projects to differ materially from present expectations include (among others) price of petroleum products, levels of cash flow from operations, unforeseen hazards such as weather conditions and the completion of construction. Some factors that could affect the SSA store sales include the inability or delay in obtaining necessary government and third party approvals, and satisfaction of customary closing conditions. 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 emerging integrated gas strategy.

Marathon owns an interest in the following pipeline systems that were not contributed to MAP: 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); and a 17 percent interest in Explorer Pipeline Company and a 3 percent interest in Colonial Pipeline Company (both light product pipeline systems extending from the Gulf of Mexico to the Midwest and East Coast, respectively).

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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 transported on the Nautilus pipeline system.

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 ownership in a Kenai, Alaska, natural gas liquefication plant and leases 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 has been extended to continue through March 31, 2009. LNG deliveries totaled 63 gross bcf (19 net bcf) in 2002.

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 719,000 gross metric tons (324,000 net metric tons) in 2002. 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 in 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 operator 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 an LNG facility located on Bioko Island, Equatorial Guinea. LNG is likely to be shipped to the United States or Europe where it will be regasified and sold into the marketplace. Approvals are required from the partners and government of Equatorial Guinea.

Marathon’s Pacific Basin integrated gas activity centers around construction of the Tijuana Regional Energy Center. The proposed project, to be located near Tijuana, Mexico, is an integrated complex planned to consist of a 750 mmcf per day LNG offloading terminal and regasification plant, a 1,200-megawatt power generation plant, a 20-million gallon per day water desalination plant, wastewater treatment facilities and natural gas pipeline infrastructure. Currently, Marathon is proceeding with regulatory reviews and permits as required by federal authorities in Mexico. Assuming regulatory approval and the development of a successful commercial structure and financing plan, construction of the facilities is scheduled to begin in 2003 with expected startup in 2006.

The above OERB discussion contains forward looking statements concerning the Tijuana Regional Energy Center. Some factors, but not necessarily all factors that could adversely affect these expected results include unforeseen difficulty in negotiation of definitive agreements among project participants, identification of additional participants to reach optimum levels of participation, inability or delay in obtaining necessary government and third-party approvals, arranging sufficient project financing, unanticipated changes in market demand or supply, competition with similar projects, environmental issues, availability or construction of sufficient LNG vessels, and government review and approval of the required permits.

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 2001 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 sixth among U.S. petroleum companies on the basis of crude oil refining capacity as of January 1, 2003. MAP competes in four distinct markets – wholesale, spot, branded and retail distribution—for the sale of refined products and believes it competes with about forty companies in the wholesale distribution of petroleum products to private brand marketers and large commercial and industrial consumers; about eighty-seven companies in the sale of petroleum products in the spot market; eleven refiner/marketers in the supply of branded petroleum

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products to dealers and jobbers; and approximately six hundred 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^™ and Taco Bell^™. 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:

Marathon and its subsidiaries are continuing the energy business that comprised the Marathon Group of USX Corporation.

Assumption of Indebtedness and Other Obligations by United States Steel

Prior to the Separation, Marathon managed most of its financial activities on a centralized, consolidated basis and, in its financial statements, attributed amounts that related primarily to the following items to the Marathon Group and the U.S. Steel Group on the basis of their cash flows for the applicable periods and the initial capital structure for each group:

The following items, however, were specifically attributed to, and reflected in their entirety in the financial statements of, the group to which they related:

These attributions were for accounting purposes only and did not reflect the legal ownership of cash or the legal obligations to pay and discharge debt or other obligations.

In connection with the Separation:

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These arrangements required a post-Separation cash settlement of $54 million between Marathon and United States Steel following the audit of the balance sheets for both the Marathon Group and the U. S. Steel Group as of December 31, 2001, in order to ensure that the Value Transfer was $900 million. At December 31, 2001, Marathon had a $54 million settlement receivable from United States Steel arising from the allocation of net debt and other financings at the time of the Separation, which was paid on February 6, 2002.

As a result of its assumption of various items of indebtedness and other obligations from its former parent entity in the Holding Company Reorganization, Marathon remained obligated after the Separation for the following items of indebtedness and other obligations that were attributed to the U.S. Steel Group in accordance with the provisions of the Reorganization Agreement:

As contemplated by the Reorganization Agreement, Marathon and United States Steel entered into a financial matters agreement to reflect United States Steel’s agreement to assume and discharge all of Marathon’s obligations referred to above. For additional information relating to the financial matters agreement, see “Relationship Between Marathon and United States Steel After the Separation – Financial Matters Agreement” below.

