Marathon Oil (MRO)

Purchases related to matching buy/sell transactions decreased $5,247 million in 2007 from 2006 as a result of the change in accounting for matching buy/sell transactions discussed above.

Depreciation, depletion and amortization increased $95 million in 2007 from 2006. The increase in 2007 primarily relates to the addition of the Oil Sands Mining assets recorded as a result of the Western acquisition, increased accretion of asset retirement obligations associated with international E&P properties and increased depreciation related to various refinery improvements in 2006 and 2007, such as our low-sulfur diesel projects.

Selling, general and administrative expenses increased $99 million in 2007 from 2006. The 2007 expense increases were primarily because personnel and staffing costs increased throughout the year as a result of variable compensation arrangements and increased business activity. Contingency accruals also contributed to the 2007 increase.

Purchases related to matching buy/sell transactions decreased $5,247 million in 2007 from 2006 as a result of the change in accounting for matching buy/sell transactions discussed above.

Depreciation, depletion and amortization increased $95 million in 2007 from 2006. The increase in 2007 primarily relates to the addition of the Oil Sands Mining assets recorded as a result of the Western acquisition, increased accretion of asset retirement obligations associated with international E&P properties and increased depreciation related to various refinery improvements in 2006 and 2007, such as our low-sulfur diesel projects.

Selling, general and administrative expenses increased $99 million in 2007 from 2006. The 2007 expense increases were primarily because personnel and staffing costs increased throughout the year as a result of variable compensation arrangements and increased business activity. Contingency accruals also contributed to the 2007 increase.

Purchases related to matching buy/sell transactions decreased $5.247 billion in 2007 from 2006 and $6.968 billion in 2006 from 2005 as a result of the change in accounting for matching buy/sell transactions discussed above.

Depreciation, depletion and amortization increased $95 million in 2007 from 2006 and $215 million in 2006 from 2005. The increase in 2007 primarily relates to the addition of the Oil Sands Mining assets recorded as a result of the Western acquisition, increased accretion of asset retirement obligations associated with international E&P properties and increased depreciation related to various refinery improvements in 2006 and 2007, such as our low-sulfur diesel projects. The increase in 2006 included higher RM&T depreciation expense primarily as a result of the increase in asset value recorded for our acquisition of the 38 percent interest in MPC on June 30, 2005, and the completion of the Detroit refinery expansion in the fourth quarter of 2005.

Selling, general and administrative expenses increased $99 million in 2007 from 2006 and $73 million in 2006 from 2005. The 2007 and 2006 increases were primarily because personnel and staffing costs increased throughout the years as a result of variable compensation arrangements and increased business activity. Contingency accruals also contributed to the 2007 increase. Partially offsetting the 2006 increases were reductions in stock-based compensation expense.

Exploration expenses increased $89 million in 2007 from 2006 and $148 million in 2006 from 2005. Exploration expenses related to dry wells and other write-offs totaled $233 million, $166 million and $111 million in 2007, 2006 and 2005. In 2006, exploration expenses also included $47 million for exiting the Cortland and Empire leases in Nova Scotia.

Net interest and other financial income or costs reflected $41 million of income for 2007, a favorable change of $4 million from 2006. Net interest and other financial income or costs reflected $37 million of income for 2006, a favorable change of $183 million from $146 million of expense in 2005. The favorable changes in 2006 included increased interest income due to higher interest rates and average cash balances, foreign currency exchange gains, adjustments to interest on tax issues and greater capitalized interest. Included in net interest and other financial income or costs are foreign currency transaction gains of $2 million and $16 million for 2007 and 2006, and losses of $17 million for 2005.

Gain on foreign currency derivative instruments in 2007 represents gains on foreign currency derivative instruments entered to limit our exposure to changes in the Canadian dollar exchange rate related to the cash portion of the purchase price for Western. These derivative instruments were settled on October 17, 2007.

