UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


          [X] Quarterly Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
                  For the quarterly period ended June 30, 2003

                                       OR

              [ ] Transition Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                  For the transition period from _____ to _____



                          Commission File Number 1-3492


                               HALLIBURTON COMPANY

                            (a Delaware Corporation)
                                   75-2677995

                                5 Houston Center
                            1401 McKinney, Suite 2400
                              Houston, Texas 77010
                    (Address of Principal Executive Offices)

                   Telephone Number - Area Code (713) 759-2600

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

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

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

Common stock, par value $2.50 per share:
Outstanding at July 24, 2003 - 437,927,577





                               HALLIBURTON COMPANY

                                      Index

                                                                                                        Page No.
                                                                                                        --------
                                                                                                 

PART I.         FINANCIAL INFORMATION

Item 1.         Financial Statements                                                                        2-33

                -     Condensed Consolidated Statements of Operations                                          2
                -     Condensed Consolidated Balance Sheets                                                    3
                -     Condensed Consolidated Statements of Cash Flows                                          4
                -     Notes to Quarterly Condensed Consolidated Financial Statements                        5-33

Item 2.         Management's Discussion and Analysis of Financial Condition and
                Results of Operations                                                                      34-61

Item 3.         Quantitative and Qualitative Disclosures about Market Risk                                    62

Item 4.         Controls and Procedures                                                                       62

PART II.        OTHER INFORMATION

Item 2.         Changes in Securities and Use of Proceeds                                                     63

Item 4.         Submission of Matters to a Vote of the Security Holders                                    63-64

Item 6.         Exhibits and Reports on Form 8-K                                                           64-66

Signatures                                                                                                    67




PART I.       FINANCIAL INFORMATION
Item 1.  Financial Statements
-----------------------------


                               HALLIBURTON COMPANY
                 Condensed Consolidated Statements of Operations
                                   (Unaudited)
             (Millions of dollars and shares except per share data)
                                                                     Three Months                 Six Months
                                                                    Ended June 30                Ended June 30
                                                               -----------------------------------------------------
                                                                  2003         2002            2003         2002
-------------------------------------------------------------- ------------ ----------------------------------------
                                                                                              
Revenues:
Services                                                        $   3,106    $   2,750       $   5,735    $   5,279
Product sales                                                         476          457             924          917
Equity in earnings of unconsolidated affiliates                        17           28               -           46
--------------------------------------------------------------------------------------------------------------------
Total revenues                                                  $   3,599    $   3,235       $   6,659    $   6,242
--------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services                                                $   3,050    $   3,075       $   5,504    $   5,605
Cost of sales                                                         425          407             829          816
General and administrative                                             80           97             161          150
(Gain) loss on sale of business assets, net                           (27)          61             (48)         (47)
--------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses                              $   3,528    $   3,640       $   6,446    $   6,524
--------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                71         (405)            213         (282)
Interest expense                                                      (25)         (30)            (52)         (62)
Interest income                                                         7           12              15           16
Foreign currency gains (losses), net                                   19           (5)             13          (13)
Other, net                                                              2           (2)              2            2
--------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
     taxes, minority interest, and change in accounting
     principle, net                                                    74         (430)            191         (339)
(Provision) benefit for income taxes                                  (29)          77             (79)          41
Minority interest in net income of subsidiaries, net of tax            (3)          (5)            (11)         (10)
--------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
     before change in accounting principle, net                        42         (358)            101         (308)
Loss from discontinued operations, net of tax
     benefit of $26, $19, $30 and $34                                 (16)        (140)            (24)        (168)
Cumulative effect of change in accounting principle,
     net of tax benefit of $5                                           -            -              (8)           -
--------------------------------------------------------------------------------------------------------------------
Net income (loss)                                               $      26    $    (498)      $      69    $    (476)
====================================================================================================================

Basic income (loss) per share:
Income (loss) from continuing operations before change in
     accounting principle, net                                  $    0.09    $   (0.83)      $    0.23    $   (0.71)
Loss from discontinued operations, net                              (0.03)       (0.32)          (0.05)       (0.39)
Cumulative effect of change in accounting principle, net                -            -           (0.02)           -
--------------------------------------------------------------------------------------------------------------------
Net income (loss)                                               $    0.06    $   (1.15)      $    0.16    $   (1.10)
====================================================================================================================

Diluted income (loss) per share:
Income (loss) from continuing operations before change in
     accounting principle, net                                  $    0.09    $   (0.83)      $    0.23    $   (0.71)
Loss from discontinued operations, net                              (0.03)       (0.32)          (0.05)       (0.39)
Cumulative effect of change in accounting principle, net                -            -           (0.02)           -
--------------------------------------------------------------------------------------------------------------------
Net income (loss)                                               $    0.06    $   (1.15)      $    0.16    $   (1.10)
====================================================================================================================

Cash dividends per share                                        $   0.125    $   0.125       $    0.25    $    0.25
Basic weighted average common shares outstanding                      434          432             434          432
Diluted weighted average common shares outstanding                    436          432             436          432

See notes to quarterly condensed consolidated financial statements.



                                       2




                               HALLIBURTON COMPANY
                      Condensed Consolidated Balance Sheets
                                   (Unaudited)
             (Millions of dollars and shares except per share data)

                                                                   June 30        December 31
                                                                --------------------------------
                                                                     2003            2002
------------------------------------------------------------------------------------------------
                            Assets
                                                                          
Current assets:
Cash and equivalents                                              $    1,859       $   1,107
Receivables:
     Notes and accounts receivable, net                                2,656           2,533
     Unbilled work on uncompleted contracts                            1,010             724
------------------------------------------------------------------------------------------------
Total receivables                                                      3,666           3,257
Inventories                                                              747             734
Current deferred income taxes                                            212             200
Other current assets                                                     291             262
------------------------------------------------------------------------------------------------
Total current assets                                                   6,775           5,560
Property, plant and equipment, net of accumulated
     depreciation of $3,403 and $3,323                                 2,498           2,629
Equity in and advances to related companies                              412             413
Goodwill, net                                                            669             723
Noncurrent deferred income taxes                                         670             607
Insurance for asbestos and silica related liabilities                  2,059           2,059
Other assets, net                                                        939             853
------------------------------------------------------------------------------------------------
Total assets                                                      $   14,022       $  12,844
================================================================================================
             Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable                                          $       16       $      49
Current maturities of long-term debt                                     166             295
Accounts payable                                                       1,056           1,077
Accrued employee compensation and benefits                               353             370
Advanced billings on uncompleted contracts                               715             641
Deferred revenues                                                         86             100
Income taxes payable                                                     129             148
Estimated loss on uncompleted contracts                                  276              82
Other current liabilities                                                520             510
------------------------------------------------------------------------------------------------
Total current liabilities                                              3,317           3,272
Long-term debt                                                         2,374           1,181
Employee compensation and benefits                                       713             756
Asbestos and silica related liabilities                                3,396           3,425
Other liabilities                                                        580             581
Minority interest in consolidated subsidiaries                            83              71
------------------------------------------------------------------------------------------------
Total liabilities                                                     10,463           9,286
================================================================================================
Shareholders' equity:
Common shares, par value $2.50 per share - authorized
     600 shares, issued 457 and 456 shares                             1,142           1,141
Paid-in capital in excess of par value                                   287             293
Deferred compensation                                                    (67)            (75)
Accumulated other comprehensive income                                  (260)           (281)
Retained earnings                                                      3,070           3,110
------------------------------------------------------------------------------------------------
                                                                       4,172           4,188
Less 19 and 20 shares of treasury stock, at cost                         613             630
------------------------------------------------------------------------------------------------
Total shareholders' equity                                             3,559           3,558
------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                        $   14,022       $  12,844
================================================================================================

See notes to quarterly condensed consolidated financial statements.



                                       3




                               HALLIBURTON COMPANY
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
                              (Millions of dollars)

                                                                                            Six Months
                                                                                          Ended June 30
                                                                               -------------------------------------
                                                                                     2003               2002
--------------------------------------------------------------------------------------------------------------------
                                                                                            
Cash flows from operating activities:
Net income (loss)                                                                 $     69        $      (476)
Adjustments to reconcile net income (loss) to net cash from operations:
Loss from discontinued operations, net                                                  24                168
Depreciation, depletion and amortization                                               252                266
Benefit for deferred income taxes                                                      (77)               (73)
Distributions from (advances to) related companies, net of
     equity in (earnings) losses                                                        47                 14
Change in accounting principle, net                                                      8                  -
Gain on sale of assets, net                                                            (53)               (50)
Asbestos and silica related liabilities, net                                           (29)               477
Other non-cash items                                                                    (6)                72
Other changes, net of non-cash items:
Receivables and unbilled work on uncompleted contracts                                (417)               227
Sale of receivables                                                                      -                200
Inventories                                                                            (45)               (24)
Accounts payable                                                                       (50)               169
Other working capital, net                                                             139               (239)
Other operating activities                                                             (75)              (111)
--------------------------------------------------------------------------------------------------------------------
Total cash flows from operating activities                                            (213)               620
--------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures                                                                  (229)              (404)
Sales of property, plant and equipment                                                  49                 54
Dispositions (acquisitions) of businesses, net of cash disposed (acquired)             224                134
Proceeds from sale of securities                                                        57                  -
Investments - restricted cash                                                          (22)              (188)
Other investing activities                                                             (29)               (10)
--------------------------------------------------------------------------------------------------------------------
Total cash flows from investing activities                                              50               (414)
--------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term borrowings, net of offering costs                            1,178                  -
Payments on long-term borrowings                                                      (140)                (4)
Borrowings (repayments) of short-term debt, net                                        (34)                14
Payments of dividends to shareholders                                                 (109)              (109)
Other financing activities                                                              (2)                (2)
--------------------------------------------------------------------------------------------------------------------
Total cash flows from financing activities                                             893               (101)
--------------------------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash                                                 22                (12)
--------------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents                                                       752                 93
Cash and equivalents at beginning of period                                          1,107                290
--------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period                                             $  1,859        $       383
====================================================================================================================

Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest                                                                          $     48        $        53
Income taxes                                                                      $    100        $        98

See notes to quarterly condensed consolidated financial statements.



                                       4


                               HALLIBURTON COMPANY
         Notes to Quarterly Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 1.  Management Representations
         Our  accounting  policies are in  accordance  with  generally  accepted
accounting  principles  in the United  States of  America.  The  preparation  of
financial statements in conformity with accounting principles generally accepted
in the United States of America  requires us to make  estimates and  assumptions
that affect:
              -   the reported  amounts of assets and liabilities and disclosure
                  of contingent  assets and  liabilities  at  the  date  of  the
                  financial statements; and
              -   the reported  amounts of  revenues  and  expenses  during  the
                  reporting period.
Ultimate results could differ from those estimates.
         The accompanying  unaudited condensed consolidated financial statements
were  prepared  using  generally  accepted  accounting  principles  for  interim
financial  information  and the  instructions  to Form 10-Q and Regulation  S-X.
Accordingly,  these  financial  statements  do not  include all  information  or
footnotes  required by generally  accepted  accounting  principles  for complete
financial  statements and should be read together with our 2002 Annual Report on
Form 10-K.  Certain prior period amounts have been reclassified to be consistent
with the current presentation.
         In  our  opinion,  the  condensed   consolidated  financial  statements
included here contain all adjustments  necessary to present fairly our financial
position as of June 30, 2003,  the results of our  operations  for the three and
six months  ended  June 30,  2003 and 2002 and our cash flows for the six months
ended June 30, 2003 and 2002. Such adjustments are of a normal recurring nature.
The results of  operations  for the six months  ended June 30, 2003 and 2002 may
not be indicative of results for the full year.

Note 2.  Business Segment Information
         During the second quarter of 2003, we restructured  our Energy Services
Group  into four  divisions,  which is the basis  for the four  segments  we now
report within the Energy  Services  Group.  We grouped product lines in order to
better align  ourselves  with how our  customers  procure our  services,  and to
capture new business and achieve better  integration,  including  joint research
and development of new products and technologies  and other  synergies.  The new
segments  mirror  the way our  chief  executive  officer  (our  chief  operating
decision  maker)  now  regularly   reviews  the  operating   results,   assesses
performance and allocates  resources.  Our Engineering  and  Construction  Group
(known as KBR) segment remains unchanged.
         All prior period  segment  results have been  restated to reflect these
changes.
         Our  five business  segments  are organized  around how  we  manage the
business. These segments are:
              -   Drilling and Formation Evaluation;
              -   Fluids;
              -   Production Optimization;
              -   Landmark and Other Energy Services; and
              -   Engineering and Construction Group.
         Drilling  and   Formation   Evaluation.   The  Drilling  and  Formation
Evaluation  segment  is  primarily  involved  in  drilling  and  evaluating  the
formations  related to bore-hole  construction and initial oil and gas formation
evaluation.  The products and  services in this segment  incorporate  integrated
technologies,  which offer  synergies  related to drilling  activities  and data
gathering.  The segment  consists of drilling  services,  including  directional
drilling    and    measurement-while-drilling/logging-while-drilling;    logging
services;  and drill bits. Included in this business segment are our Sperry-Sun,
Logging and  Perforating  and Security DBS product  lines.  Also included is our
Mono Pumps business, which we disposed of in the first quarter of 2003.
         Fluids. The Fluids segment focuses on fluid management and technologies
to assist in the drilling and construction of oil and gas wells. Drilling fluids
are used to provide for well  control,  drilling  efficiency,  and as a means of
removing  wellbore  cuttings.  Cementing  services  provide  zonal  isolation to
prevent fluid movement between formations,  ensure a bond to provide support for
the casing, and provide wellbore  reliability.  Our Baroid and Cementing product
lines,  along with our equity method investment in Enventure Global  Technology,
LLC, an expandable casing joint venture, are included in this business segment.

                                       5


         Production Optimization.  The Production Optimization segment primarily
tests, measures and provides means to manage and/or improve well production once
a well is drilled and, in some cases, after it has been producing.  This segment
consists of:
              -   production   enhancement   services   (including   fracturing,
                  acidizing,  coiled tubing,  hydraulic workover,  sand control,
                  and pipeline and process services);
              -   completion  products and services (including  well  completion
                  equipment, slickline and safety systems);
              -   tools   and   testing   services   (including    underbalanced
                  applications   and   tubular   conveyed   perforating  testing
                  services); and
              -   subsea  operations  conducted in our 50% owned company, Subsea
                  7, Inc.
         Landmark and Other Energy Services.  This segment represents integrated
exploration and production software  information  systems,  consulting services,
real-time operations, smartwells, subsea operations not contributed to Subsea 7,
Inc. and non-core  businesses.  Included in this  business  segment are Landmark
Graphics,  Integrated  Solutions,  Real Time  Operations  and our equity  method
investment in WellDynamics  B.V., an intelligent well completions joint venture.
Also included are Wellstream, Bredero-Shaw and European Marine Contractors Ltd.,
all of which have been sold.
         Engineering and  Construction  Group.  The Engineering and Construction
Group provides engineering,  procurement,  construction,  project management and
facilities  operation and maintenance  for oil and gas and other  industrial and
governmental  customers.  The  Engineering  and  Construction  Group  offers the
following types of products and services:
              -   Onshore  operations  consist of engineering  and  construction
                  activities,   including   engineering   and   construction  of
                  liquefied  natural  gas,  ammonia and natural gas plants,  and
                  crude oil refineries;
              -   Offshore operations include offshore deepwater engineering and
                  marine technology and worldwide construction capabilities;
              -   Government   Services   provide    engineering,    operations,
                  construction,   maintenance   and  logistics   activities  for
                  government facilities and installations;
              -   Operations and Maintenance  services include plant operations,
                  construction   maintenance  and  start-up  services  for  both
                  upstream and downstream oil, gas and petrochemical  facilities
                  as well as engineering,  operations, maintenance and logistics
                  services for the power, commercial and industrial markets; and
              -   Infrastructure   provides civil   engineering,   construction,
                  consulting and project management services.

                                       6


         The tables  below present  revenues, operating  income (loss) and total
assets by business segment on a comparable basis.


                                                       Three Months                 Six Months
                                                       Ended June 30               Ended June 30
                                                  ----------------------------------------------------
Millions of dollars                                  2003        2002            2003         2002
------------------------------------------------------------------------------------------------------
                                                                                
Revenues:
Drilling and Formation Evaluation                  $    414     $    413       $    793     $     812
Fluids                                                  518          450            998           903
Production Optimization                                 693          634          1,322         1,246
Landmark and Other Energy Services                      155          259            278           484
------------------------------------------------------------------------------------------------------
     Total Energy Services Group                      1,780        1,756          3,391         3,445
Engineering and Construction Group                    1,819        1,479          3,268         2,797
------------------------------------------------------------------------------------------------------
Total                                              $  3,599     $  3,235       $  6,659     $   6,242
======================================================================================================

Operating income (loss):
Drilling and Formation Evaluation                  $     49     $     42       $    115     $      80
Fluids                                                   68           49            123           100
Production Optimization                                 113          106            183           189
Landmark and Other Energy Services                        5         (127)            (6)         (130)
------------------------------------------------------------------------------------------------------
     Total Energy Services Group                        235           70            415           239
Engineering and Construction Group                     (148)        (450)          (167)         (508)
General corporate                                       (16)         (25)           (35)          (13)
------------------------------------------------------------------------------------------------------
Total                                              $     71     $   (405)      $    213     $    (282)
======================================================================================================




       Millions of dollars                                 June 30, 2003       December 31, 2002
       --------------------------------------------------------------------------------------------
                                                                         
       Total Assets:
       Drilling and Formation Evaluation                   $       1,101          $      1,163
       Fluids                                                        855                   830
       Production Optimization                                     1,425                 1,365
       Landmark and Other Energy Services                          1,124                 1,399
       Shared Energy Services Assets                               1,180                 1,187
       --------------------------------------------------------------------------------------------
            Total Energy Services Group                            5,685                 5,944
       Engineering and Construction Group                          3,773                 3,104
       General Corporate                                           4,564                 3,796
       --------------------------------------------------------------------------------------------
       Total                                               $      14,022          $     12,844
       ============================================================================================

         Within the Energy  Services  Group,  only certain assets are associated
with specific segments. Those assets include receivables,  inventories,  certain
identified  property,  plant and equipment  (including field service equipment),
equity in and advances to related companies and goodwill.  The remaining assets,
such as cash and the remaining property,  plant and equipment  (including shared
facilities)  are not  associated  with a segment but are considered to be shared
among the segments within the Energy Services Group.
         Intersegment revenues are immaterial.