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, 2002, four of the nine 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 subsequent to the Separation and providing for the allocation of tax and certain other liabilities and obligations arising from periods prior to the Separation. The following is a description of the material terms of those agreements.

Financial Matters Agreement

Marathon and United States Steel have a financial matters agreement that provides for United States Steel’s assumption of the obligations under Marathon’s outstanding industrial revenue bonds, the sale-leaseback financing arrangement and the lease and guarantee obligations referred to above under “The Separation— Assumption of Indebtedness and Other Obligations by United States Steel” on page 20. 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 those industrial revenue bonds and lease and guarantee arrangements described above, including any amounts due on any default or acceleration of any of those obligations, other than any default caused by 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. 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

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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:

Under the general tax sharing principles in effect prior to the Separation:

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 prior to December 31, 2001.

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

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The prescribed actions and transactions include:

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.

License Agreement

Marathon and United States Steel have entered into a license agreement under which Marathon granted to United States Steel a non-exclusive, fully paid, worldwide license to use the “USX” name and various trade secrets, know-how and intellectual property rights previously used in connection with the business of both companies. The license agreement provides that United States Steel may use these rights solely in the conduct of its internal business. It also provides United States Steel with the right to sublicense these rights to any of its subsidiaries. The license agreement provides for a perpetual term, so long as United States Steel performs its obligations under the agreement.

Insurance Assistance Agreement

Marathon and United States Steel have an insurance assistance agreement, which provides for:

Under the insurance assistance agreement:

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Transition Services Agreement

Marathon and United States Steel had a transition services agreement that governed the provision of the common corporate support services and inter-unit computer services until December 31, 2002. Common corporate support services included services personnel at the former Pittsburgh corporate headquarters historically provided prior to the Separation.

Obligations Associated with the Separation as of December 31, 2002

As of December 31, 2002, Marathon has identified the following obligations totaling $705 million that arise from the Separation of United States Steel:

Of the total $705 million, obligations of $556 million and corresponding receivables from United States Steel were recorded on Marathon’s consolidated balance sheet. The remaining $149 million was related to off-balance sheet arrangements and contingent liabilities of United States Steel.

Environmental Matters

Marathon maintains a comprehensive environmental policy overseen by the Corporate Governance and Public Policy 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 has also formed an Emergency Management Team, composed of senior management, which will oversee 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.

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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 laws such as RCRA and the CAA 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 43 and “Legal Proceedings” on page 27.

Marathon has incurred and will continue to incur capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures are not ultimately reflected in the prices of Marathon’s products and services, Marathon’s 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 or refined products.

During the past decade, MAP has received a number of notices of alleged violations of environmental laws from the U.S. Environmental Protection Agency (the “EPA”) and state environmental agencies. In some cases, MAP has entered into consent decrees or orders that require it to pay fines or install pollution controls to settle its alleged liability. The most significant of these examples was MAP’s agreement to settle alleged violations of several environmental laws, including New Source Review regulations, with a consent decree in 2001. The consent decree requires MAP to complete certain agreed upon environmental control programs with total one-time expenditures of approximately $360 million over an eight-year period, with about $230 million remaining over the next six years. The impact of this settlement on on-going operating expenses is not expected to be material. The decree also requires MAP to perform supplemental environmental projects which will cost approximately $9 million. These supplemental environmental projects were undertaken as part of this settlement of an enforcement action for alleged CAA violations. In addition, MAP paid a $3.8 million penalty in 2001. MAP believes that this settlement will provide increased permitting and operating flexibility while achieving emission reductions.

Air

Of particular significance to MAP are new EPA regulations that require reduced sulfur levels in the manufacture of gasoline and diesel fuel. 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, operating and logistical considerations, further refinement of preliminary engineering studies and project scopes and unforeseen hazards.