Minority interest in income of MPC was eliminated subsequent to our acquisition of the 38 percent interest in MPC on June 30, 2005.

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Table of Contents

Index to Financial Statements

Provision for income taxes decreased $1.121 billion in 2007 from 2006 and increased $2.308 billion in 2006 from 2005, primarily due to the $2.130 billion decrease and the $4.259 billion increase in income from continuing operations before income taxes. The decrease in our effective income tax rate in 2007 was primarily a result of the $193 million benefit of applying the Canadian income tax rate reductions enacted subsequent to our acquisition of Western to the applicable net deferred tax liabilities. These tax rates will decrease from 32 percent to 25 percent by 2012. The increase in our effective income tax rate in 2006 was primarily a result of the income taxes related to our Libya operations, where the statutory income tax rate is in excess of 90 percent. The following is an analysis of the effective income tax rates for continuing operations for 2007, 2006 and 2005. See Note 11 to the consolidated financial statements.

Discontinued operations for 2006 and 2005 reflects the operations of our former Russian oil exploration and production businesses which were sold in June 2006. After-tax gains on the disposal of $8 million and $243 million are also included in discontinued operations for 2007 and 2006. See Note 7 to the consolidated financial statements.

Cumulative effect of change in accounting principle in 2005 was an unfavorable effect of $19 million, net of taxes of $12 million, representing the adoption of Financial Accounting Standards Board Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143,” as of December 31, 2005.

Purchases related to matching buy/sell transactions decreased $5.247 billion in
2007 from 2006 and $6.968 billion in 2006 from 2005 as a result of the change in accounting for matching buy/sell transactions discussed above.

FACE="Times New Roman" SIZE="2">Depreciation, depletion and amortization increased $95 million in 2007 from 2006 and $215 million in 2006 from 2005. The increase in 2007 primarily relates to the addition of the Oil Sands Mining assets
recorded as a result of the Western acquisition, increased accretion of asset retirement obligations associated with international E&P properties and increased depreciation related to various refinery improvements in 2006 and 2007, such as our
low-sulfur diesel projects. The increase in 2006 included higher RM&T depreciation expense primarily as a result of the increase in asset value recorded for our acquisition of the 38 percent interest in MPC on June 30, 2005, and the
completion of the Detroit refinery expansion in the fourth quarter of 2005.

Selling, general and administrative expenses increased
$99 million in 2007 from 2006 and $73 million in 2006 from 2005. The 2007 and 2006 increases were primarily because personnel and staffing costs increased throughout the years as a result of variable compensation arrangements and increased business
activity. Contingency accruals also contributed to the 2007 increase. Partially offsetting the 2006 increases were reductions in stock-based compensation expense.

FACE="Times New Roman" SIZE="2">Exploration expenses increased $89 million in 2007 from 2006 and $148 million in 2006 from 2005. Exploration expenses related to dry wells and other write-offs totaled $233 million, $166 million and $111
million in 2007, 2006 and 2005. In 2006, exploration expenses also included $47 million for exiting the Cortland and Empire leases in Nova Scotia.

FACE="Times New Roman" SIZE="2">Net interest and other financial income or costs reflected $41 million of income for 2007, a favorable change of $4 million from 2006. Net interest and other financial income or costs reflected $37 million of
income for 2006, a favorable change of $183 million from $146 million of expense in 2005. The favorable changes in 2006 included increased interest income due to higher interest rates and average cash balances, foreign currency exchange gains,
adjustments to interest on tax issues and greater capitalized interest. Included in net interest and other financial income or costs are foreign currency transaction gains of $2 million and $16 million for 2007 and 2006, and losses of $17 million
for 2005.

Gain on foreign currency derivative instruments in 2007 represents gains on foreign currency derivative instruments
entered to limit our exposure to changes in the Canadian dollar exchange rate related to the cash portion of the purchase price for Western. These derivative instruments were settled on October 17, 2007.