Note 3.  Dispositions
         Halliburton Measurement Systems. In May 2003, we sold certain assets of
Halliburton  Measurement  Systems,  which provides flow measurement and sampling
systems,  to NuFlo  Technologies,  Inc. for  approximately  $33 million in cash,
subject to post-closing adjustments.  The pretax gain on the sale of Halliburton
Measurement  Systems assets was $24 million ($14 million after tax, or $0.03 per
diluted share) and is included in our Production Optimization segment.
         Wellstream.  In  March  2003,  we  sold  the  assets  relating  to  our
Wellstream  business,  a global provider of flexible pipe products,  systems and
solutions to Candover  Partners  Ltd. for $136 million in cash.  The assets sold
included  manufacturing  plants in Newcastle on the Tyne,  United  Kingdom,  and
Panama City,  Florida,  as well as certain  assets and contracts in Brazil.  The
transaction  resulted in a pretax loss of $15 million ($12 million after tax, or

                                       7


$0.03 per diluted  share),  which is included in our  Landmark  and Other Energy
Services segment. Included in the pretax loss is the write-off of the cumulative
translation  adjustment  related to Wellstream of approximately $9 million.  The
cumulative  translation  adjustment could not be tax benefited and therefore the
effective tax benefit for this loss on disposition was only 20%.
         Mono  Pumps.  In  January  2003,  we sold our Mono  Pumps  business  to
National Oilwell,  Inc. (NYSE: NOI). The sale price of approximately $88 million
was paid with $23  million in cash and 3.2 million  shares of  National  Oilwell
common stock,  which were valued at $65 million on January 15, 2003. We recorded
a pretax gain of $36 million ($21 million after tax, or $0.05 per diluted share)
on the sale, which is included in our Drilling and Formation Evaluation segment.
Included  in the pretax  gain is the  write-off  of the  cumulative  translation
adjustment  related to Mono Pumps of  approximately  $5 million.  The cumulative
translation  adjustment  could not be tax  benefited and therefore the effective
tax rate for this  disposition was 42%. In February 2003, we sold 2.5 million of
our 3.2 million  shares of the  National  Oilwell  common stock for $52 million,
which resulted in a gain of $2 million pretax, or $1 million after tax, that was
recorded in "Other, net".
         Subsea 7 formation.  In May 2002, we contributed  substantially  all of
our Halliburton  Subsea assets,  with a book value of approximately $82 million,
to a newly formed company,  Subsea 7, Inc. The contributed  assets were recorded
by the new company at a fair value of approximately $94 million. The $12 million
difference is being amortized over ten years  representing the average remaining
useful life of the assets contributed.  We own 50% of Subsea 7, Inc. and account
for this  investment  using the  equity  method in our  Production  Optimization
segment. The remaining 50% is owned by DSND Subsea ASA.
         Bredero-Shaw.  In the second quarter of 2002, we incurred an impairment
charge of $61 million  ($0.14 per diluted  share after tax)  related to our then
pending sale of Bredero-Shaw. On September 30, 2002, we sold our 50% interest in
the  Bredero-Shaw  joint  venture to our partner  ShawCor Ltd. The sale price of
$149 million was  comprised  of $53 million in cash,  a  short-term  note of $25
million and 7.7 million of ShawCor Class A Subordinate shares. Consequently,  we
recorded a 2002 third quarter  pretax loss on the sale of $18 million,  or $0.04
per diluted share after tax, which is reflected in our Landmark and Other Energy
Services  segment.   Included  in  this  loss  was  $15  million  of  cumulative
translation  adjustment  loss which was  realized  upon the  disposition  of our
investment  in  Bredero-Shaw.  During the 2002  fourth  quarter,  we recorded in
"Other, net" a $9 million pretax loss on the sale of ShawCor shares.
         European  Marine  Contractors  Ltd.  In January  2002,  we sold our 50%
interest in European Marine  Contractors Ltd., an  unconsolidated  joint venture
reported  within our Landmark and Other Energy  Services,  to our joint  venture
partner,  Saipem.  At the date of sale,  we received  $115 million in cash and a
contingent  payment option valued at $16 million,  resulting in a pretax gain of
$108 million.  The  contingent  payment  option was based on a formula linked to
performance of the Oil Service Index.  In February 2002, we exercised our option
and received an additional  $19 million and recorded a pretax gain of $3 million
in "Other,  net" in the  statement of  operations as a result of the increase in
value of this option.

Note 4.  Discontinued Operations
         During  the  second  quarter of 2003,  we  recorded a pretax  loss from
discontinued  operations of $42 million. This loss reflects a $30 million charge
for the debtor-in-possession financing provided to Harbison-Walker in connection
with their  Chapter 11 bankruptcy  proceeding  which was funded on July 31, 2003
and is expected to be forgiven by us on the earlier of the  effective  date of a
plan of  reorganization  for DII  Industries or the effective  date of a plan of
reorganization for  Harbison-Walker  acceptable to DII Industries.  In addition,
discontinued  operations  included  professional  fees  associated  with the due
diligence and other aspects of the proposed settlement for asbestos  liabilities
offset by a release of  environmental  and legal accruals related to indemnities
associated  with our 2001  disposition  of Dresser  Equipment  Group that are no
longer required.
         During the first  quarter of  2003,  we recorded  as pretax  expense to
discontinued  operations $12 million for  professional  fees associated with due
diligence and other aspects of the proposed  settlement  for asbestos and silica
liabilities.

                                       8


         During the second  quarter of 2002,  in  connection  with our  asbestos
econometric  study, we recorded a pretax expense of $153 million to discontinued
operations for existing and future  asbestos claims and defense costs related to
businesses disposed of, net of anticipated insurance recoveries. See Note 11. We
also recorded pretax expense of $6 million  associated with the  Harbison-Walker
bankruptcy filing.
         During the first quarter of  2002,   we recorded  as pretax  expense to
discontinued operations $3 million for asbestos claims and defense costs related
to businesses disposed of, net of anticipated  insurance recoveries for asbestos
claims.  We also recorded pretax  expense for a $40 million  payment  associated
with the Harbison-Walker bankruptcy filing.

Note 5.  Income (Loss) Per Share


                                                                 Three Months               Six Months
                                                                Ended June 30             Ended June 30
Millions of dollars and shares except                      ---------------------------------------------------
per share data                                                2003         2002         2003         2002
--------------------------------------------------------------------------------------------------------------
                                                                                      
Income (loss) from continuing operations before
     change in accounting principle, net                    $     42     $   (358)    $    101    $   (308)
==============================================================================================================
Basic weighted average common shares outstanding                 434          432          434         432
Effect of common stock equivalents                                 2            -            2           -
--------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding               436          432          436         432
==============================================================================================================

Income (loss) per common share from continuing
     operations before change in accounting
     principle, net:
Basic                                                       $   0.09     $  (0.83)    $   0.23    $  (0.71)
==============================================================================================================
Diluted                                                     $   0.09     $  (0.83)    $   0.23    $  (0.71)
==============================================================================================================

         Basic income  (loss) per common share is based on the weighted  average
number of common shares outstanding during the period. Diluted income (loss) per
common share includes  additional common shares that would have been outstanding
if potential common shares with a dilutive effect had been issued. Excluded from
the  computation  of  diluted  income  (loss) per  common  share are  options to
purchase 15 million  shares of common  stock which were  outstanding  during the
three and six months ended June 30, 2003. These options were outstanding  during
the applicable  period,  but were excluded because the option exercise price was
greater than the average market price of the common shares.  The shares issuable
upon  conversion of the 3.125%  convertible  senior notes due 2023 (see Note 15)
were not included in the  computation  of diluted income (loss) per common share
since the conditions for conversion had not been met as of June 30, 2003.
         For the three and the six months ended June 30, 2002, we used the basic
weighted  average shares in the calculation of diluted loss per common share, as
the effect of the common stock equivalents (which totaled two million shares for
each  period)  would be  anti-dilutive  based upon the net loss from  continuing
operations.

Note 6.  Comprehensive Income (Loss)
         The components of other comprehensive  income adjustments to net income
include the following:


                                                             Three Months                  Six Months
                                                             Ended June 30               Ended June 30
                                                      --------------------------------------------------------
Millions of dollars                                       2003           2002          2003          2002
--------------------------------------------------------------------------------------------------------------
                                                                                       
Net income (loss)                                       $     26       $   (498)     $     69      $   (476)
Cumulative translation adjustment                             25             32            12            35
Realization of losses included in net income                   1              -            15             -
--------------------------------------------------------------------------------------------------------------
Net cumulative translation adjustment                         26             32            27            35
Pension liability adjustments                                 (7)             -            (7)            -
Unrealized losses on investments and derivatives               2              -             1             -
--------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss)                       $     47       $   (466)     $     90      $   (441)
==============================================================================================================


                                       9


         Accumulated other comprehensive income consisted of the following:


                                                        June 30        December 31
                                                     --------------------------------
Millions of dollars                                       2003            2002
-------------------------------------------------------------------------------------
                                                                  
Cumulative translation adjustments                      $    (94)       $   (121)
Pension liability adjustments                               (164)           (157)
Unrealized losses on investments and derivatives              (2)             (3)
-------------------------------------------------------------------------------------
Total accumulated other comprehensive income            $   (260)       $   (281)
=====================================================================================

Note 7.  Restricted Cash
         At   June 30, 2003 we had restricted  cash of $212 million  included in
"Other assets, net".  Restricted cash consists of:
              -   $108 million deposit that collateralizes a bond  for a  patent
                  infringement judgment on appeal;
              -   $78 million as collateral for potential future insurance claim
                  reimbursements; and
              -   $26 million  primarily related  to cash  collateral agreements
                  for outstanding letters of credit for various projects.
         At December 31, 2002 we had restricted cash of $190 million, consisting
of similar items.

Note 8.  Receivables
         Included  in notes  and  accounts  receivable  are notes  with  varying
interest rates totaling $23 million at June 30, 2003 and $53 million at December
31, 2002.
         On April 15,  2002,  we  entered  into an  agreement  to sell  accounts
receivable to a bankruptcy-remote  limited-purpose funding subsidiary. Under the
terms of the agreement,  new receivables are added on a continuous  basis to the
pool of receivables, and collections reduce previously sold accounts receivable.
This funding  subsidiary sells an undivided  ownership  interest in this pool of
receivables to entities  managed by unaffiliated  financial  institutions  under
another agreement. Sales to the funding subsidiary have been structured as "true
sales" under applicable  bankruptcy  laws. The assets of the funding  subsidiary
are not  available  to pay any  creditors  of  ours  or of our  subsidiaries  or
affiliates,  until such time as the agreement with the unaffiliated companies is
terminated  following  sufficient   collections  to  liquidate  all  outstanding
undivided  ownership  interests.  The funding subsidiary retains the interest in
the pool of receivables that are not sold to the  unaffiliated  companies and is
fully consolidated and reported in our financial statements.
         The amount of undivided  interests  which can be sold under the program
varies based on the amount of eligible Energy Services Group  receivables in the
pool at any given time and other factors.  The funding subsidiary initially sold
a $200 million undivided ownership interest to the unaffiliated  companies,  and
may from time to time sell additional undivided ownership  interests.  The total
amount outstanding under this facility was $180 million as of June 30, 2003. The
undivided ownership interest in the pool of receivables sold to the unaffiliated
companies is reflected as a reduction of accounts receivable in our consolidated
balance sheets.  In July 2003, the balance  outstanding  under this facility was
reduced to zero.

Note 9.  Inventories
         Inventories  are stated at the lower of cost or market.  We manufacture
in the United States certain finished  products and parts  inventories for drill
bits,  completion  products  and bulk  materials  that are  recorded  using  the
last-in,  first-out  method and  totaled  $45  million at June 30,  2003 and $43
million at December  31, 2002.  If the average cost method had been used,  total
inventories  would have been $18 million  higher than  reported at June 30, 2003
and $17 million higher than reported at December 31, 2002.
         Over 90% of remaining inventory is recorded on the average cost method,
with the remainder on the first-in, first-out method.

                                       10


         Inventories at  June 30, 2003 and December 31, 2002 are composed of the
following:


                                     June 30       December 31
                                 --------------------------------
Millions of dollars                   2003             2002
-----------------------------------------------------------------
                                             
Finished products and parts          $  505           $   545
Raw materials and supplies              179               141
Work in process                          63                48
-----------------------------------------------------------------
Total                                $  747           $   734
=================================================================

Note 10.  Long-Term Construction Contracts and Unapproved Claims
         Revenues from  engineering and  construction  contracts are reported on
the percentage of completion method of accounting using measurements of progress
toward  completion  appropriate  for the work  performed.  Progress is generally
based  upon  physical  progress,  man-hours  or costs  incurred  based  upon the
appropriate method for the type of job.
         Billing  practices  for  engineering  and  construction   projects  are
governed  by the  contract  terms of each  project  based upon  costs  incurred,
achievement of milestones or pre-agreed  schedules.  Billings do not necessarily
correlate with revenues  recognized under the percentage of completion method of
accounting.  Billings in excess of recognized revenues are recorded in "Advanced
billings on  uncompleted  contracts".  When  billings  are less than  recognized
revenues,   the   difference  is  recorded  in  "Unbilled  work  on  uncompleted
contracts".  With the  exception  of claims and change  orders  which are in the
process of being  negotiated  with  customers,  unbilled work is usually  billed
during  normal  billing  processes  following  achievement  of  the  contractual
requirements.
         Recording  of profits  and losses on  long-term  contracts  requires an
estimate  of the  total  profit  or loss  over the life of each  contract.  This
estimate requires  consideration of contract  revenue,  change orders and claims
reduced by costs incurred and estimated costs to complete. Anticipated losses on
contracts are recorded in full in the period they become  evident.  Except where
we, because of  uncertainties  in the estimation of costs on a limited number of
projects,  deem it prudent to defer income  recognition,  we do not delay income
recognition until projects have reached a specified percentage of completion. We
have not done so during the  periods  presented,  although  we  followed  such a
practice  for some  offshore  projects  prior to the periods  presented  herein.
Otherwise, profits are recorded from the commencement date of the contract based
upon the total estimated  contract profit  multiplied by the current  percentage
complete for the contract.
         When  calculating  the  amount of total  profit or loss on a  long-term
contract,  we include unapproved claims as revenue when the collection is deemed
probable based upon the four criteria for  recognizing  unapproved  claims under
the American  Institute of Certified  Public  Accountants  Statement of Position
81-1,   "Accounting   for   Performance   of   Construction-Type   and   Certain
Production-Type  Contracts".  Including  unapproved  claims in this  calculation
increases  the  operating  income (or  reduces  the  operating  loss) that would
otherwise be recorded without  consideration of the probable  unapproved claims.
Unapproved  claims are  recorded to the extent of costs  incurred and include no
profit element.  In  substantially  all cases,  the probable  unapproved  claims
included in determining  contract  profit or loss are less than the actual claim
that will be or has been presented to the customer.
         When recording the revenue and the associated  unbilled  receivable for
unapproved  claims, we only accrue an amount up to the costs incurred related to
probable  unapproved  claims.  The  difference  between the probable  unapproved
claims  included  in  determining  contract  profit  or loss  and  the  probable
unapproved claims recorded in "Unbilled work on uncompleted  contracts"  relates
to forecasted  costs which have not yet been incurred.  The amounts  included in
determining the profit or loss on contracts, and the amounts booked to "Unbilled
work on uncompleted contracts" for each period are as follows:


                                                  June 30       December 31
                                              --------------------------------
Millions of dollars                                2003             2002
------------------------------------------------------------------------------
                                                          
Probable unapproved claims (included
    in determining contract profit or loss)       $   335          $   279
Unapproved claims in unbilled work on
    uncompleted contracts                         $   285          $   210
==============================================================================


                                       11


         Our claims at June 30, 2003 are listed in the table above. These claims
relate to ten contracts,  most of which are complete or substantially  complete.
We are actively engaged in claims  negotiation  with the customers.  The largest
claim relates to the  Barracuda-Caratinga  contract which was  approximately 75%
complete  at  June  30,  2003.  The  probable   unapproved  claims  included  in
determining  this  contract's  loss were $182  million  at June 30,  2003 and at
December 31, 2002.  As most of the claim  elements for this contract will likely
not be settled within one year,  related amounts in unbilled work on uncompleted
contracts of $134 million at June 30, 2003 and $115 million at December 31, 2002
included in the table above have been  recorded to  long-term  unbilled  work on
uncompleted  contracts  which is included in "Other assets,  net" on the balance
sheet.  All other  claims  included  in the table  above have been  recorded  to
"Unbilled work on  uncompleted  contracts"  included in the "Total  receivables"
amount on the balance sheet.
         A summary of  unapproved  claims  activity for the three and six months
ended June 30, 2003 is as follows:


                                        Total Probable Unapproved         Probable Unapproved Claims
                                                  Claims                         Unbilled Work
                                     --------------------------------------------------------------------
                                       Three Months      Six Months      Three Months      Six Months
                                          Ended            Ended            Ended             Ended
Millions of dollars                   June 30, 2003    June 30, 2003    June 30, 2003     June 30, 2003
---------------------------------------------------------------------------------------------------------
                                                                              
Beginning balance                       $    298           $   279         $  237            $   210
    Additions                                 42                62             41                 61
    Costs incurred during period               -                 -             12                 20
    Other                                     (5)               (6)            (5)                (6)
---------------------------------------------------------------------------------------------------------
Ending balance                          $    335           $   335         $  285            $   285
=========================================================================================================

         In addition,  our  unconsolidated  related  companies  include probable
unapproved claims as revenue to determine the amount of profit or loss for their
contracts.  Our "Equity in earnings of unconsolidated  affiliates"  includes our
equity  percentage  of unapproved  claims  related  to  unconsolidated  projects
totaling $11 million at June 30, 2003 and $9 million at December 31, 2002.

Note 11.  Commitments and Contingencies - Asbestos and Silica
         Asbestos  litigation.  Several of our  subsidiaries,  particularly  DII
Industries, LLC (DII Industries) and Kellogg Brown & Root, Inc. (Kellogg Brown &
Root),  are  defendants  in a large  number of  asbestos-related  lawsuits.  The
plaintiffs  allege  injury as a result  of  exposure  to  asbestos  in  products
manufactured or sold by former  divisions of DII Industries or in materials used
in construction or maintenance projects of Kellogg Brown & Root.
         These claims are in three general categories:
              -   refractory claims;
              -   other DII Industries claims; and
              -   construction claims.
         Refractory  claims.  Asbestos  was used in a small  number of  products
manufactured  or  sold  by  Harbison-Walker   Refractories  Company,  which  DII
Industries acquired in 1967. The Harbison-Walker  operations were conducted as a
division of DII  Industries  (then named Dresser  Industries,  Inc.) until those
operations  were  transferred  to  another   then-existing   subsidiary  of  DII
Industries in preparation  for a spin-off.  Harbison-Walker  was spun-off by DII
Industries in July 1992.  At that time,  Harbison-Walker  assumed  liability for
asbestos  claims filed after the spin-off and it agreed to defend and  indemnify
DII  Industries  from  liability  for  those  claims,  although  DII  Industries
continues  to have direct  liability  to tort  claimants  for all post  spin-off
refractory  asbestos  claims.  DII Industries  retained  responsibility  for all
asbestos claims pending as of the date of the spin-off.  The agreement governing
the spin-off  provided that  Harbison-Walker  would have the right to access DII
Industries historic insurance coverage for the asbestos-related liabilities that
Harbison-Walker assumed in the spin-off.  After the spin-off, DII Industries and
Harbison-Walker jointly negotiated and entered into coverage-in-place agreements
with a number of insurance  companies that had issued historic general liability
insurance policies which both DII Industries and  Harbison-Walker  had the right
to access for,  among other  things,  bodily injury  occurring  between 1963 and
1985.  These  coverage-in-place  agreements  provide  for the payment of defense
costs,  settlements  and court  judgments  paid to resolve  refractory  asbestos
claims.