In July 1997, the EPA promulgated more stringent revisions to the National Ambient Air Quality Standards (“NAAQS”) for ozone and particulate matter. These revisions had been vacated by the Court of Appeals for the District of Columbia and remanded to the EPA for further action. The EPA sought review of the matter by the United States Supreme Court, and the Supreme Court heard the case in the fall of 2000. On February 27, 2001, the Supreme Court affirmed in part, reversed in part and remanded the case to the EPA to develop a reasonable interpretation of the non-attainment implementation provisions insofar as they relate to the revised ozone NAAQS. On remand, the EPA stood firm on the new eight-hour ozone standard and recently stated its intention to promulgate a final rule by December 2003, but another part of this case remains with the D.C. Circuit Court of Appeals for further determination. Additionally, in 1998, the EPA published a nitrogen oxide (“NOx”) State Implementation Plan (“SIP”) call, which would require approximately 20 states, including many states where Marathon has operations, to revise their SIPs to reduce NOx emissions. In December 1999, the EPA granted a petition from several northeastern states requesting that stricter NOx standards be required of “upwind” midwestern states, including several states where Marathon has refineries. The impact of the revised NAAQS and NOx standards could be significant to Marathon, but the potential financial effects cannot be reasonably estimated until the EPA takes further action on the revised ozone NAAQS (along with any further judicial review) and the states, as necessary, develop and implement revised SIPs in response to the revised NAAQS and NOx standards.

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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, 2002, 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.

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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-40 through F-42.

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 38.

Employees

Marathon had 28,166 active employees as of December 31, 2002, including 25,166 MAP employees. Of the total number of MAP employees, 18,705 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

Our Internet address is www.marathon.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.

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. In July 2001, the court in the consolidated proceeding denied defendants’ motions to dismiss. The matters are in the discovery phase and Marathon intends to vigorously defend these cases.

Cajun Express Arbitration

In September, 2002, Marathon settled its pending arbitration with Transocean Sedco Forex Inc. arising from Marathon’s cancellation of the Cajun Express rig contract on July 5, 2001. Transocean’s July 19, 2001 demand for arbitration sought net lost revenue of an unspecified amount. The contract may have generated $90 million in gross revenues over the remainder of the 18 month period. The settlement terms included payment of a portion of the disputed claim resulting in a $9 million after-tax loss.

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Environmental Proceedings

The following is a summary of proceedings involving Marathon that were pending or contemplated as of December 31, 2002, 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, 2002, Marathon had been identified as a PRP at a total of 11 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 82 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, 10 were associated with properties conveyed to MAP by Ashland which have 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 12 of these sites will be under $100,000 per site, 28 sites have potential costs between $100,000 and $1 million per site, 13 sites may involve remediation costs between $1 million and $5 million per site and 6 sites have incurred remediation costs of more than $5 million per site. Of the 6 sites, only 1 site as described in the following paragraph has future costs that are estimated to exceed $5 million. There are 13 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 are expected to be approximately $500,000. Additionally, negotiations are taking place with the Michigan Department of Environmental Quality to eventually perform a risk-based closure on this site.

On December 3, 2001, Illinois EPA (“IEPA”) issued a NOV to MAP arising out of the sinking of a floating roof on a storage tank at a Martinsville, Illinois facility. A storm and heavy rainfall caused the floating roof to sink. MAP believes it may have an emergency or malfunction defense. This matter has been referred to the Illinois Attorney General’s office for enforcement proceedings.

In March, 2002, MAP attended a meeting with the Illinois EPA concerning MAP’s self reporting of possible emission exceedences and permitting issues related to some storage tanks at MAP’s Robinson, Illinois facility. In late April, MAP submitted to IEPA a comprehensive settlement proposal which was rejected by IEPA. We have had subsequent discussions with IEPA and the Illinois Attorney General’s office and anticipate additional meetings and discussions in the coming months.

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The Kentucky Natural Resources and Environmental Cabinet (the “Cabinet) issued the MAP Catlettsburg, Kentucky refinery a Notice of Violation 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 has been involved in discussions with the Cabinet to resolve this matter through an agreed Administrative Order. MAP is optimistic that this matter may be resolved in 2003 and the civil penalty will be in the range of $90,000 to $120,000.

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.

MAP entered into a Consent Decree in July of 2002 with the State of Ohio regarding air compliance matters at its Canton refinery during both Ashland’s and MAP’s term of ownership and operation. The Consent Decree required $350,000 in payments which included a penalty of $216,500, several Supplemental Environmental Projects and the funding of a community notification system. The Consent Decree is being implemented.

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.

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

Not applicable.

PART II

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-37.

As of January 31, 2003, there were 64,857 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 of 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

See page F-46.

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Marathon Oil Corporation (“Marathon”), formerly USX Corporation, 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 the Consolidated Financial Statements and Notes to Consolidated Financial Statements.

Prior to 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, USX Corporation 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 (the “Separation”) and changed its name to Marathon Oil Corporation.

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” 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. For additional risk factors affecting the businesses of Marathon, see “Disclosures Regarding Forward-Looking Statements” on page 2.