                                       12


         As  Harbison-Walker's  financial  condition  worsened  in late 2000 and
2001,  Harbison-Walker  began  agreeing  to pay more in  settlement  of the post
spin-off  refractory  claims  than it  historically  had paid.  These  increased
settlement amounts led to  Harbison-Walker  making greater demands on the shared
insurance  asset. By July 2001, DII Industries  determined that the demands that
Harbison-Walker  was making on the shared insurance policies were not acceptable
to DII Industries and that Harbison-Walker probably would not be able to fulfill
its indemnification  obligation to DII Industries.  Accordingly,  DII Industries
took up the defense of unsettled post spin-off refractory claims that name it as
a defendant in order to prevent  Harbison-Walker from unnecessarily  eroding the
insurance coverage both companies access for these claims.  These claims are now
stayed in the Harbison-Walker bankruptcy proceeding.
         As of June 30, 2003, there were approximately 6,000 open and unresolved
pre-spin-off refractory claims against DII Industries.  In addition,  there were
approximately  153,000  post  spin-off  claims  that  name DII  Industries  as a
defendant.
         Other  DII  Industries   claims.  As  of  June  30,  2003,  there  were
approximately 185,000 open and unresolved claims alleging injuries from asbestos
used  in  other  products  formerly   manufactured  by  DII  Industries  or  its
predecessors. Most of these claims involve gaskets and packing materials used in
pumps and other industrial products.
         Construction  claims.  Our Engineering and Construction  Group includes
engineering and construction  businesses  formerly  operated by The M.W. Kellogg
Company and Brown & Root, Inc., now combined as Kellogg Brown & Root. As of June
30, 2003, there were  approximately  81,000 open and unresolved  claims alleging
injuries  from  asbestos  in  materials  used in  construction  and  maintenance
projects, most of which were conducted by Brown & Root, Inc. Approximately 6,000
of these claims are asserted against The M.W.  Kellogg Company.  We believe that
Kellogg  Brown & Root has a good defense to these  claims,  and a prior owner of
The  M.W.   Kellogg  Company   provides  Kellogg  Brown  &  Root  a  contractual
indemnification for claims against The M.W. Kellogg Company.
         Harbison-Walker   Chapter  11   bankruptcy.   On  February   14,  2002,
Harbison-Walker  filed a voluntary petition for reorganization  under Chapter 11
of the United States  Bankruptcy  Code in the  Bankruptcy  Court in  Pittsburgh,
Pennsylvania.  In its initial bankruptcy-related  filings,  Harbison-Walker said
that it would seek to utilize  Sections 524(g) and 105 of the Bankruptcy Code to
propose and seek confirmation of a plan of reorganization that would provide for
distributions  for all  legitimate,  pending and future asbestos claims asserted
directly  against  Harbison-Walker  or asserted against DII Industries for which
Harbison-Walker is required to indemnify and defend DII Industries.
         Harbison-Walker's failure to fulfill its indemnity obligations, and its
erosion  of  insurance  coverage  shared  with  DII  Industries,   required  DII
Industries to assist  Harbison-Walker  in its bankruptcy  proceeding in order to
protect the shared insurance from dissipation.  At the time that Harbison-Walker
filed its  bankruptcy,  DII  Industries  agreed to provide up to $35  million of
debtor-in-possession  financing  to  Harbison-Walker  during the pendency of the
Chapter 11 proceeding, of which $5 million was advanced during the first quarter
of 2002.  Halliburton  funded the  remaining  $30 million on July 31,  2003.  We
recorded a pretax charge of  $30 million in "Loss from discontinued  operations"
in our condensed  consolidated  statements of operations  for the second quarter
2003, as the  debtor-in-possession financing  is  expected to be forgiven on the
earlier of the effective date of a plan of reorganization  for DII Industries or
the effective date of a plan of reorganization for Harbison-Walker acceptable to
DII  Industries.  On February 14, 2002, in accordance with the terms of a letter
agreement,  DII Industries paid $40 million to  Harbison-Walker's  United States
parent holding  company,  RHI  Refractories  Holding  Company.  This payment was
charged to  discontinued  operations  in our  financial  statements in the first
quarter of 2002.
         The terms of the letter agreement also require DII Industries to pay to
RHI  Refractories  an  additional  $35  million if a plan of  reorganization  is
proposed in the Harbison-Walker  bankruptcy  proceedings,  and an additional $85
million if a plan is confirmed in the Harbison-Walker bankruptcy proceedings, in
each case  acceptable  to DII  Industries  in its sole  discretion.  The  letter
agreement  provides  that a plan  acceptable to DII  Industries  must include an
injunction  channeling  to a Section  524(g)/105  trust all  present  and future
asbestos  claims  against  DII  Industries  arising  out of the  Harbison-Walker
business  or  other  DII  Industries'   businesses  that  share  insurance  with
Harbison-Walker.

                                       13


         Harbison-Walker  filed a proposed  plan of  reorganization  on July 31,
2003.  However,  the  proposed  plan does not provide  for a Section  524(g)/105
injunction for the benefit of DII Industries and other DII Industries businesses
that share insurance with Harbison-Walker,  and DII Industries has not consented
to the plan.  Although  possible,  at this time we do not believe it likely that
Harbison-Walker will propose or will be able to confirm a plan of reorganization
in its bankruptcy  proceeding  that is acceptable to DII  Industries  within the
meaning of the letter agreement with RHI Refractories.
         In  general,  in order  for a  Harbison-Walker  plan of  reorganization
involving a Section 524(g)/105 trust to be confirmed, the plan would need, among
other things,  to be structured to provide  substantially  similar  treatment to
current  and future  asbestos  claimants  and the  creation  of the trust  would
require  the  approval  of  75%  of  those   asbestos   claimant   creditors  of
Harbison-Walker  voting on the plan. A plan also would be subject to  completion
of  negotiations of material terms and definitive  plan  documentation  with the
asbestos claimants committee, a futures representative for asbestos claimants in
the  Harbison-Walker  bankruptcy  cases  and  DII  Industries.  There  can be no
assurance that any plan proposed by Harbison-Walker  would be structured to meet
the  requirements  for  obtaining an injunction  or that  Harbison-Walker  could
obtain the necessary approval.
         As an  alternative,  DII  Industries  has entered into a settlement  in
principle  with  Harbison-Walker  which would resolve  substantially  all of the
issues  between them.  This  agreement is subject to  negotiation  of definitive
documentation  and court  approval  in  Harbison-Walker's  bankruptcy  case.  If
approved by the court in Harbison-Walker's bankruptcy case, this agreement would
provide for:
              -   channeling  of  asbestos  and silica  personal  injury  claims
                  against  Harbison-Walker  and certain of its affiliates to the
                  trusts created in the Chapter 11 cases being  contemplated for
                  DII Industries and Kellogg Brown & Root;
              -   release by Harbison-Walker and its affiliates of any rights in
                  insurance  shared with DII  Industries  on  occurrence  of the
                  effective  date  of  the  plan  of   reorganization   for  DII
                  Industries;
              -   release  by DII  Industries of any  right to be indemnified by
                  Harbison-Walker for asbestos or silica personal injury claims;
              -   forgiveness  by DII  Industries  of  all of  Harbison-Walker's
                  obligations under the debtor-in-possession  financing provided
                  by DII  Industries on the earlier of the  effective  date of a
                  plan of  reorganization  for DII  Industries  or the effective
                  date  of  a  plan  of   reorganization   for   Harbison-Walker
                  acceptable to DII Industries;
              -   purchase by DII  Industries of  Harbison-Walker's  outstanding
                  insurance  receivables  for  an  amount  of  approximately $50
                  million on the earliest of the  effective date  of a  plan  of
                  reorganization  for  DII Industries, the  effective  date of a
                  plan of reorganization for Harbison-Walker  acceptable  to DII
                  Industries or December 31, 2003. It is expected that a portion
                  of   this    receivable   would   require    a   reserve   for
                  uncollectibility  due  to  the  insolvency  of  the  insurance
                  carriers.  This  receivable  and  related  allowance  will  be
                  recorded in the third quarter 2003;
              -   guarantee of  the  insurance   receivable  purchase  price  by
                  Halliburton on a subordinated basis; and
              -   negotiation  between  the  parties  on  a   mutually-agreeable
                  structure for resolving other products or tort claims.
         We do not believe it probable that DII Industries  will be obligated to
make  either of the  additional  $35  million  or $85  million  payments  to RHI
Refractories  described  above  because  the  plan of  reorganization  filed  by
Harbison-Walker  on July 31,  2003 in its  bankruptcy  proceeding  would not, if
confirmed,  create a Section 524(g) and/or 105 channeling injunction in favor of
DII Industries and because the plan of reorganization  filed by  Harbison-Walker
is not acceptable to DII Industries  within the meaning of the February 14, 2002
letter agreement.  RHI A.G., the ultimate  corporate parent of RHI Refractories,
has indicated  that it believes  otherwise, and has  announced an intent to take
legal action against us to recover $35 million they believe is presently  owing.
On  August  8,  2003,  we  filed a  declaratory  judgment  lawsuit  against  RHI
Refractories  in the  District  Court of Harris  County,  Texas,  80th  Judicial
District  seeking  a  declaration  from  the  court  that  we  do  not  owe  RHI
Refractories any money pursuant to the letter agreement.

                                       14


         In  connection  with the  Chapter  11  filing by  Harbison-Walker,  the
Bankruptcy  Court on February  14, 2002  issued a  temporary  restraining  order
staying all further  litigation of more than 200,000  asbestos claims  currently
pending against DII Industries in numerous courts  throughout the United States.
The period of the stay  contained in the  temporary  restraining  order has been
extended  through  September  30, 2003. At present,  the stay will  terminate at
close of  business on  September  30,  2003,  but DII  Industries  does have the
ability,  provided  the  asbestos  claimants  committee  in the  Harbison-Walker
bankruptcy agrees, to request that the Court extend the stay further. Currently,
there is no assurance  that a stay will remain in effect  beyond  September  30,
2003, that a plan of reorganization  will be confirmed for  Harbison-Walker,  or
that any plan that is confirmed  will provide relief to DII  Industries.  Should
the stay expire on September 30, 2003, the  Bankruptcy  Court  established  that
discovery on the claims that had been stayed cannot begin until November 1, 2003
and that trials on any of the claims that had been stayed cannot commence before
January 1, 2004.
         The stayed  asbestos  claims are those  covered by  insurance  that DII
Industries and Harbison-Walker each access to pay defense costs, settlements and
judgments  attributable to both refractory and  non-refractory  asbestos claims.
The stayed claims include  approximately  153,000 post-1992 spin-off  refractory
claims,  6,000  pre-spin-off  refractory claims and approximately  135,000 other
types of asbestos claims pending against DII Industries. Approximately 51,000 of
the claims in the third category are claims made against DII Industries based on
more than one ground for  recovery  and the stay affects only the portion of the
claim  covered  by the  shared  insurance.  The stay  prevents  litigation  from
proceeding  while the stay is in effect  and also  prohibits  the  filing of new
claims.  One of the  purposes  of the stay is to allow  Harbison-Walker  and DII
Industries time to develop and propose a plan of reorganization.
         Asbestos insurance coverage.  DII Industries has substantial  insurance
for  reimbursement  for portions of the costs  incurred  defending  asbestos and
silica  claims,  as well as amounts paid to settle  claims and court  judgments.
This  coverage is provided by a large  number of insurance  policies  written by
dozens of insurance companies. The insurance companies wrote the coverage over a
period  of more  than 30  years  for DII  Industries,  its  predecessors  or its
subsidiaries  and their  predecessors.  Large  amounts of this  coverage are now
subject to  coverage-in-place  agreements that resolve issues concerning amounts
and terms of coverage.  The amount of insurance  available to DII Industries and
its  subsidiaries  depends  on the nature and time of the  alleged  exposure  to
asbestos or silica, the specific  subsidiary against which an asbestos or silica
claim is asserted and other factors.
         Refractory  claims  insurance.  DII Industries has  approximately  $2.1
billion in aggregate  limits of insurance  coverage for refractory  asbestos and
silica  claims,  of which over  one-half is with  Equitas or other  London-based
insurance companies. Most of this insurance is shared with Harbison-Walker. Many
of the issues  relating to the majority of this  coverage  have been resolved by
coverage-in-place agreements  with dozens  of companies,  including  Equitas and
other  London-based  insurance  companies.   Coverage-in-place   agreements  are
settlement  agreements  between  policyholders  and the insurers  specifying the
terms and  conditions  under  which  coverage  will be  applied  as  claims  are
presented for payment.  These  agreements in an asbestos  claims  context govern
such things as what events will be deemed to trigger coverage, how liability for
a claim will be allocated  among insurers and what  procedures the  policyholder
must follow in order to obligate  the insurer to pay claims.  Beginning  in 2001
however,  Equitas and other London-based  companies have attempted to impose new
restrictive  documentation  requirements  on DII Industries and other  insureds.
Equitas  and  the  other  London-based   companies  have  stated  that  the  new
requirements  are part of an effort to limit payment of settlements to claimants
who are truly  impaired by exposure to asbestos  and can identify the product or
premises that caused their exposure.
         On March 21, 2002, Harbison-Walker filed a lawsuit in the United States
Bankruptcy  Court for the  Western  District of  Pennsylvania  in its Chapter 11
bankruptcy  proceeding.  This lawsuit is substantially similar to DII Industries
lawsuit  filed in Texas State Court in 2001 and seeks,  among  other  relief,  a
determination  as to the rights of DII  Industries  and  Harbison-Walker  to the
shared  general  liability  insurance.  The lawsuit also seeks  damages  against
specific  insurers  for  breach of  contract  and bad faith,  and a  declaratory
judgment  concerning  the  insurers'  obligations  under the  shared  insurance.
Although DII Industries is also a defendant in this lawsuit, it has asserted its
own claim to  coverage  under  the  shared  insurance  and is  cooperating  with
Harbison-Walker  to secure both companies' rights to the shared  insurance.  The
Bankruptcy  Court  has  ordered  the  parties  to  this  lawsuit  to  engage  in
non-binding mediation. The first mediation session was held on July 26, 2002 and
additional  sessions  have  since  taken  place  and  further  sessions  will be
scheduled to take place, provided the Bankruptcy Court's mediation order remains

                                       15


in effect.  Given the early stages of these negotiations,  DII Industries cannot
predict whether a negotiated resolution of this dispute will occur or, if such a
resolution does occur, the precise terms of such a resolution.
         Prior  to the  Harbison-Walker  bankruptcy,  on  August  7,  2001,  DII
Industries  filed a lawsuit in Dallas County,  Texas,  against a number of these
insurance   companies   asserting  DII  Industries   rights  under  an  existing
coverage-in-place  agreement  and under  insurance  policies  not yet subject to
coverage-in-place   agreements.  The  coverage-in-place   agreements  allow  DII
Industries  to enter  into  settlements  for  small  amounts  without  requiring
claimants to produce detailed  documentation  to support their claims,  when DII
Industries believes the settlements are an effective claims management strategy.
DII Industries believes that the new documentation requirements are inconsistent
with  the  current  coverage-in-place  agreements  and  are  unenforceable.  The
insurance  companies that DII Industries has sued have not refused to pay larger
claim settlements  where  documentation is obtained or where court judgments are
entered.
         On May 10, 2002,  the  London-based  insuring  entities  and  companies
removed DII  Industries'  Dallas  County State Court Action to the United States
District  Court for the Northern  District of Texas  alleging that federal court
jurisdiction  existed over the case because it is related to the Harbison-Walker
bankruptcy. DII Industries has filed an opposition to that removal and has asked
the federal court to remand the case back to the Dallas  County state court.  On
June 12, 2002, the London-based  insuring  entities and companies filed a motion
to  transfer  the case to the federal  court in  Pittsburgh,  Pennsylvania.  DII
Industries has filed an opposition to that motion to transfer. The federal court
in Dallas has yet to rule on any of these motions.  Regardless of the outcome of
these  motions,  because of the  similar  insurance  coverage  lawsuit  filed by
Harbison-Walker  in  its  bankruptcy   proceeding,   it  is  unlikely  that  DII
Industries' case will proceed  simultaneously  with the insurance  coverage case
filed by Harbison-Walker in its bankruptcy.
         Other DII Industries claims  insurance.  DII Industries has substantial
insurance to cover other non-refractory  asbestos claims. Two  coverage-in-place
agreements  cover DII Industries for companies or operations that DII Industries
either acquired or operated prior to November 1, 1957.  Asbestos claims that are
covered  by  these  agreements  are  currently  stayed  by  the  Harbison-Walker
bankruptcy  because the majority of this  coverage  also  applies to  refractory
claims and is shared with Harbison-Walker.  Other insurance coverage is provided
by a number of different policies that DII Industries  acquired rights to access
when it  acquired  businesses  from  other  companies.  Three  coverage-in-place
agreements   provide   reimbursement   for  asbestos  claims  made  against  DII
Industries'  former  Worthington Pump division.  There is also other substantial
insurance  coverage with approximately $2.0 billion in aggregate limits that has
not yet been reduced to coverage-in-place agreements.
         On  August  28,  2001,  DII  Industries  filed a  lawsuit  in the 192nd
Judicial  District  of the  District  Court for  Dallas  County,  Texas  against
specific  London-based  insuring  entities that issued  insurance  policies that
provide coverage to DII Industries for asbestos-related  liabilities arising out
of the historical operations of Worthington Corporation or its successors.  This
lawsuit raises  essentially the same issue as to the documentation  requirements
as the  August 7, 2001  Harbison-Walker  lawsuit  filed in the same  court.  The
London-based insuring entities filed a motion in that case seeking to compel the
parties to binding  arbitration.  The trial  court  denied  that  motion and the
London-based  insuring  entities  appealed that decision to the state  appellate
court.  The state  appellate  court  denied the appeal and, most  recently,  the
London-based insuring entities have removed the case from the state court to the
federal  court.  DII Industries was successful in remanding the case back to the
state court.
         A  significant   portion  of  the  insurance  coverage   applicable  to
Worthington claims is alleged by Federal-Mogul  Products, Inc. to be shared with
it. In 2001,  Federal-Mogul  Products, Inc. and a large number of its affiliated
companies filed a voluntary petition for reorganization  under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court in Wilmington, Delaware.
         In response to  Federal-Mogul's  allegations,  on December 7, 2001, DII
Industries filed a lawsuit in the Delaware Bankruptcy Court asserting its rights
to insurance  coverage  under  historic  general  liability  policies  issued to
Studebaker-Worthington,  Inc. and its successor for asbestos-related liabilities
arising from, among other operations, Worthington's and its successors' historic
operations.  This  lawsuit  also seeks a  judicial  declaration  concerning  the
competing rights of DII Industries and Federal-Mogul,  if any, to this insurance
coverage.  DII  Industries  recently  filed a third  amended  complaint  in that
lawsuit  and the  parties  are  engaged in the  discovery  process  and  summary
judgment briefing. The parties to this litigation, including Federal-Mogul, have

                                       16


agreed to mediate this dispute.  Unlike the  Harbison-Walker  insurance coverage
litigation,  in which the litigation is stayed while the mediation proceeds, the
insurance  coverage  litigation  concerning  the  Worthington-related   asbestos
liabilities has not been stayed and such litigation is proceeding simultaneously
with the mediation.
         At the same time, DII Industries filed its insurance coverage action in
the  Federal-Mogul  bankruptcy,  DII  Industries  also filed a second lawsuit in
which it has filed a motion  for  preliminary  injunction  seeking a stay of all
Worthington  asbestos-related lawsuits against DII Industries that are scheduled
for trial  within the six months  following  the filing of the motion.  The stay
that DII Industries seeks, if granted, would remain in place until the competing
rights of DII Industries and Federal-Mogul to the allegedly shared insurance are
resolved.  The Court has yet to schedule a hearing on DII Industries' motion for
preliminary injunction.
         A number of insurers  who have agreed to  coverage-in-place  agreements
with DII Industries have suspended payment under the shared Worthington policies
until  the  Federal-Mogul   Bankruptcy  Court  resolves  the  insurance  issues.
Consequently,  the  effect of the  Federal-Mogul  bankruptcy  on DII  Industries
rights to access this shared insurance is uncertain.
         Construction claims insurance.  Nearly all of our construction asbestos
claims relate to Brown & Root,  Inc.  operations  before the 1980s.  Our primary
insurance  coverage for these claims was written by Highlands  Insurance Company
during the time it was one of our  subsidiaries.  Highlands  was spun-off to our
shareholders in 1996. On April 5, 2000,  Highlands filed a lawsuit against us in
the Delaware Chancery Court.  Highlands asserted that the insurance it wrote for
Brown & Root, Inc. that covered  construction  asbestos claims was terminated by
agreements  between  Halliburton and Highlands at the time of the 1996 spin-off.
In March 2001,  the Chancery  Court ruled that a termination  did occur and that
Highlands  was not  obligated  to  provide  coverage  for  Brown & Root,  Inc.'s
asbestos  claims.  This  decision was affirmed by the Delaware  Supreme Court on
March 13, 2002.  As a result of this  ruling,  we  wrote-off  approximately  $35
million in accounts receivable for amounts paid for claims and defense costs and
$45 million of accrued receivables in relation to estimated insurance recoveries
claims  settlements  from  Highlands in the first quarter 2002. In addition,  we
dismissed  the April 24,  2000  lawsuit  we filed  against  Highlands  in Harris
County, Texas.
         As a consequence  of the Delaware  Supreme  Court's  decision,  Kellogg
Brown & Root no  longer  has  primary  insurance  coverage  from  Highlands  for
asbestos claims. However,  Kellogg Brown & Root has significant excess insurance
coverage.  The amount of this  excess  coverage  that will  reimburse  us for an
asbestos claim depends on a variety of factors. On March 20, 2002, Kellogg Brown
& Root filed a lawsuit in the 172nd  Judicial  District of the District Court of
Jefferson County,  Texas,  against Kellogg Brown & Root's historic insurers that
issued these excess  insurance  policies.  In the lawsuit,  Kellogg Brown & Root
seeks to establish the specific terms under which it can seek  reimbursement for
costs it incurs in settling  and  defending  asbestos  claims from its  historic
construction operations. On January 6, 2003, this lawsuit was transferred to the
11th Judicial  District of the District Court of Harris County,  Texas,  and the
parties are engaged in the  discovery  process.  Until this lawsuit is resolved,
the scope of the excess insurance will remain uncertain, and as such we have not
assumed any  recoveries  from excess  insurance  coverage.  We do not expect the
excess  insurers  will  reimburse us for  asbestos  claims until this lawsuit is
resolved.
         Significant  asbestos  judgments  on appeal.  During  2001,  there were
several adverse  judgments in trial court proceedings that are in various stages
of the appeal process.  All of these judgments concern asbestos claims involving
Harbison-Walker  refractory products.  Each of these appeals,  however, has been
stayed by the Bankruptcy Court in the Harbison-Walker Chapter 11 bankruptcy.
         On  November  29,  2001,  the Texas  District  Court in Orange,  Texas,
entered judgments against Dresser Industries, Inc. (now DII Industries) on a $65
million jury verdict rendered in September 2001 in favor of five plaintiffs. The
$65 million amount  includes $15 million of a $30 million  judgment  against DII
Industries and another defendant. DII Industries is jointly and severally liable
for $15 million in addition to $65 million if the other  defendant  does not pay
its  share of this  judgment.  Based  upon  what we  believe  to be  controlling
precedent,  which would hold that the judgment  entered is void, we believe that
the  likelihood of the judgment  being  affirmed in the face of DII  Industries'
appeal  is  remote.  As a  result,  we have not  accrued  any  amounts  for this
judgment. However, a favorable outcome from the appeal is not assured.
         On November 29, 2001, the same District Court in Orange, Texas, entered
three additional judgments against Dresser Industries, Inc. (now DII Industries)
in the  aggregate  amount  of  $35.7  million  in favor  of 100  other  asbestos
plaintiffs.  These judgments relate to an alleged breach of purported settlement

                                       17


agreements   signed   early  in  2001  by  a  New   Orleans   lawyer   hired  by
Harbison-Walker,  which  had  been  defending  DII  Industries  pursuant  to the
agreement by which Harbison-Walker was spun-off by DII Industries in 1992. These
settlement agreements expressly bind Harbison-Walker Refractories Company as the
obligated party, not DII Industries, which is not a party to the agreements. For
that reason, and based upon what we believe to be controlling  precedent,  which
would hold that the judgment  entered is void, we believe that the likelihood of
the judgment being affirmed in the face of DII Industries'  appeal is remote. As
a  result,  we have not  accrued  any  amounts  for this  judgment.  However,  a
favorable outcome from the appeal is not assured.
         On December 5, 2001, a jury in the Circuit Court for Baltimore  County,
Maryland,   returned  verdicts  against  Dresser   Industries,   Inc.  (now  DII
Industries) and other defendants following a trial involving refractory asbestos
claims.  Each  of  the  five  plaintiffs  alleges  exposure  to  Harbison-Walker
products.  DII Industries portion of the verdicts was approximately $30 million,
which we fully accrued in 2002. DII Industries intends to appeal the judgment to
the Maryland  Supreme  Court.  While we believe we have a valid basis for appeal
and intend to  vigorously  pursue our appeal,  any  favorable  outcome from that
appeal is not assured.
         On  October  25,  2001,  in  the  Circuit   Court  of  Holmes   County,
Mississippi,  a jury  verdict  of $150  million  was  rendered  in  favor of six
plaintiffs against Dresser  Industries,  Inc. (now DII Industries) and two other
companies.  DII Industries share of the verdict was $21.3 million which we fully
accrued in 2002. The award was for compensatory  damages. The jury did not award
any punitive damages. The trial court has entered judgment on the verdict. While
we believe we have a valid basis for appeal and intend to vigorously  pursue our
appeal, any favorable outcome from that appeal is not assured.
         Asbestos claims history.  Since 1976,  approximately  661,000  asbestos
claims have been filed  against us. Almost all of these claims have been made in
separate  lawsuits in which we are named as a  defendant  along with a number of
other defendants, often exceeding 100 unaffiliated defendant companies in total.
The approximate number of open claims pending against us is as follows:


                                      Total Open
Period Ending                           Claims
---------------------------------------------------
                                   
June 30, 2003                           425,000
March 31, 2003                          389,000
December 31, 2002                       347,000
September 30, 2002                      328,000
June 30, 2002                           312,000
March 31, 2002                          292,000
December 31, 2001                       274,000
===================================================

         During the second quarter of 2003, we received approximately 37,000 new
claims and we closed  approximately 1,000 claims. We believe that in many cases,
single claimants are filing claims against multiple Halliburton entities, and we
believe  that the actual  number of  additional  claimants  is about half of the
number of new claims.  If and when we confirm  duplicate  claims, we will adjust
our data accordingly. We believe of the 425,000 open claims as of June 30, 2003,
these represent claims made by approximately 345,000 separate claimants.
         The total open claims include post spin-off Harbison-Walker  refractory
related  claims that name DII  Industries  as a defendant.  All such claims have
been factored into the  calculation of our asbestos  liability.  The approximate
number of post  spin-off  Harbison-Walker  claims  included in total open claims
pending against us is as follows:

                                       18




                                     Post Spin-off
                                    Harbison-Walker
Period Ending                           Claims
------------------------------------------------------
                                 
June 30, 2003                           153,000
March 31, 2003                          152,000
December 31, 2002                       142,000
September 30, 2002                      142,000
June 30, 2002                           139,000
March 31, 2002                          133,000
December 31, 2001                       125,000
======================================================

         We manage  asbestos  claims to achieve  settlements of valid claims for
reasonable  amounts.  When  reasonable  settlement is not  possible,  we contest
claims in court. Since 1976, we have closed approximately 236,000 claims through
settlements and court proceedings at a total cost of approximately $217 million.
We have  received or expect to receive from our  insurers all but  approximately
$105 million of this cost,  resulting in an average net cost per closed claim of
about $445.
         Asbestos  study  and  the  valuation  of  unresolved current and future
asbestos claims.
         Asbestos Study.  In late 2001, DII Industries  retained Dr. Francine F.
Rabinovitz  of Hamilton,  Rabinovitz & Alschuler,  Inc. to estimate the probable
number and value,  including  defense  costs,  of unresolved  current and future
asbestos and silica-related bodily injury claims asserted against DII Industries
and  its  subsidiaries.  Dr.  Rabinovitz  is a  nationally  renowned  expert  in
conducting such analyses,  has been involved in a number of asbestos-related and
other  toxic  tort-related  valuations  of current and future  liabilities,  has
served as the expert for three  representatives  of future claimants in asbestos
related  bankruptcies  and has  had  her  valuation  methodologies  accepted  by
numerous courts. Further, the methodology utilized by Dr. Rabinovitz is the same
methodology  that is  utilized  by the expert who is  routinely  retained by the
asbestos claimants  committee in asbestos-related  bankruptcies.  Dr. Rabinovitz
estimated  the  probable  number  and value of  unresolved  current  and  future
asbestos and silica-related bodily injury claims asserted against DII Industries
and its subsidiaries over a 50 year period. The report took approximately  seven
months to complete.
         Methodology.  The methodology utilized by Dr. Rabinovitz to project DII
Industries and its subsidiaries'  asbestos- and  silica-related  liabilities and
defense costs relied upon and included:
              -   an  analysis  of DII  Industries,  Kellogg  Brown & Root's and
                  Harbison-Walker Refractories Company's historical asbestos and
                  silica  settlements  and  defense  costs  to  develop  average
                  settlement  values  and  average  defense  costs for  specific
                  asbestos-  and  silica-related  diseases  and for the specific
                  business  operation or entity  allegedly  responsible  for the
                  asbestos- and silica-related diseases;
              -   an  analysis  of DII  Industries,  Kellogg  Brown & Root's and
                  Harbison-Walker  Refractories  Company's  pending inventory of
                  asbestos- and  silica-related  claims by specific diseases and
                  by  the  specific  business   operation  or  entity  allegedly
                  responsible for the disease;
              -   an analysis of the claims  filing  history for  asbestos-  and
                  silica-related claims against DII Industries,  Kellogg Brown &
                  Root  and   Harbison-Walker   Refractories   Company  for  the
                  approximate two-year period from January 2000 to May 31, 2002,
                  and for the approximate  five-year period from January 1997 to
                  May 31, 2002 by specific disease and by business  operation or
                  entity allegedly responsible for the disease;
              -   an analysis of the  population  likely to have been exposed or
                  claim exposure to products manufactured by DII Industries, its
                  predecessors   and   Harbison-Walker   or  to   Brown  &  Root
                  construction and renovation projects; and
              -   epidemiological  studies to estimate  the number of people who
                  might  allege   exposure  to  products   manufactured  by  DII
                  Industries, its predecessors and Harbison-Walker or to Brown &
                  Root construction and renovation projects that would be likely
                  to  develop   asbestos-related   diseases.   Dr.  Rabinovitz's
                  estimates  are  based  on  historical  data  supplied  by  DII
                  Industries,  Kellogg  Brown  & Root  and  Harbison-Walker  and

                                       19


                  publicly  available  studies,  including annual surveys by the
                  National  Institutes  of Health  concerning  the  incidence of
                  mesothelioma deaths.
         In her estimates,  Dr. Rabinovitz relied on the source data provided by
our  management;  she did not  independently  verify the  accuracy of the source
data.  The  source  data  provided  by us was based on our  24-year  history  in
gathering  claimant  information and defending and settling  asbestos and silica
claims.
         In her  analysis,  Dr.  Rabinovitz  projected  that  the  elevated  and
historically  unprecedented  rate of claim  filings  of the last  several  years
(particularly  in 2000  and  2001),  especially  as  expressed  by the  ratio of
nonmalignant  claim filings to malignant claim filings,  would continue into the
future for five more years. After that, Dr. Rabinovitz  projected that the ratio
of nonmalignant claim filings to malignant claim filings will gradually decrease
for a 10 year period  ultimately  returning to the historical  claiming rate and
claiming ratio. In making her calculation,  Dr. Rabinovitz alternatively assumed
a  somewhat  lower rate of claim  filings,  based on an average of the last five
years of claims  experience,  would continue into the future for five more years
and decrease thereafter.
         Other important assumptions  utilized  in Dr.  Rabinovitz's  estimates,
which we relied upon in making our accrual are:
              -   there will be no legislative or other systemic  changes to the
                  tort system;
              -   that we will continue to aggressively defend against  asbestos
                  and silica claims made against us;
              -   an inflation  rate of 3% annually for settlement  payments and
                  an inflation rate of 4% annually for defense costs; and
              -   we would receive no relief from our asbestos obligation due to
                  actions taken in the Harbison-Walker bankruptcy.
         Range of Liabilities. Based upon her analysis, Dr. Rabinovitz estimated
total, undiscounted asbestos and silica liabilities, including defense costs, of
DII  Industries,  Kellogg  Brown & Root  and some of their  current  and  former
subsidiaries.  Through  2052,  Dr.  Rabinovitz  estimated the current and future
total  undiscounted  liability for personal  injury  asbestos and silica claims,
including defense costs,  would be a range between $2.2 billion and $3.5 billion
as of June 30, 2002 (which  includes  payments  related to the claims  currently
pending).  The lower end of the range is  calculated  by using an average of the
last five years of asbestos claims  experience and the upper end of the range is
calculated  using the more  recent  two-year  elevated  rate of  asbestos  claim
filings in projecting the rate of future claims.
         2nd Quarter 2002 Accrual. Based on that estimate, in the second quarter
of 2002, we accrued  asbestos and silica claims  liability and defense costs for
both  known  outstanding  and  future  refractory,  other  DII  Industries,  and
construction  asbestos  and silica  claims using the low end of the range of Dr.
Rabinovitz's study, or approximately $2.2 billion. In establishing our liability
for  asbestos, we  included all post  spin-off  claims  against  Harbison-Walker
that name DII Industries as a defendant.  Our accruals were based on an estimate
of personal  injury  asbestos  claims  through 2052 based on the average  claims
experience of the last five years.  At the end of the second quarter of 2002, we
did not believe that any point in the  expert's  range was better than any other
point,  and  accordingly,  based  our  accrual  on the low end of the  range  in
accordance with FIN 14.
         Agreement  regarding  proposed  asbestos  and  silica  settlement.   In
December 2002, we announced that we had reached an agreement in principle  that,
if and when  consummated,  would result in a  settlement  of asbestos and silica
personal injury claims against our subsidiaries DII Industries and Kellogg Brown
& Root and their current and former  subsidiaries with United States operations.
Subsequently,  DII Industries  and Kellogg Brown & Root entered into  definitive
written  agreements  finalizing the  terms of the  agreements in  principle with
attorneys representing more than 90% of the current asbestos claimants.  We have
also reached agreements in principle with 48% of current silica claimants.
         The definitive agreements provide that:
              -   up to $2.775 billion in cash, 59.5 million  Halliburton shares
                  (valued at $1.4 billion using the stock price at June 30, 2003
                  of $23.00) and notes with a net value expected to be less than
                  $100  million  will  be paid  to one or  more  trusts  for the
                  benefit of current  and future  asbestos  and silica  personal
                  injury claimants upon receiving final and non-appealable court
                  confirmation of a plan of reorganization;