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

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 a) if such estimates require assumptions about matters that are dependent on events remote in time that may or may not occur, are not capable of being readily calculated from generally accepted methodologies, or cannot be derived with some degree of precision from available data and b) if different estimates that reasonably could have been used or changes in the estimate that are reasonably likely to occur would have had a material impact on the presentation of financial condition, changes in financial condition or results of operations.

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 affects, 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. The actual recoverability of hydrocarbons can vary from estimated amounts. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of net recoverable quantities of oil and gas are subject to potentially substantial changes, either positively or negatively, as additional information becomes available and as contractual, economic and political conditions change.

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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 in order to evaluate the possible need to impair the carrying value of those properties. An impairment of any one of Marathon’s three largest fields could have a material impact on the presentation of financial condition, changes in financial condition or results of operations. Those fields – the Alba field offshore Equatorial Guinea, the Yates field in west Texas and the Brae Area Complex offshore the United Kingdom – comprise approximately 46 percent of Marathon’s total proved oil and gas reserves. The expected future cash flows from these properties 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 assets held and used in operations must be impaired when the carrying value is not recoverable and exceeds the fair value. Recoverability of the carrying value is determined by comparison with the undiscounted expected future cash flows to be generated by those assets. As of December 31, 2002, no impairment in the value of the Alba field or the Brae Area Complex was indicated.

Marathon’s interest in the Yates field is held through its investment in MKM Partners L.P., which is accounted for under the equity method. Equity method investments must be impaired when a loss in value occurs that is other than a temporary decline. As of December 31, 2002, no impairment in the value of MKM Partners L.P. was indicated.

Expected Future Taxable Income

Marathon must estimate its expected future taxable income in order to assess the realizability of its deferred income tax assets. As of December 31, 2002, Marathon reported net deferred tax assets of $1.103 billion, which represented gross assets of $1.585 billion net of valuation allowances of $482 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 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 $393 million relating to Norwegian net operating loss carryforwards (“NOLs”). Marathon has established a valuation allowance of $363 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 2001 and 2002. These interests currently have no proved reserves and generate no income, although some interests hold undeveloped discoveries. To the extent that these newly acquired interests demonstrate the capability to generate future taxable income, Marathon may be able to release some or all of its $363 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 41, 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, 2002,

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Marathon has reported receivables from United States Steel of $556 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. In order to make this assessment, Marathon must rely on public information about United States Steel. As of December 31, 2002, 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 $556 million, $469 million, or 84 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, 2002, Marathon’s cash-adjusted debt-to-capital ratio (which includes debt for which United States Steel has assumed responsibility for repayment) was 44.5 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.

For instance, 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, 2002 would have been approximately 41 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, 2002 would have been approximately 46 percent. (If United States Steel were not able 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 $21 per barrel. As of December 31, 2002, no IMV reserve had been recognized.

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. These contingent obligations are assessed regularly by Marathon’s in-house legal counsel. 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 43.

Pensions and Other Postretirement Benefit Obligations

Accounting for these benefits involves assumptions related to the appropriate discount rate for measuring the present value of plan obligations, the expected rates of return on plan assets, the rate of future increases in

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compensation levels and health care cost projections. Marathon develops its demographics and utilizes the work of outside actuaries to assist in the measurement of these obligations.

Effective December 31, 2002, Marathon revised the actuarial assumptions related to its pension and other postretirement benefit plans. The discount rate was lowered from 7 percent to 6.5 percent. The expected rate of return on plan assets was reduced from 9.5 percent to 9 percent. The annual rate of increase in per capita cost of covered health care benefits was increased from 7.5 percent to 10 percent.

Based on the actual 2002 results for the various plans and the revisions to the underlying assumptions, Marathon recognized an unfavorable additional minimum pension adjustment to other comprehensive income (loss) of $33 million at December 31, 2002. Marathon expects that pension and other postretirement plan expense in 2003 will increase approximately $75 million from 2002 levels, of which approximately $45 million relates to MAP. MAP is required to fund a cash contribution of approximately $35 million to its pension plan in the third quarter of 2003.

As of December 31, 2002, the allocation of pension plan assets approximated 75 percent in equity securities, 22 percent in bonds and 3 percent in other investments, which is consistent with the expectations underlying the rate-of-return assumptions. The average rate-of-return on Marathon’s plan assets achieved by its investment advisor has historically exceeded the current expected rate-of-return.

Management’s Discussion and Analysis of Income and Operations

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