                                       20


              -   DII  Industries and Kellogg Brown & Root will retain rights to
                  the first $2.3  billion  of any  insurance  proceeds  with any
                  proceeds received between $2.3 billion and $3 billion going to
                  the trust;
              -   the  agreement  is to be  implemented  through a  pre-packaged
                  filing under Chapter 11 of the United States  Bankruptcy  Code
                  for  DII  Industries,  Kellogg  Brown & Root  and  some of the
                  subsidiaries with United States operations; and
              -   the  funding  of  the  settlement  amounts  would  occur  upon
                  receiving  final and  non-appealable  court  confirmation of a
                  plan of reorganization  for DII Industries and Kellogg Brown &
                  Root  and  some  of  their  subsidiaries  with  United  States
                  operations in the Chapter 11 proceeding.
         Among the prerequisites for concluding the proposed settlement are:
              -   agreement on  the amounts to be  contributed to the trusts for
                  the benefit of silica claimants;
              -   completion  of our review  of the current  claims to establish
                  that the  claimed injuries resulted  from exposure to products
                  of   DII   Industries,  Kellogg   Brown   &  Root   or   their
                  subsidiaries or former businesses or subsidiaries;
              -   completion of our medical  review of  the injuries  alleged to
                  have been sustained by plaintiffs to establish a medical basis
                  for payment of settlement amounts;
              -   finalizing the  principal amount and  terms of the notes to be
                  contributed to the trusts;
              -   agreement with a proposed  representative  of future claimants
                  and attorneys representing current claimants on procedures for
                  the distribution of settlement  funds to individuals  claiming
                  personal injury;
              -   definitive agreement with a proposed  representative of future
                  claimants  and the  attorneys  representing  current  asbestos
                  claimants  on a plan  of  reorganization  for the  Chapter  11
                  filing  of DII  Industries,  Kellogg  Brown & Root and some of
                  their   subsidiaries  with  United  States   operations;   and
                  agreement with the attorneys representing current asbestos and
                  silica  claimants  with  respect  to   a  disclosure statement
                  explaining  the pre-packaged  plan of  reorganization  to  the
                  current claimants;
              -   arrangement  of financing, in addition  to the proceeds of our
                  recent   offering  of  $1.2   billion   principal   amount  of
                  convertible senior notes, for the proposed settlement on terms
                  acceptable  to us to fund the cash  amounts  to be paid in the
                  settlement;
              -   Halliburton board approval;
              -   distribution of a disclosure  statement and obtaining approval
                  of a plan of reorganization from  at least the required 75% of
                  known present asbestos  claimants and from a majority of known
                  present  silica claimants  in order to  complete  the  plan of
                  reorganization; and
              -   obtaining  final and non-appealable  bankruptcy court approval
                  and  federal  district  court  confirmation  of  the  plan  of
                  reorganization.
         Many of  these prerequisites are subject  to matters and  uncertainties
beyond  our control.  There can be no assurance that we  will be able to satisfy
the prerequisities for completion of the settlement.
         We are  currently  continuing  our  due  diligence  review  of  current
asbestos claims to be included in the proposed settlement.  We have now received
in excess of 75% of the necessary files related to medical  evidence and we have
reviewed  substantially  all of the  information  provided.  In  regards  to the
product  identification  due diligence,  the process is moving at a steady pace,
but not as rapidly as the medical due  diligence.  In addition,  we have not yet
commenced any due diligence in regards to silica claims.  While no assurance can
be given,  if we continue to receive  documentation  that is consistent with the
recent  quantity and quality of the  documentation  received to date,  we expect
that this  documentation  will provide an  acceptable  basis on which to proceed
with the proposed settlement.
         One   result  of  our  due   diligence   review   is  the   preliminary
identification  of more claims than  contemplated  by the  proposed  settlement.
However, until the more recently identified claims are subject to a complete due
diligence  review,  we will not be able to  determine  if these  claims would be
appropriately  included  under the proposed  settlement.  Many of these recently
identified  claims may be  duplicative  of  previously  submitted  claims or may
otherwise not be appropriately  included under the proposed  settlement.  In the
event that more claims are  identified and validated  than  contemplated  by the
proposed  settlement,  the cash  required to fund the  settlement  may  modestly

                                       21


exceed $2.775 billion. If it does, we would need to decide whether to propose to
adjust the settlement  matrices to reduce the overall  amounts,  or increase the
amounts  we  would  be  willing  to pay  to  resolve  the  asbestos  and  silica
liabilities.
         If we attempt to adjust the settlement matrices or otherwise attempt to
renegotiate the terms of the proposed settlement, the attorneys representing the
current asbestos claimants may not proceed with the settlement or may attempt to
renegotiate  the  settlement  amount to  increase  the  aggregate  amount of the
settlement.  Conversely,  an  increase in the amount of cash  required  may make
completing the proposed settlement more difficult.
         In the event we elect to adjust the  settlement  matrices to reduce the
average amounts per claim, a supplemental  disclosure statement may be required,
and if so, the claimants  potentially  adversely  affected by the adjustment may
have an  opportunity to change  their votes.  The  additional  time to make such
supplemental disclosure and opportunity to change votes may result in a delay in
the Chapter 11 filing.
         Included in the next steps to complete the proposed  settlement are (1)
an agreement on the  procedures  for the  distribution  of  settlement  funds to
individuals  claiming  personal  injury  and  (2)  an  agreement  on a  plan  of
reorganization  for  Kellogg  Brown & Root  and DII  Industries  and some of the
subsidiaries with United States operations and the related disclosure statement.
We cannot  predict the exact timing of the  completion  of these  steps,  but we
expect  that  these  prerequisites  to making  the  Chapter  11 filing  could be
completed  on a timeline  that would allow the Chapter 11 filing to be made late
in the third quarter or very early in the fourth quarter of 2003.
         The settlement agreements with attorneys  representing current asbestos
and silica  claimants grant the attorneys a right to terminate their  definitive
agreement  on 10  days'  notice.  While no right  to  terminate  any  settlement
agreement has been exercised to date,  there can be no assurance that claimants'
attorneys will not exercise  their right to terminate the settlement agreements.
         We continue to track legislative  proposals for asbestos reform pending
in the United States  Congress.  In determining  whether to approve the proposed
settlement  and proceed with the Chapter 11 filing of DII Industries and Kellogg
Brown & Root and some of their subsidiaries with United States  operations,  the
Halliburton Board of Directors will take into account the then-current status of
these legislative initiatives.
         Review of  accruals.  As a result of the  proposed  settlement,  in the
fourth quarter of 2002, we re-evaluated  our accruals for known  outstanding and
future asbestos claims.  Although we have reached an agreement in principle with
respect to a proposed settlement, we do not believe the settlement is "probable"
under Statement of Financial Standards ("SFAS") No. 5 at the current time.
         Because we do not  believe  the  settlement  is  currently  probable as
defined by SFAS No. 5, we have continued to establish our accruals in accordance
with the  analysis  performed  by Dr.  Rabinovitz.  However,  as a result of the
settlement  and  the  payment  amounts  contemplated  thereby,  we  believed  it
appropriate to adjust our  accrual to use the upper end of the range of probable
and reasonably estimable liabilities for current and future asbestos liabilities
contained in Dr.  Rabinovitz's  study, which estimated  liabilities through 2052
and  assumed  the  more  recent  two-year  elevated  rate of  claim  filings  in
projecting the rate of future claims.
         As a result, in the fourth quarter of 2002, we determined that the best
estimate of the probable loss is the $3.5 billion  estimate in Dr.  Rabinovitz's
study,  and  accordingly,  we increased our accrual for probable and  reasonably
estimable  liabilities for current and future asbestos and silica claims to $3.4
billion.
         Insurance.    In   2002,   we   retained   Peterson    Consulting,    a
nationally-recognized  consultant in asbestos  liability and insurance,  to work
with us to project the amount of insurance  recoveries  probable in light of the
projected current and future liabilities  accrued by us. Using Dr.  Rabinovitz's
projection  of  liabilities  through  2052 using the two-year  elevated  rate of
asbestos  claim  filings,  Peterson  Consulting  assisted  us in  conducting  an
analysis to determine the amount of insurance  that we estimate is probable that
we will  recover in  relation to the  projected  claims and  defense  costs.  In
conducting this analysis, Peterson Consulting:
              -   reviewed DII Industries historical course of dealings with its
                  insurance companies concerning the payment of asbestos-related
                  claims,  including  DII  Industries  15  year  litigation  and
                  settlement history;
              -   reviewed our  insurance  coverage policy  database  containing
                  information  on  key  policy  terms  as  provided  by  outside
                  counsel;
              -   reviewed the  terms  of  DII  Industries   prior  and  current
                  coverage-in-place settlement agreements;

                                       22


              -   reviewed  the status  of DII  Industries and  Kellogg  Brown &
                  Root's  current  insurance-related  lawsuits  and the  various
                  legal  positions of the parties in those  lawsuits in relation
                  to the  developed  and  developing  case law and the  historic
                  positions  taken by insurers in the earlier  filed and settled
                  lawsuits;
              -   engaged in discussions with our counsel; and
              -   analyzed publicly-available information concerning the ability
                  of the DII Industries insurers to meet their obligations.
         Based  on  review,  analyses  and   discussions,  Peterson   Consulting
assisted us in making judgments  concerning  insurance  coverage that we believe
are reasonable and  consistent  with our historical  course of dealings with our
insurers  and  the  relevant  case  law  to  determine  the  probable  insurance
recoveries  for asbestos  liabilities.  This  analysis  factored in the probable
effects of  self-insurance  features,  such as self-insured  retentions,  policy
exclusions,  liability caps and the financial status of applicable insurers, and
various judicial  determinations  relevant to the applicable insurance programs.
The  analysis  of  Peterson  Consulting  is  based  on  its  best  judgment  and
information provided by us.
         Probable  insurance  recoveries.  Based on our analysis of the probable
insurance recoveries, in the second quarter of 2002, we recorded a receivable of
$1.6 billion for probable insurance recoveries.
         In connection with our adjustment of our accrual for asbestos liability
and defense costs in the fourth quarter of 2002, Peterson Consulting assisted us
in re-evaluating our receivable for insurance recoveries deemed probable through
2052,  assuming  $3.5  billion of  liabilities  for current and future  asbestos
claims  using the same  factors  cited  above  through  2052.  Based on Peterson
Consulting  analysis of the probable  insurance  recoveries,  we  increased  our
insurance  receivable  to $2.1  billion  as of the fourth  quarter of 2002.  The
insurance  receivable recorded by us does not assume any recovery from insolvent
carriers  and assumes  that those  carriers  which are  currently  solvent  will
continue to be solvent throughout the period of the applicable recoveries in the
projections.  However,  there can be no assurance that these assumptions will be
correct.  These  insurance  receivables do not exhaust the applicable  insurance
coverage for asbestos-related liabilities.
         Current accruals.  The current accrual of $3.4 billion for probable and
reasonably  estimable  liabilities  for current and future  asbestos  and silica
claims and the $2.1 billion in insurance  receivables are included in noncurrent
assets and  liabilities  due to the  extended  time  periods  involved to settle
claims.  In the second  quarter  of 2002,  we  recorded a pretax  charge of $483
million  ($391  million  after  tax),  and,  in the fourth  quarter of 2002,  we
recorded a pretax charge of $799 million ($675 million after tax).
         In the  fourth  quarter of 2002,  we  recorded  pretax  charges of $232
million ($212 million after tax) for claims related to Brown & Root construction
and renovation  projects under the Engineering and  Construction  Group segment.
The  balance  of $567  million  ($463  million  after  tax)  related  to  claims
associated   with  businesses  no  longer  owned  by  us  and  was  recorded  as
discontinued  operations.  The low effective tax rate on the asbestos  charge is
due to the recording of a valuation  allowance against the United States Federal
deferred tax asset associated with the accrual as the deferred tax asset may not
be fully realizable based upon future taxable income projections.
         The total estimated claims through 2052,  including the 425,000 current
open claims,  are  approximately  one million.  A summary of our accrual for all
claims and corresponding insurance recoveries is as follows:

                                       23




                                                              Six Months Ended         Year Ended
Millions of dollars                                            June 30, 2003       December 31, 2002
-------------------------------------------------------------------------------------------------------
                                                                             
Gross liability - beginning balance                               $ 3,425              $    737
     Accrued liability                                                  -                 2,820
     Payments on claims                                               (29)                 (132)
-------------------------------------------------------------------------------------------------------
Gross liability - ending balance                                  $ 3,396              $  3,425
=======================================================================================================

Estimated insurance recoveries:
     Highlands Insurance Company - beginning balance              $     -              $    (45)
         Write-off of recoveries                                        -                    45
-------------------------------------------------------------------------------------------------------
     Highlands Insurance Company - ending balance                 $     -              $      -
=======================================================================================================

Other insurance carriers - beginning balance                      $(2,059)             $   (567)
     Accrued insurance recoveries                                       -                (1,530)
     Insurance billings                                                 -                    38
-------------------------------------------------------------------------------------------------------
Other insurance carriers - ending balance                         $(2,059)             $ (2,059)
=======================================================================================================
Total estimated insurance recoveries                              $(2,059)             $ (2,059)
=======================================================================================================
Net liability for asbestos claims                                 $ 1,337              $  1,366
=======================================================================================================

         Accounts  receivable  for billings to insurance  companies for payments
made on asbestos claims were $44 million at June 30, 2003 and December 31, 2002.
The $44 million at December 31, 2002 excludes $35 million in accounts receivable
written off at the conclusion of the Highlands litigation.
         Possible  additional  accruals.  When  and  if the  currently  proposed
settlement  becomes probable under SFAS No. 5, we would increase our accrual for
probable and reasonably  estimable  liabilities  for current and future asbestos
claims up to $4.3 billion,  reflecting the amount in cash and notes we would pay
to fund the  settlement  combined  with  the  value of 59.5  million  shares  of
Halliburton common stock, a value of $1.4 billion, using the stock price at June
30,  2003 of  $23.00.  In  addition,  at such  time  as the  settlement  becomes
probable,  we would  adjust our accrual for  liabilities  for current and future
asbestos  claims and we would  expect to  increase  the amount of our  insurance
receivables  to $2.3  billion.  As a  result,  we would  record  at such time an
additional pretax charge of $606 million ($493 million after tax).  Beginning in
the first quarter in which the settlement  becomes  probable,  the accrual would
then be adjusted from period to period based on positive and negative changes in
the market price of our common stock until  contribution  of the shares into the
trust. We may enter into  agreements with all or some of our insurance  carriers
to negotiate an overall accelerated  payment of anticipated  insurance proceeds.
If this were to happen, we would expect to recover less than the $2.3 billion of
anticipated  insurance receivables which would result in an additional charge to
income.
         Continuing  review.   Projecting  future  events  is  subject  to  many
uncertainties  that could cause the  asbestos-related  liabilities and insurance
recoveries to be higher or lower than those projected and booked such as:
              -   the number of future asbestos- and silica-related lawsuits to
                  be filed against DII Industries and Kellogg Brown & Root;
              -   the average cost to resolve such future lawsuits;
              -   coverage issues  among  layers of  insurers issuing  different
                  policies  to different  policyholders over extended periods of
                  time;
              -   the impact on  the amount of insurance recoverable in light of
                  the Harbison-Walker and Federal-Mogul bankruptcies; and
              -   the continuing solvency of various insurance companies.
         Given the inherent uncertainty in making future projections, we plan to
have  the   projections  of  current  and  future  asbestos  and  silica  claims
periodically  reexamined,  and we  will  update  them  if  needed  based  on our
experience  and other relevant  factors such as changes in the tort system,  the
resolution  of  the  bankruptcies  of  various   asbestos   defendants  and  the
probability of our settlement of all claims becoming  effective.  Similarly,  we
will re-evaluate our projections concerning our probable insurance recoveries in
light  of any  updates  to Dr.  Rabinovitz's  projections,  developments  in DII
Industries  and Kellogg Brown & Root's  various  lawsuits  against its insurance
companies and other developments that may impact the probable insurance.

                                       24


Note 12.  Commitments and Contingencies - Excluding Asbestos and Silica
         Barracuda-Caratinga  Project. In June 2000, KBR entered into a contract
with the project owner,  Barracuda & Caratinga  Leasing Company B.V., to develop
the Barracuda and Caratinga crude oil fields, which are located off the coast of
Brazil. The project manager and owner's  representative is Petroleo Brasilero SA
(Petrobras),  the Brazilian  national oil company.  When completed,  the project
will  consist  of two  converted  supertankers  which  will be used as  floating
production,   storage  and  offloading  platforms,   or  FPSOs,  33  hydrocarbon
production wells, 18 water injection wells and all sub-sea flow lines and risers
necessary to connect the underwater wells to the FPSOs.
         KBR's performance under the contract is secured by:
              -   three  performance  letters of credit,  which together have an
                  available credit of approximately  $266 million as of June 30,
                  2003 and which  represent  approximately  10% of the  contract
                  amount, as amended to date by change orders;
              -   a  retainage  letter  of  credit  in  an  amount equal to $141
                  million as  of June 30, 2003 and which will increase  in order
                  to continue  to  represent 10%  of the cumulative cash amounts
                  paid to KBR; and
              -   a  guarantee   of  KBR's  performance  of   the  agreement  by
                  Halliburton Company in favor of the project owner.
         In the event that KBR is alleged to be in default  under the  contract,
the project owner may assert a right to draw upon the letters of credit.  If the
letters of credit were to be drawn,  KBR would be required to fund the amount of
the draw to the issuing  banks.  To the extent KBR cannot fund the amount of the
draw,  Halliburton  would be  required  to do so,  which  could  have a material
adverse effect on Halliburton's financial condition and results of operations.
         In addition, the proposed Chapter 11 pre-packaged  bankruptcy filing by
KBR in  connection  with the proposed  settlement  of its asbestos  claims would
constitute  an event of default  under the  contract  that would allow the owner
(with the  approval of the lenders  financing  the project) to assert a right to
draw the letters of credit unless waivers are obtained.  The proposed Chapter 11
filing  would  also  constitute  an event of  default  under  the  owner's  loan
agreements  with the lenders  that would allow the lenders to cease  funding the
project.  We believe that it is unlikely  that the owner will make a draw on the
letters of credit as a result of the proposed Chapter 11 filing. We also believe
it is unlikely  that the lenders will  exercise  any right to cease  funding the
project  given the current  status of the project and the fact that a failure to
pay KBR may allow KBR to cease work on the project  without  Petrobras  having a
readily available substitute contractor. However, there can be no assurance that
the lenders will continue to fund the project or that the owner will not require
funding of the letters of credit by KBR.
         In the event that KBR was determined after an arbitration proceeding to
have been in default under the contract with  Petrobras,  and if the project was
not  completed  by KBR as a result of such  default  (i.e.,  KBR's  services are
terminated  as a result of such  default),  the  project  owner may seek  direct
damages (including completion costs in excess of the contract price and interest
on borrowed funds,  but excluding  consequential  damages) against KBR for up to
$500  million  plus  the  return  of up to  $300  million  in  advance  payments
previously received by KBR to the extent they have not been repaid.
         In  addition  to the  amounts  described  above,  KBR  may  have to pay
liquidated  damages  if the  project is delayed  beyond  the  original  contract
completion  date. KBR expects that the project will likely be completed at least
16 months  later  than the  original  contract  completion  date.  Although  KBR
believes that the project's delay is due primarily to the actions of the project
owner,  in  the  event that  any  portion  of  the delay  is  determined  to  be
attributable  to KBR and  any  phase  of the  project  is  completed  after  the
milestone  dates  specified  in the  contract,  KBR  could  be  required  to pay
liquidated damages.  These damages would be calculated on an escalating basis of
approximately  $1 million per day of delay caused by KBR, subject to a total cap
on liquidated  damages of 10% of the final  contract  amount  (yielding a cap of
approximately $266 million as of June 30, 2003).
         As of June 30, 2003, the project was approximately 75% complete and KBR
had recorded a pretax loss of $345 million related to the project, of which $173
million was  recorded in the second  quarter of 2003.  The second  quarter  2003
charge was due to higher cost estimates, schedule extensions,  increased project
contingencies  and other factors  identified  during the quarterly review of the
project.  The probable unapproved claims included in determining the loss on the
project were $182  million as of June 30, 2003.  The claims for the project most
likely will not be settled within one year. Accordingly, based upon the contract
being approximately 75% complete,  probable unapproved claims of $134 million at

                                       25


June 30,  2003 have been  recorded to  long-term  unbilled  work on  uncompleted
contracts.  Those  amounts are  included in "Other  assets,  net" on the balance
sheet. KBR has asserted claims for compensation  substantially in excess of $182
million. The project owner, through its project manager,  Petrobras,  has denied
responsibility for all such claims. Petrobras has, however, issued formal change
orders  worth  approximately  $61  million  which  are not  included in the $182
million in probable unapproved claims.
         In June 2003, Halliburton,  KBR and Petrobras, on behalf of the project
owner,  entered into a non-binding heads of agreement that would resolve some of
the disputed  issues between the parties,  subject to final agreement and lender
approval.  The original  completion date for the Barracuda  project was December
2003 and the original  completion date for the Caratinga project was April 2004.
Under the heads of agreement, the project owner would grant an extension of time
to the  original  completion  dates  and other  milestone  dates  that  averages
approximately  12 months,  delay any attempt to assess the  original  liquidated
damages  against  KBR for project  delays  beyond 12 months and up to 18 months,
delay any drawing of letters of credit with respect to such  liquidated  damages
and delay the return of any of the $300 million in advance  payments until after
arbitration.  The heads of agreement  also  provides  for a separate  liquidated
damages  calculation  of  $450,000  per day for  each of the  Barracuda  and the
Caratinga  vessels  for a delay  from the  original  schedule  beyond  18 months
(subject  to the total cap on  liquidated  damages of 10% of the final  contract
amount).  The heads of agreement does not delay the drawing of letters of credit
for these liquidated damages. The extension of the original completion dates and
other  milestones  would  significantly  reduce the  likelihood of KBR incurring
liquidated damages on the project.  Nevertheless, KBR continues to have exposure
for substantial liquidated damages for delays in the completion of the project.
         Under the heads of  agreement,  the project owner has agreed to pay $59
million of KBR's  disputed  claims  (which are  included in the $182  million of
probable  unapproved  claims as of June 30,  2003) and to  arbitrate  additional
claims. The maximum recovery from the claims to be arbitrated would be capped at
$375 million.  The heads of agreement also allows the project owner or Petrobras
to arbitrate  additional claims against KBR, not including  liquidated  damages,
the maximum  recovery from which would be capped at $380  million.  KBR believes
the  claims  made to date by the  project  owner are based on a delay in project
completion. KBR's contract with the project owner excludes consequential damages
and, as indicated above,  provides for liquidated  damages in the event of delay
in  completion  of the  project.  While  there  can  be no  assurance  that  the
arbitrator  will  agree,  KBR  believes  if it is determined  that KBR is liable
for  delays,  the  project  owner  would be entitled  to liquidated  damages  in
amounts up to those referred to above and not to an additional $380 million.
         The finalization of the heads of agreement is subject to project lender
approval.  The parties have had discussions  with the lenders and based on these
discussions  have agreed to certain  modifications  to the original terms of the
heads of  agreement to conform to the  lenders'  requirements.  They have agreed
that the $300  million  in  advance  payments  would be due on the  earliest  of
December 7, 2004,  the  completion of any  arbitration  or the resolution of all
claims  between  the  project  owner  and KBR.  Likewise,  the  project  owner's
obligation to defer drawing letters of credit with respect to liquidated damages
for the delays  between 12 and 18 months  would  extend  only until  December 7,
2004. The  discussions  with the lenders are not yet complete,  and no agreement
for their approval has yet been  obtained.  While we believe the lenders have an
incentive  to approve the heads of agreement  and complete the  financing of the
project, and the parties have agreed to the modifications described above to the
heads of agreement to secure the lenders'  approval,  there is no assurance that
they will do so.  If the  lenders  do not  consent  to the  heads of  agreement,
Petrobras may be forced to secure other  funding to complete the project.  There
is no  assurance  that  Petrobras  will  pursue or will be able to  secure  such
funding.
         Absent lender approval of the heads of agreement,  KBR could be subject
to additional  liquidated damages and other claims, be subject to the letters of
credit  being  drawn and be  required  to return  the $300  million  in  advance
payments in accordance with the original  contract terms. The original  contract
terms require repayment through $300 million of credits to the last $350 million
of  invoices  on the  contract.  No  assurance  can be given  that the  heads of
agreement  will be  finalized  or that the  lenders  will  approve  the heads of
agreement  or that the  lenders  will  approve  the heads of  agreement  without
revisions that could adversely affect KBR.
         The project owner has procured project finance funding obligations from
various  lenders to finance  the  payments  due to KBR under the  contract.  The
project owner currently has no other committed source of funding on which we can
necessarily rely other than the project finance funding for the project.  If the
lenders cease to fund the project, the project owner may not have the ability to
continue to pay KBR for its services.  The original loan documents  provide that

                                       26


the lenders are not obligated to continue to fund the project if the project has
been delayed for more than 6 months.  In November  2002,  the lenders  agreed to
extend the 6-month period to 12 months.  Other  provisions in the loan documents
may provide for additional time extensions. However, delays beyond 12 months may
require lender consent in order to obtain additional  funding.  While we believe
the lenders have an incentive to complete the financing of the project, there is
no assurance that they would do so. If the lenders did not consent to extensions
of time or otherwise ceased funding the project, we believe that Petrobras would
provide for or secure other funding to complete the project,  although  there is
no  assurance  that it would  do so.  To  date,  the  lenders  have  made  funds
available,  and the project  owner has  continued  to  disburse  funds to KBR as
payment for its work on the project even though the project  completion has been
delayed.
         In addition, although the project financing includes borrowing capacity
in excess of the original contract amount,  only $250 million of this additional
borrowing  capacity is reserved for increases in the contract  amount payable to
KBR and its subcontractors.  Under the loan documents, the availability date for
loan draws  expires  December 1, 2003.  As a condition to approving the heads of
agreement,  the lenders  will  require the project  owner to draw all  remaining
available  funds  prior to  December  1,  2003,  and to escrow the funds for the
exclusive use of paying project costs.  No funds may be paid to Petrobras or its
subsidiary  (which is  funding  the  drilling  costs of the  project)  until all
amounts due to KBR,  including  amounts due for the claims,  are  liquidated and
paid. While this  potentially  increases the funds available for payment to KBR,
KBR is not party to the  arrangement  between the lenders and the project  owner
and can give no assurance  that there will be adequate  funding to cover current
or future KBR claims and change orders.
         Securities and Exchange  Commission  ("SEC")  Investigation and Fortune
500 Review.  In late May 2002, we received a letter from the Fort Worth District
Office of the Securities and Exchange  Commission stating that it was initiating
a preliminary  inquiry into some of our accounting  practices.  In  mid-December
2002, we were notified by the SEC that a formal order of investigation  had been
issued. Since that time, the SEC has issued subpoenas calling for the production
of documents and  requiring  the  appearance of a number of witnesses to testify
regarding those accounting practices,  which relate to the recording of revenues
associated with cost overruns and unapproved claims on long-term engineering and
construction  projects.  Throughout the informal inquiry and during the pendency
of the formal investigation, we have provided approximately 300,000 documents to
the SEC. The production of documents is essentially  complete and the process of
providing  witnesses  to  testify  is  ongoing.  To  our  knowledge,  the  SEC's
investigation has focused on the compliance with generally  accepted  accounting
principles  of our  recording  of revenues  associated  with cost  overruns  and
unapproved claims for long-term engineering and construction  projects,  and the
disclosure of our accrual  practices.  Accrual of revenue from unapproved claims
is an accepted and widely  followed  accounting  practice  for  companies in the
engineering and  construction  business.  Although we accrued revenue related to
unapproved  claims in 1998, we first made disclosures  regarding the accruals in
our 1999 Annual Report on Form 10-K. We believe we properly applied the required
methodology of the American Institute of Certified Public Accountants' Statement
of Position 81-1,  "Accounting for Performance of Construction-Type  and Certain
Production-Type  Contracts",  and satisfied  the relevant  criteria for accruing
this revenue, although the SEC may conclude otherwise.
         On  December  21,  2001,  the SEC's  Division  of  Corporation  Finance
announced  that it would review the annual  reports of all Fortune 500 companies
that file periodic  reports with the SEC. We received the SEC's initial comments
in letter form dated September 20, 2002 and responded on October 31, 2002. Since
then, we have received and responded to several follow-up sets of comments.
         Securities  and related  litigation.  On June 3, 2002,  a class  action
lawsuit  was  filed  against  us in the  United  States  District  Court for the
Northern  District of Texas on behalf of purchasers of our common stock alleging
violations of the federal securities laws. After that date, approximately twenty
similar class  actions were filed  against us in that or other federal  district
courts.  Several of those lawsuits also named as defendants Arthur Andersen, LLP
("Arthur Andersen"),  our independent  accountants for the period covered by the
lawsuits,  and several of our present or former  officers and  directors.  Those
lawsuits allege that we violated federal  securities laws in failing to disclose
a change in the  manner  in which we  accounted  for  revenues  associated  with
unapproved claims on long-term engineering and construction contracts,  and that
we overstated  revenue by accruing the  unapproved  claims.  One such action was
subsequently dismissed voluntarily, without prejudice, upon motion by the filing
plaintiff.  The federal securities fraud class actions have all been transferred
to the United  States  District  Court for the  Northern  District  of Texas and

                                       27


consolidated  before the Honorable Judge David Godbey. The amended  consolidated
class action complaint in that case,  styled Richard Moore v.  Halliburton,  was
filed and  served  upon us on or about  April 11,  2003.  In early May 2003,  we
announced that we had entered into a written memorandum of understanding setting
forth  the terms  upon  which  the  consolidated  cases  would be  settled.  The
memorandum of understanding calls for Halliburton to pay $6 million, which is to
be  funded by  insurance  proceeds.  After  that  announcement,  one of the lead
plaintiffs  announced  that  it  was  dissatisfied  with  the  lead  plaintiffs'
counsel's handling of settlement  negotiations and what the dissident  plaintiff
regarded as  inadequate  communications  by the lead  plaintiffs'  counsel.  The
dissident  plaintiff has since filed a motion for an order to show cause why the
lead  plaintiffs'  counsel  should not  be held to have  breached  his fiduciary
duties to the class and be replaced as lead plaintiffs'  counsel.  It is unclear
whether  this  dispute  within  the ranks of the lead  plaintiffs  will have any
impact upon the process of approval of the  settlement and whether the dissident
plaintiff will object to the  settlement at the time of the fairness  hearing or
opt out of the class action for  settlement  purposes.  The process by which the
parties will seek approval of the settlement is ongoing.
         Another case,  also filed in the United States  District  Court for the
Northern  District of Texas on behalf of three  individuals,  and based upon the
same revenue recognition  practices and accounting treatment that is the subject
of the securities class actions,  alleges only common law and statutory fraud in
violation  of Texas  state law.  We moved to dismiss  that action on October 24,
2002,  as  required  by the court's  scheduling  order,  on the bases of lack of
federal  subject  matter  jurisdiction  and  failure to plead with the degree of
particularity required by the rules of procedure. That motion has now been fully
briefed  and oral  argument on it was held on July 29,  2003.  No ruling has yet
been announced.
         In addition to the  securities  class  actions,  one  additional  class
action,  alleging  violations of the Employee  Retirement Income Security Act of
1974 ("ERISA") in connection with the Company's Benefits Committee's purchase of
our stock for the accounts of participants in our 401(k)  retirement plan during
the  period  we  allegedly  knew or  should  have  known  that our  revenue  was
overstated as a result of the accrual of revenue in connection  with  unapproved
claims, was filed and subsequently voluntarily dismissed.
         On October 11, 2002, a shareholder  derivative  action against  present
and  former  directors  and our former  CFO was filed in the  District  Court of
Harris  County,  Texas  alleging  breach of fiduciary  duty and corporate  waste
arising out of the same events and circumstances upon which the securities class
actions are based.  We moved to dismiss that action and,  after hearings on that
motion, the court dismissed the action.
         On March 12, 2003, another shareholder derivative action arising out of
the same events and  circumstances was filed in the United States District Court
for the  Northern  District of Texas  against  certain of our present and former
officers and directors. Like the case filed in the state court in Harris County,
we believe that this action is without merit and we intend to vigorously  defend
it.  Settlement of this action is included in the memorandum of understanding in
the consolidated actions discussed above.
         As of the date of this filing, the $6 million settlement amount for the
consolidated  actions and the federal court derivative  action was fully covered
by the Company's  directors' and officers'  insurance carrier.  As such, we have
accrued a contingent  liability for the $6 million  settlement  and a $6 million
insurance  receivable  from  the  insurance  carrier.  We  have  not  accrued  a
contingent  liability as of June 30, 2003 for any other  shareholder  derivative
action or class action lawsuit discussed above.
         BJ Services  Company  patent  litigation.  On April 12, 2002, a federal
court jury in Houston,  Texas,  returned a verdict  against  Halliburton  Energy
Services,  Inc. in a patent infringement lawsuit brought by BJ Services Company,
or BJ. The lawsuit alleged that our Phoenix  fracturing fluid infringed a patent
issued to BJ in January  2000 for a method of well  fracturing  using a specific
fracturing fluid. The jury awarded BJ approximately $98 million in damages, plus
pre-judgment interest, and the court enjoined us from further use of our Phoenix
fracturing fluid. The United  States  Court of Appeals  for the  Federal Circuit
in Washington D.C. affirmed BJ Services'  judgment against us in August 2003. We
currently  anticipate  filing a petition for  rehearing  before the full federal
circuit  court on August 20,  2003.  In light of the trial  court's  decision in
April 2002,  a total of $102  million was accrued in the first  quarter of 2002,
which was comprised of the $98 million  judgment and $4 million in  pre-judgment
interest costs.  We do not expect the loss of the use of the Phoenix  fracturing
fluid to have a material adverse impact on our overall energy services business.
We have  alternative  products to use in our fracturing  operations and have not
been using the Phoenix fracturing fluid since April 2002.

                                       28


         Anglo-Dutch  (Tenge). We have been sued in the District Court of Harris
County,   Texas  by  Anglo-Dutch   (Tenge)  L.L.C.  and  Anglo-Dutch   Petroleum
International,  Inc. for allegedly breaching a confidentiality agreement related
to an investment  opportunity we considered in the late 1990s in an oil field in
the former Soviet Republic of Kazakhstan.  While we believe the claims raised in
that lawsuit are without merit and are  vigorously  defending  against them, the
plaintiffs have announced their intention to seek  approximately $680 million in
damages. Since we believe the probability of loss is remote, we have not accrued
a contingent  liability  for this matter as of June 30, 2003.  In mid-July,  the
court granted  portions of our motions for summary judgment and on July 24, 2003
granted   another   portion  as  well  and   invited   the  parties  to  request
reconsideration  of any other  portions of the  motions  that have thus far been
denied.  As of this date, it appears  likely that the case will proceed to trial
as  scheduled  on August 18, 2003 on  plaintiffs'  claims of breach of contract,
misappropriation  and  misappropriation  of trade  secrets.  In the  event of an
adverse  judgment,  we could be called upon to post  security  not to exceed $25
million  in the  form of cash or a bond in order to  postpone  execution  on the
judgment until after all appeals have been exhausted.
         Improper payments  reported to the Securities and Exchange  Commission.
During the second  quarter  2002,  we reported to the SEC and  disclosed  in our
first quarter 2002 Form 10-Q that one of our foreign  subsidiaries  operating in
Nigeria made improper  payments of approximately  $2.4 million to entities owned
by a Nigerian  national who held himself out as a tax consultant when in fact he
was an  employee  of a local tax  authority.  The  payments  were made to obtain
favorable tax treatment  and clearly  violated our Code of Business  Conduct and
our internal control procedures. The payments were discovered during an audit of
the foreign subsidiary.  We have conducted an investigation  assisted by outside
legal counsel.  Based on the findings of the  investigation  we have  terminated
several employees. None of our senior officers were involved. We are cooperating
with the SEC in its  review of the  matter.  We plan to take  further  action to
ensure that our foreign subsidiary pays all taxes owed in Nigeria,  which may be
as much as $5 million,  which has been fully accrued.  A preliminary  assessment
was issued by the Nigerian Tax Authorities in June of 2003 for  approximately $3
million.  Payment of that assessment has been made, and we are cooperating  with
the Nigerian  Tax  Authorities  to determine  the total amount due as quickly as
possible.
         Environmental.  We are  subject to  numerous  environmental,  legal and
regulatory  requirements  related  to our  operations  worldwide.  In the United
States,  these laws and  regulations  include  the  Comprehensive  Environmental
Response,  Compensation  and  Liability  Act,  the  Resources  Conservation  and
Recovery Act, the Clean Air Act, the Federal Water Pollution Control Act and the
Toxic Substances  Control Act, among others. In addition to the federal laws and
regulations,   states  where  we  do  business  may  have  equivalent  laws  and
regulations  by  which  we  must  also  abide.   We  evaluate  and  address  the
environmental impact of our operations by assessing and remediating contaminated
properties in order to avoid future  liabilities and comply with  environmental,
legal and  regulatory  requirements.  On  occasion,  we are involved in specific
environmental  litigation and claims, including the remediation of properties we
own or have  operated  as well as efforts to meet or correct  compliance-related
matters.
         We do not expect costs  related to these  remediation  requirements  to
have a material  adverse effect on our  consolidated  financial  position or our
results of operations.  Our accrued  liabilities for environmental  matters were
$36 million as of June 30, 2003 and $48 million as of  December  31,  2002.  The
liability covers numerous  properties,  and no individual  property accounts for
more than $5 million of the liability balance.  In some instances,  we have been
named a potentially  responsible  party by a regulatory  agency,  but in each of
those  cases,  we do not  believe  we  have  any  material  liability.  We  have
subsidiaries that have been named as potentially  responsible parties along with
other third parties for nine federal and state superfund sites for which we have
established  liabilities.  As of June 30, 2003,  those nine sites  accounted for
approximately $7 million of our total $36 million liability.
         Letters of credit. In the normal course of business, we have agreements
with banks under which  approximately  $1.3 billion of letters of credit or bank
guarantees were issued as of June 30, 2003,  including $195 million which relate
to our joint  ventures'  operations.  Effective  October 9, 2002,  we amended an
agreement  with banks  under  which  $261  million of letters of credit had been
issued.  The amended agreement removed the provision that previously allowed the
banks to require  collateralization  if ratings of  Halliburton  debt fell below
investment grade ratings. The revised agreements include provisions that require
us to  maintain  ratios of debt to total  capital and of total  earnings  before
interest,   taxes,  depreciation  and  amortization  to  interest  expense.  The
definition  of debt  includes our asbestos  liability.  The  definition of total
earnings before interest,  taxes,  depreciation  and  amortization  excludes any
non-cash charges related to the proposed  asbestos  settlement  through December
31, 2003.

                                       29


         If our  debt  ratings  fall  below  investment  grade,  we  would be in
technical breach of a bank agreement  covering another $52 million of letters of
credit at June 30,  2003,  which might  entitle the bank to set-off  rights.  In
addition,  a $151 million  letter of credit line, of which $141 million has been
issued,   includes   provisions   that   allow   the   bank  to   require   cash
collateralization for the full line if debt ratings fall below either the rating
of BBB by  Standard  & Poor's  or Baa2 by  Moody's  Investors'  Services.  These
letters  of  credit  and bank  guarantees  generally  relate  to our  guaranteed
performance   or  retention   payments   under  our   long-term   contracts  and
self-insurance.
         In the past, no  significant  claims have been made against  letters of
credit we have issued. We do not anticipate material losses to occur as a result
of these financial instruments.
         Liquidated damages. Many of our engineering and construction  contracts
have  milestone due dates that must be met or we may be subject to penalties for
liquidated  damages  if claims  are  asserted  and we were  responsible  for the
delays. These generally relate to specified activities within a project by a set
contractual  date or achievement of a specified level of output or throughput of
a plant we  construct.  Each  contract  defines  the  conditions  under  which a
customer may make a claim for liquidated damages. In most instances,  liquidated
damages are not asserted by the  customer but the  potential to do so is used in
negotiating claims and closing out the contract.  We had not accrued a liability
for $431  million at June 30,  2003 and $364  million at  December  31,  2002 of
possible  liquidated damages as we consider the imposition of liquidated damages
to be unlikely.  We believe we have valid claims for schedule extensions against
the customers which would eliminate our liability for liquidated damages. Of the
total  liquidated  damages,  $266  million at June 30, 2003 and $263  million at
December   31,   2002   relate  to   unasserted   liquidated   damages  for  the
Barracuda-Caratinga  project.
         Other.  We are a party to various other legal  proceedings.  We expense
the cost of legal fees related to these proceedings as incurred.  We believe any
liabilities we may have arising from these  proceedings  will not be material to
our consolidated financial position or results of operations.

Note 13.  Accounting for Stock-Based Compensation
         We have six  stock-based  employee  compensation  plans. We account for
those plans under the  recognition  and  measurement  principles  of  Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related  interpretations.  No cost for stock options granted is reflected in net
income, as all  options granted under our  plans have an exercise price equal to
the  market  value of the  underlying  common  stock on the  date of  grant.  In
addition,  no cost for the  Employee  Stock  Purchase  Plan is  reflected in net
income because it is not considered a compensatory plan.
         The fair value of options at the date of grant was estimated  using the
Black-Scholes  option pricing model. For the three and six months ended June 30,
2003 and June 30, 2002,  the weighted  average  assumptions  and resulting  fair
values of options granted are as follows:


                                                            Three Months                 Six Months
                                                            Ended June 30               Ended June 30
                                                     -------------------------------------------------------
                                                         2003           2002         2003          2002
  ----------------------------------------------------------------------------------------------------------
                                                                                     
  Assumptions:
      Risk-free interest rate                              2.4%          4.1%          2.4%          4.1%
      Expected dividend yield                              2.2%          3.1%          2.2%          3.1%
      Expected life (in years)                              5             5             5             5
      Expected volatility                                 62.0%         60.0%         62.0%         60.0%
  Weighted average fair value of options granted      $   12.68       $  9.15       $ 12.55        $ 6.92
============================================================================================================

         The following table illustrates the effect on net income and income per
share if we had applied the fair value recognition  provisions of FASB Statement
No. 123,  "Accounting for  Stock-Based  Compensation",  to stock-based  employee
compensation.

                                       30




                                                            Three Months                 Six Months
                                                            Ended June 30               Ended June 30
                                                     -------------------------------------------------------
  Millions of dollars except per share data              2003           2002         2003          2002
  ----------------------------------------------------------------------------------------------------------
                                                                                     
  Net income (loss), as reported                         $   26       $ (498)       $  69       $  (476)
  Total stock-based employee compensation
      expense determined under fair value
      based method for all awards, net of
      related tax effects                                   (7)           (6)         (13)          (12)
  ----------------------------------------------------------------------------------------------------------
  Net income (loss), pro forma                           $   19       $ (504)       $  56       $  (488)
  ==========================================================================================================

  Basic income (loss) per share:
  As reported                                            $ 0.06       $ (1.15)       $ 0.16      $ (1.10)
  Pro forma                                              $ 0.04       $ (1.16)       $ 0.13      $ (1.12)

  Diluted income (loss) per share:
  As reported                                            $ 0.06       $ (1.15)       $ 0.16      $ (1.10)
  Pro forma                                              $ 0.04       $ (1.16)       $ 0.12      $ (1.12)
  ==========================================================================================================

Note 14.  Change in Accounting Principle
         In August 2001,  the  Financial  Accounting  Standards  Board  ("FASB")
issued Statement of Financial  Accounting Standard ("SFAS") No. 143, "Accounting
for Asset Retirement  Obligations" which addresses the financial  accounting and
reporting for obligations  associated with the retirement of tangible long-lived
assets and the associated  assets'  retirement costs. SFAS No. 143 requires that
the fair value of a liability  associated with an asset retirement be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated retirement costs are capitalized as part of the carrying
amount of the long-lived asset and subsequently depreciated over the life of the
asset. The new standard was effective for us beginning  January 1, 2003, and the
adoption  of this  standard  resulted  in a charge of $8 million  after tax as a
cumulative  effect of a change in  accounting  principle.  The asset  retirement
obligations  primarily  relate to the  removal of  leasehold  improvements  upon
exiting certain lease  arrangements  and restoration of land associated with the
mining of bentonite.  The total  liability  recorded at adoption and at June 30,
2003 for asset retirement obligations and the related accretion and depreciation
expense for all periods  presented is immaterial to our  consolidated  financial
position and results of operations.
         In  November  2002,  the  FASB  issued  FASB   Interpretation  No.  45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of Others"  ("FIN 45").  This  statement
requires  that a liability  be recorded in the  guarantor's  balance  sheet upon
issuance of a guarantee.  In  addition,  FIN 45 requires  disclosures  about the
guarantees that an entity has issued.  The disclosure  provisions of FIN 45 were
effective  for financial  statements of interim  and annual periods  ended after
December 15, 2002. We adopted the recognition provisions of FIN 45 as of January
1,  2003.  The  adoption  of FIN 45  did  not  have  a  material  effect  on our
consolidated financial position or results of operations.
         The FASB issued FASB Interpretation No. 46,  "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"), in January 2003.
FIN 46, which we adopted  effective July 1, 2003,  requires the consolidation of
entities  in which a company  absorbs a majority  of another  entity's  expected
losses,  receives a majority of the other entity's expected residual returns, or
both, as a result of ownership,  contractual or other financial interests in the
other  entity.  Currently,  entities  are  generally  consolidated  based upon a
controlling  financial  interest through ownership of a majority voting interest
in the entity.  At this time, we have identified the following variable interest
entities:
              -   during 2001,  we formed a joint  venture  under which we own a
                  50% equity  interest with two other unrelated  partners,  each
                  owning a 25%  equity  interest.  We have  determined  that the
                  joint venture is a variable  interest entity  and  that we are
                  the primary beneficiary. We will consolidate the entity in our
                  Engineering and Construction  Group business segment effective
                  July 1,  2003.  The joint  venture  was  formed to  construct,
                  operate and service  certain  assets for a third party and was

                                       31


                  funded with third party debt. The  construction  of the assets
                  is  expected to be  completed  in 2004, and the operating  and
                  service  contract  related to  the  assets  will extend for 20
                  years beginning in 2003.  The proceeds from the debt financing
                  are being  used to construct the  assets and will be paid down
                  with cash  flows  generated  during  the operation and service
                  phase of  the  contract  with the  third party.  Our aggregate
                  exposure  to loss  is immaterial.  The  consolidation of  this
                  joint  venture will  increase total  assets  by  approximately
                  $139  million   and  long-term   debt  by  approximately  $143
                  million,  with   corresponding  decreases  in   equity  of  $2
                  million  and minority  interest  of $2  million  as of July 1,
                  2003.  The  joint  venture is currently  accounted  for  under
                  the   equity   method   of    accounting    and   the   future
                  consolidation will have no impact on net income;
              -   during the second  quarter of 2001,  we formed a joint venture
                  with an unrelated party in which we have a 50% equity interest
                  and account for this investment using the equity method in our
                  Landmark and Other Energy Services business segment. The joint
                  venture  was  established  for  the  further  development  and
                  deployment of new technologies related to completions and well
                  intervention  products  and  services.  The joint  venture  is
                  considered a variable  interest  entity under FIN 46. However,
                  we are not the  primary  beneficiary  of the  entity  and will
                  continue  to  apply  the  equity  method  of  accounting.  Our
                  maximum exposure to loss as a result of our involvement in the
                  joint venture  is $100  million as of June 30, 2003,  which is
                  the sum  of our  current  investment  and  our  share  of  the
                  balance outstanding  under the joint  venture's revolving loan
                  agreement  with the equity partners. We are  also at  risk for
                  our share of  any future losses  the joint venture  may incur;
                  and
              -   our  Engineering and  Construction  Group is involved in three
                  joint ventures formed to design,  build,  operate and maintain
                  roadways  for  certain  government  agencies.  We  have  a 25%
                  ownership  interest  in these joint  ventures  and account for
                  them  under  the  equity  method.  These  joint  ventures  are
                  considered    variable   interest   entities   as  they   were
                  initially  formed  with  little  equity   contributed  by  the
                  partners.  The joint ventures have obtained  financing through
                  third  parties  which is not  guaranteed by us. We are not the
                  primary   beneficiary  of   these   joint   ventures and will,
                  therefore,  continue to  account for  them  using  the  equity
                  method.  As  of  June  30, 2003,  these  joint  ventures   had
                  total  assets of $911  million  and total  liabilities of $906
                  million.  Our  maximum exposure  to  loss is  limited  to  our
                  equity  investments  in  and  loans  to  the  joint   ventures
                  (totaling $38 million  at June 30,  2003) and our share of any
                  future  losses  related  to  the  construction,  operation and
                  maintenance of these roadways.

Note 15.  Convertible Senior Notes
         In June 2003, we issued $1.2 billion of 3.125% convertible senior notes
due July 15, 2023. The notes were offered and sold in accordance  with Rule 144A
under the Securities Act of 1933. The notes are our senior unsecured obligations
ranking   equally  with  all  of  our  existing  and  future  senior   unsecured
indebtedness.  We will pay  interest  on the notes on  January 15 and July 15 of
each year.
         The  notes  are  convertible  into our  common  stock  under any of the
following circumstances:
              -   during any  calendar  quarter  (and only during such  calendar
                  quarter) if the last  reported  sale price of our common stock
                  for  at  least  20  trading  days  during  the  period  of  30
                  consecutive trading days ending on the last trading day of the
                  previous  quarter  is  greater  than or  equal  to 120% of the
                  conversion  price per share of our  common  stock on such last
                  trading day;
              -   if the notes have been called for redemption;
              -   upon  the occurrence of specified  corporate transactions that
                  are described in the indenture relating to the offering; or
              -   during any period in which the credit ratings  assigned to the
                  notes by both Moody's and Standard & Poor's are lower than Ba1
                  and BB+, respectively,  or the notes are no longer rated by at
                  least one of these rating services or their successors.

                                       32


         The  initial  conversion  price is $37.65  per share and is  subject to
adjustment.  Upon  conversion,  we will  have the right to  deliver,  in lieu of
shares of our common stock, cash or a combination of cash and common stock.
         The notes are  redeemable  for cash at our  option on or after July 15,
2008.  Holders  may  require us to  repurchase  the notes for cash on July 15 of
2008,  2013 or 2018 or,  prior to July 15, 2008,  in the event of a  fundamental
change as defined in the  indenture.  In each case, we will pay a purchase price
equal to 100% of the  principal  amount  plus  accrued and unpaid  interest  and
additional amounts owed, if any.
         We have agreed to file a shelf registration statement with the SEC with
respect to the notes and the common stock issuable upon conversion of the notes.
If we fail to fulfill this obligation  within the specified time period, we will
pay  additional  amounts  on the  notes  and  the  common  stock  issuable  upon
conversion of the notes.

Note 16.  Income Taxes
         Our effective tax rate for the  second quarter 2003 was 39% as compared
to 18%  for the second  quarter 2002.  The effective tax rate  was lower in 2002
due to the impact of the impairment loss on Bredero-Shaw and charges  associated
with our asbestos  exposure.  The  Bredero-Shaw  loss created a capital loss for
which we have no  capital  gains to offset  and  therefore  no tax  benefit  was
recorded for the loss as future realization of the benefit was questionable. The
asbestos accrual  generates a United States Federal deferred tax asset which may
not be fully realizable based upon future taxable income projections and thus we
have recorded a partial valuation allowance.

                                       33


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
--------------------------------------------------------------------------------

         In this section, we discuss the business environment, operating results
and general financial condition of Halliburton Company and its subsidiaries.  We
explain:
              -   factors and risks that impact our business;
              -   why our  revenues and operating  income for the second quarter
                  2003  and  six  months  ended  June  30, 2003  vary  from  the
                  second quarter 2002 and six months ended June 30, 2002;
              -   capital expenditures;
              -   factors that impacted our cash flows; and
              -   other items that materially affect our financial condition or
                  earnings.

BUSINESS ENVIRONMENT
         During the second quarter of 2003, we restructured  our Energy Services
Group  into four  divisions,  which is the basis  for the four  segments  we now
report within the Energy  Services  Group.  We grouped product lines in order to
better align  ourselves  with how our  customers  procure our  services,  and to
capture new business and achieve better  integration,  including  joint research
and development of new products and technologies  and other  synergies.  The new
segments  mirror  the way our  chief  executive  officer  (our  chief  operating
decision  maker)  now  regularly   reviews  the  operating   results,   assesses
performance and allocates  resources.  Our Engineering  and  Construction  Group
(known as KBR) segment remains unchanged.
         All prior period  segment  results have been  restated to reflect these
changes.
         Our five  business  segments are  organized around  how  we  manage the
business. These segments are:
              -   Drilling and Formation Evaluation;
              -   Fluids;
              -   Production Optimization;
              -   Landmark and Other Energy Services; and
              -   Engineering and Construction Group.
         We  currently  operate  in over 100  countries  throughout  the  world,
providing a comprehensive range of discrete and integrated products and services
to the energy industry and to other industrial and governmental  customers.  The
majority of our consolidated  revenues are derived from the sale of services and
products,  including engineering and construction activities, to major, national
and  independent  oil and gas  companies.  These  services and products are used
throughout  the  energy  industry  from  the  earliest  phases  of  exploration,
development and production of oil and gas resources through refining, processing
and marketing.
          The industries we serve are highly  competitive  with many substantial
competitors  for each  segment.  In the first half of 2003,  the  United  States
represented 33% of our total revenue and the United Kingdom  represented 11%. No
other country accounted for more than 10% of our operations. Unsettled political
conditions,  social unrest, acts of terrorism, force majeure, war or other armed
conflict,  expropriation  or other  governmental  actions,  inflation,  exchange
controls or currency  devaluation  may result in increased  business risk in any
one  country.  We  believe  the  geographic   diversification  of  our  business
activities  reduces the risk that loss of  business in any one country  would be
material to our consolidated results of operations.
         Activity  levels  within our five business  segments are  significantly
impacted by the following:
              -   spending on  upstream exploration, development  and production
                  programs  by  major,  national  and  independent  oil and  gas
                  companies;
              -   capital  expenditures  for  downstream  refining,  processing,
                  petrochemical and  marketing facilities by major, national and
                  independent oil and gas companies; and
              -   government outsourcing and spending levels.
         The state of the  global  economy  also  impacts  our  activity,  which
indirectly  impacts oil and gas consumption,  demand for petrochemical  products
and investment in infrastructure projects.

                                       34


         Energy Services Group
         Some of the more significant  measures  of current  and future spending
levels of oil and gas companies which drive worldwide exploration and production
activity and investment are the following:
              -   oil and gas prices;
              -   the quality of exploration and production drilling  prospects;
                  and
              -   world economic  conditions and  the degree of global political
                  stability.
         In  early 2002, a surplus in working gas in storage contributed  to low
prices and reduced drilling activities.  Working gas in storage is the volume of
gas in underground reservoirs above the level of base gas (cushion gas) intended
as permanent  inventory in a storage reservoir to maintain adequate pressure and
deliverability  rates  throughout  the winter  withdrawal  season.  The  reduced
drilling,  combined with an abnormally cold 2002/2003  winter season,  drove the
working  gas in  storage  at  January  31,  2003 to 1,521  billion  cubic  feet,
commonly referred to as bcf, which was 287 bcf below the five year average.
         This low level of working  natural gas in storage in the United  States
has increased the demand for natural gas resulting in Henry Hub prices averaging
above $5.00 per million cubic feet,  commonly referred to as mcf, throughout the
second quarter 2003.  For the second  quarter 2003,  natural gas prices at Henry
Hub averaged $5.63 per mcf compared to $3.40 per mcf in the second quarter 2002.
The level of natural gas storage  continues to be a key driver of North American
activity.  As of July 4, 2003 there was 1,773 bcf in  working  gas in storage in
the  United  States  according  to an Energy  Information  Administration  (EIA)
estimate which was 580 bcf lower than a year ago and 317 bcf lower than the five
year average.
         High  natural gas prices tend to depress industrial demand for the gas,
which  occurred  during  the  second  quarter  2003.  As a  result,  a  definite
improvement in the supply situation has occurred and the probability of reaching
adequate storage levels by November has risen.
         Crude oil prices for West Texas Intermediate averaged $29.16 per barrel
for the  second  quarter  of 2003  compared  to $25.75 per barrel for the second
quarter  2002.  Crude oil  inventories  in the United  States have  consistently
remained  below the lower end of the normal  range,  which in turn has supported
crude oil prices in the United States.  The situation  worsened in December 2002
when oil imports  from  Venezuela  were  reduced due to strikes in that  country
which created supply disruptions during most of the first quarter 2003.  Despite
imports  from  Venezuela  returning  close  to  normal  levels,   United  States
commercial  crude oil inventories  (excluding  crude oil stored in the Strategic
Petroleum  Reserve) have  remained more than 15 million  barrels below the lower
end of the normal range since the end of January,  2003.  Until commercial crude
oil inventory deficits are eliminated, United States oil markets are expected to
remain tight, which should help support prices at or near current levels.
         The yearly average and quarterly  average rig counts based on the Baker
Hughes Incorporated rig count information are as follows:


Average Rig Counts                          2002            2001
----------------------------------------------------------------------
                                                   
United States                                 831          1,155
Canada                                        266            342
International (excluding Canada)              732            745
----------------------------------------------------------------------
Worldwide Total                             1,829          2,242
======================================================================




                               Second        First       Fourth        Third         Second         First
                               Quarter      Quarter      Quarter      Quarter        Quarter       Quarter
Average Rig Counts              2003         2003         2002         2002           2002          2002
--------------------------------------------------------------------------------------------------------------
                                                                                 
United States                     1,028        901          847           853           806            818
Canada                              203        493          283           250           147            383
International
    (excluding Canada)              765        744          753           718           725            731
--------------------------------------------------------------------------------- ----------------------------
Worldwide Total                   1,996      2,138        1,883         1,821         1,678          1,932
==============================================================================================================


                                       35


         Worldwide rig activity has increased  since the second  quarter of 2002
from an average of 1,678  rigs at the end of the  second  quarter  2002 to 1,996
rigs at the end of the second  quarter  2003.  The  increase in rig activity has
been most pronounced in the United States with a 28% increase in rig counts from
806 in the second  quarter 2002 to 1,028 rigs in the second  quarter  2003.  The
majority  of this  increase  is  related to rigs  drilling  for  natural  gas to
replenish working gas in storage for the upcoming  2003/2004 heating season. The
Canadian rig count decreased from 493 rigs in the first quarter 2003 to 203 rigs
in the second  quarter  2003.  Canadian rig counts  decreased as a result of the
normal  spring break up and thaw season,  but increased 38% from 147 rigs in the
second  quarter  2002 to 203 rigs in the second  quarter  2003 on a  comparative
basis.  The  international  rig count increased six percent from 725 rigs in the
second quarter 2002 to 765 rigs in the second quarter 2003. The majority of this
increase  was in Mexico and  Argentina  which was offset  slightly  by lower rig
counts in  Venezuela  and in the  United  Kingdom  sector of the North  Sea.  We
believe the increased  drilling activity and rig counts since the second quarter
of 2002 are due to the following factors:
              -   higher oil and gas prices;
              -   low  oil   inventories  in   the  Organization   for  Economic
                  Co-operation and Development consuming countries;
              -   low  natural gas  inventories in  the United  States  for  the
                  upcoming winter season;
              -   cessation of armed conflict in Iraq;
              -   perception that the global economy is improving; and
              -   increased spending by our customers.
         It is common practice in the United States oilfield  services industry
to sell services and products based on a price book and then apply  discounts to
the price book based upon a variety of factors.  Discounts are typically applied
to partially or substantially offset price book increases  immediately following
a price increase.  Discounts  normally decrease over time if the activity levels
remain strong. During periods of reduced activity,  discounts normally increase,
reducing  the net revenue for our  products  and  services.  Conversely,  during
periods of higher activity,  discounts normally decline resulting in net revenue
increasing for our products and services.
         During 2000 and 2001, we implemented  several price book increases.  In
July 2000, as a result of increased consumable materials costs and a tight labor
market causing higher labor costs, we increased  prices in the United States for
most product  lines on average  between 2% and 12%. In January 2001, as a result
of continued  labor  shortages  and  increased  labor and  materials  costs,  we
increased  prices in the United  States on average  between 5% and 12%.  In July
2001,  as  a  result  of  continuing  personnel  and  consumable  material  cost
increases, we increased prices on average between 6% and 15%.
         Decreased rig  activity in the United  States in  2002 from 2001 caused
the Energy  Services Group's  product  lines to discount  prices.  Although  rig
activity  in the  United  States  has  increased  over the last  twelve  months,
discounts have still not decreased,  particularly in some of the Western states.
Price  increases that we implemented in 2000 and 2001 have mostly been eroded by
additional discounts.
         Engineering and Construction Group
         Our  engineering  and  construction  projects are longer term in nature
than  our energy  services projects  and are  not as significantly  impacted  by
short-term  fluctuations  in oil and gas  prices.  We  believe  that the  global
economic  recovery is continuing,  but its strength and  sustainability  are not
assured. Based on the uncertain economic recovery, continuing excess capacity in
petrochemical  supplies and rising  unemployment,  customers  have  continued to
delay project awards or reduce the scope of projects involving  hydrocarbons and
manufacturing  until  growth  in  consumer  spending  is  evident.  A  number of
large-scale gas and liquefied natural gas (LNG) development, offshore deepwater,
government and infrastructure projects are being awarded or actively considered.
However,  due to the inconsistent  economic growth in certain areas of the world
and the overall limited growth of the global economy, many customers continue to
delay some of their capital commitments and international investments.
         We see an emerging  drive to monetize  gas reserves in the Middle East,
West Africa and parts of the Pacific Basin,  combined with strong demand for gas
and LNG in the  United  States,  Japan,  Korea,  Taiwan,  China and  India.  The
developments have led to numerous gas-to-liquids (GTL), LNG liquefaction and gas
development  projects  in the three  exporting  regions  as well as  onshore  or
floating regasification terminals  and gas  processing  plants  in the importing
countries.  With LNG set to play a larger role as a new supply source, the shift

                                       36


from fuel served by  exclusively  domestic  resources  to a market  increasingly
served with  international  resources  heralds a change in the United States gas
business.  This will lead to an increasing  internationalization  of the natural
gas industry,  bringing with it the  integration of North America into a growing
world market.
         We expect growth  opportunities  to exist for  additional  security and
defense support to government agencies in the United States and other countries.
Demand for these services is expected to grow as a result of the  reconstruction
efforts in Iraq and as  governmental  agencies seek to control costs and promote
efficiencies by outsourcing  these  functions.  We also expect growth due to new
demands created by increased  efforts to combat  terrorism and enhance  homeland
security.
         Engineering and  construction  contracts can be broadly  categorized as
fixed-price,  sometimes referred to as lump sum, or cost reimbursable contracts.
Some contracts can involve both fixed-price and cost reimbursable elements.
         Fixed-price  contracts  are for a fixed  sum to cover all costs and any
profit element for a defined scope of work.  Fixed-price  contracts  entail more
risk to us as we must  pre-determine both the quantities of work to be performed
and the costs  associated with executing the work. The risks to us arise,  among
other things, from:
              -   uncertainties in  estimating the technical  aspects and effort
                  involved to accomplish the work within  the contract schedule;
              -   labor availability and productivity; and
              -   supplier and subcontractor pricing and performance.
         Fixed-price  engineering,  procurement and construction and fixed-price
engineering,  procurement, installation and commissioning contracts involve even
greater risks including:
              -   bidding  a fixed-price  and completion  date  before  detailed
                  engineering work has been performed;
              -   bidding a fixed-price  and  completion  date before locking in
                  price  and  delivery  of  significant  procurement  components
                  (often items which are  specifically  designed and  fabricated
                  for the project);
              -   bidding a fixed-price  and completion  date before  finalizing
                  subcontractors' terms and conditions;
              -   subcontractors'    individual    performance    and   combined
                  interdependencies of multiple subcontractors (the  majority of
                  all  construction  and  installation   work  is  performed  by
                  subcontractors);
              -   contracts covering long periods of time;
              -   contract values generally for large amounts; and
              -   contracts    containing    significant    liquidated   damages
                  provisions.
         Cost  reimbursable  contracts  include  contracts  where  the  price is
variable  based  upon  actual  costs  incurred  for time and  materials,  or for
variable  quantities  of work priced at defined unit rates.  Profit  elements on
cost  reimbursable  contracts may be based upon a percentage  of costs  incurred
and/or a fixed amount.  Cost  reimbursable  contracts are generally  less risky,
since the owner retains many of the risks.  While fixed-price  contracts involve
greater risk,  they also are  potentially  more  profitable for the  contractor,
since the owners pay a premium to transfer many risks to the contractor.
         After  careful  consideration,  we have  decided  to no  longer  pursue
fixed-price engineering,  procurement,  installation and commissioning contracts
for  the  offshore  oil  and gas  industry.  An  important  aspect  of our  2002
reorganization was to look closely at each of our businesses to ensure that they
are  self-sufficient,  including  their use of capital  and  liquidity.  In that
process,   we  found  that  the  engineering,   procurement,   installation  and
commissioning  offshore  business  was  using a  disproportionate  share  of our
bonding and letter of credit capacity relative to its profit  contribution.  The
risk/reward  relationship  in that  business is no longer  attractive  to us. We
provide a range of engineering,  fabrication and project management  services to
the offshore  industry,  which we will continue to service  through a variety of
other  contracting  forms. We have seven fixed-price  engineering,  procurement,
installation  and  commissioning  offshore  projects  underway  and we are fully
committed to successful  completion of these projects,  all but two of which are
substantially complete. The two projects are approximately 75% complete. We plan
to retain our offshore engineering and services capabilities.
         The approximate percentages of revenues attributable to fixed-price and
cost reimbursable engineering and construction segment contracts are as follows:

                                       37




                                          Fixed-Price   Cost Reimbursable
--------------------------------------------------------------------------
                                                  
Second Quarter ended June 30, 2003             40%              60%
Year ended December 31, 2002                   47%              53%
==========================================================================

         Backlog
         Our backlog at June 30,  2003,  was $10.2  billion,  comprised  of $9.9
billion for the  Engineering  and  Construction  Group and $299  million for the
Energy Services Group. Our total backlog at December 31, 2002, was $10 billion.
         Reorganization of Business Operations
         As a part of the 2002 reorganization, we decided that the operations of
major projects, Granherne and Production  Services were better aligned with KBR,
and  these  businesses  were  moved  from  the  Energy  Services  Group  to  the
Engineering and Construction  Group during the second quarter of 2002. All prior
period  segment  results  have been  restated  to  reflect  this  change.  Major
projects, which currently consists of the Barracuda-Caratinga project in Brazil,
is now reported through the offshore product line,  Granherne is now reported in
the onshore  product  line and  production  services is now  reported  under the
operations and maintenance product line.
         Asbestos and Silica
         In December  2002,  we  announced  that we had reached an  agreement in
principle  that,  if and when  consummated,  would  result  in a  settlement  of
asbestos  and  silica  personal  injury  claims  against  our  subsidiaries  DII
Industries  and Kellogg Brown & Root and their  current and former  subsidiaries
with United States operations. Subsequently, in 2003, DII Industries and Kellogg
Brown & Root entered into definitive written agreements  finalizing the terms of
the  agreements in principle with  attorneys  representing  more than 90% of the
current  asbestos  claimants.  We revised our best  estimate of our asbestos and
silica liability based on information  obtained while  negotiating the agreement
in  principle,  and adjusted our asbestos and silica  liability to $3.4 billion,
recorded additional probable insurance  recoveries  resulting in a total of $2.1
billion as of December 31, 2002 and recorded a net pretax charge of $799 million
($675 million after tax) in the fourth quarter of 2002.
         Should the  proposed  settlement  become  probable  under  Statement of
Financial  Accounting  Standards No. 5, we would adjust our accrual for probable
and reasonably estimable  liabilities for current and future asbestos and silica
claims. The settlement amount initially would be up to $4.3 billion,  consisting
of up to $2.775 billion in cash, the value of 59.5 million Halliburton shares of
common  stock and notes with a net present  value  expected to be less than $100
million.  Assuming the adjusted  liability would be $4.3 billion,  we would also
increase our probable  insurance  recoveries to $2.3 billion.  The impact on our
statement of  operations  would be an  additional  pretax charge of $606 million
($493 million after tax). This accrual (which values our stock to be contributed
at $1.4 billion  using our stock price at June 30, 2003 of $23.00) would then be
adjusted  periodically  based on changes in the market price of our common stock
until  the  common  stock  is  contributed  to a trust  for the  benefit  of the
claimants.  We may  enter  into  agreements  with  all or some of our  insurance
carriers to negotiate an overall  accelerated  payment of anticipated  insurance
proceeds.  If this were to happen, we would expect to recover less than the $2.3
billion of anticipated insurance receivables which would result in an additional
charge to income.

                                       38


RESULTS OF OPERATIONS IN 2003 COMPARED TO 2002

Second Quarter of 2003 Compared with the Second Quarter of 2002

REVENUES


                                                   Second Quarter
                                              -----------------------   Increase
Millions of dollars                              2003        2002      (decrease)
-----------------------------------------------------------------------------------
                                                              
Drilling and Formation Evaluation              $    414    $    413      $    1
Fluids                                              518         450          68
Production Optimization                             693         634          59
Landmark and Other Energy Services                  155         259        (104)
-----------------------------------------------------------------------------------
   Total Energy Services Group                    1,780       1,756          24
-----------------------------------------------------------------------------------
Engineering and Construction Group                1,819       1,479         340
-----------------------------------------------------------------------------------
Total revenues                                 $  3,599    $  3,235      $  364
===================================================================================

         Consolidated  revenues  in the  2003  second  quarter  of $3.6  billion
increased  $364  million  compared  to the 2002  second  quarter.  International
revenues  were 67% of total  revenues  for the second  quarters of both 2003 and
2002.
         Drilling and  Formation  Evaluation segment  revenues were $414 million
for the  2003  second  quarter,  up  slightly  from  the  2002  second  quarter.
International  revenues  were 72% of total  revenues in both the second  quarter
2003 and the second  quarter 2002.  Mono Pumps,  which was sold in January 2003,
contributed  approximately $20 million in revenues in the second quarter of 2002
to our  drilling  services  product  line.  The loss of Mono Pumps  revenues was
partially  offset by revenues in the remainder of our drilling  services product
line as contracts that were expiring in the United Kingdom were more than offset
by new  contracts,  primarily  in West Africa and  Ecuador.  Drill bits  revenue
increased by 6% due mainly to sales in Continental Europe.
         On a geographic basis, the Middle East/Asia  region's revenue for the
segment  increased  $3 million in all  product  lines,  while  revenues  for the
segment in Latin  America  declined  $3 million  due to  decreased  activity  in
Venezuela  as  activity  was  slow to pick up after  the  recent  civil  unrest,
partially offset by an increase in Mexico.
         Fluids segment revenues were $518 million for the second quarter  2003,
an increase of 15% from the second quarter 2002. International revenues were 55%
of total revenues in the 2003 second quarter  compared to 52% in the 2002 second
quarter.  The  increase  in Fluids  segment  revenue was spread  almost  equally
between cementing and drilling fluids reflecting higher rig counts in the United
States and increased activity with PEMEX in Mexico. In addition, drilling fluids
benefited from higher activity in Angola, Canada and Algeria.
         On a geographic basis, Europe/Africa revenues for the segment increased
$21 million  primarily  due to  increased  activity in Norway and Angola.  North
America  revenues for the segment  increased  $24 million  primarily  due to the
higher  land  rig  count in the  United  States.  Similar  to the  Drilling  and
Formation  Evaluation  and  Production  Optimization  segments,   Latin  America
revenues for the segment were impacted by decreased  activity in Venezuela,  but
this was more than  offset by the  increases  in  Mexico.  This  resulted  in an
overall increase in Latin America revenue of $3 million.
         Production Optimization segment revenues were $693 million for the 2003
second quarter,  an increase of 9% from the 2002 second  quarter.  International
revenues were 55% of total  revenues in the second  quarter 2003 compared to 51%
in the second  quarter 2002 as activity  picked up in the Middle East  following
the end of the war in Iraq. Our production  enhancement product line was up 11%,
due to an increase  in activity in the United  States as a result of higher land
rig  counts.  In  addition,  Subsea 7, Inc.  accounted  for $11  million  of the
increase  due to higher  activity  in the North Sea.  Further,  the 2002  second
quarter did not include all three months of activity  for Subsea 7, Inc.,  as it
was not formed until May 23, 2002. The sale of Halliburton  Measurement  Systems
during the second  quarter of 2003 had a $3 million  negative  impact on segment
revenue.
         On a geographic basis,  Middle East/Asia  revenues for the segment were
up $25 million due to higher  sales to  Kazakhstan,  and higher  activity in the
former Soviet Union , Australia,  Brunei and Iraq. Revenues for the segment were
$10 million  higher in Latin America due to increased  work with PEMEX in Mexico
partially offset by lower activity in Venezuela and Brazil.

                                       39


         Landmark and Other Energy  Services segment  revenues were $155 million
for the second quarter 2003, a decrease of 40% from the second quarter 2002. The
decrease is due to most of our subsea activities being moved into Subsea 7, Inc.
in May 2002 plus the impact of the sale of  Wellstream  during the first quarter
of 2003.  Revenues for Landmark  Graphics were flat with the prior year quarter.
International  revenues for the segment were 72% of total revenues in the second
quarter 2003 compared to 75% in the second quarter 2002.
         Engineering and Construction Group revenues of $1.8 billion in the 2003
second quarter were 23% higher than in the 2002 second quarter.  The improvement
was due to revenue  increases  in  government  services  and  onshore  projects,
partially  offset by declines in offshore  projects.  Revenues  from  government
related  activities  more than doubled on increased  work in the Middle East for
the United States and the United Kingdom  governments,  offset slightly by lower
activity  levels  on the  Balkans  project.  Onshore  revenues  were  up by 21%,
primarily due to several new projects in Algeria,  Egypt, Chad and Cameroon that
began during 2002.  Offshore revenues  decreased 23% reflecting reduced activity
on the Barracuda-Caratinga project in Brazil and projects in the Philippines and
Nigeria  that are nearing  the  completion  phase.  Operations  and  maintenance
revenues  were  down 12%  compared  to the  second  quarter  of 2002  due to the
loss of several contracts that have not been replaced.

OPERATING INCOME


                                               Second Quarter
                                          --------------------------   Increase
Millions of dollars                          2003          2002       (decrease)
----------------------------------------------------------------------------------
                                                             
Drilling and Formation Evaluation           $    49      $    42       $     7
Fluids                                           68           49            19
Production Optimization                         113          106             7
Landmark and Other Energy Services                5         (127)          132
----------------------------------------------------------------------------------
   Total Energy Services Group                  235           70           165
----------------------------------------------------------------------------------
Engineering and Construction Group             (148)        (450)          302
General corporate                               (16)         (25)            9
-------------------------------------------------------------------- -------------
Total operating income                      $    71      $  (405)      $   476
==================================================================================

         Consolidated operating income of $71 million was $476 million higher in
the second  quarter 2003  compared to the second  quarter  2002.  This change is
attributable  to several  significant  items  which  occurred  during the second
quarter of 2003 and 2002.
         The significant items for the 2003 second quarter included:
              -   $173 million loss in the  Engineering and  Construction  Group
                  related to the  Barracuda-Caratinga  project  due to  recently
                  identified  higher cost  trends and some actual and  committed
                  costs exceeding estimated costs. In addition,  schedule delays
                  have added to the costs of the project during the quarter; and
              -   $24  million  gain  in  the  Production  Optimization  segment
                  related to the sale of Halliburton Measurement Systems.
The net effect of these second quarter 2003 items was a loss of $149 million.
         The significant items for the 2002 second quarter included:
              -   $56 million in expense related to restructuring charges;
              -   $119 million loss in the Engineering  and  Construction  Group
                  related to the Barracuda-Caratinga project in Brazil;
              -   $330 million  loss in  the Engineering and Construction  Group
                  related to asbestos exposures; and
              -   $61  million  loss  in the  Landmark and Other Energy Services
                  segment for the impairment of our 50% equity investment in the
                  Bredero-Shaw joint venture.
The net effect of these second quarter 2002 items was a loss of $566 million.
         Drilling and Formation Evaluation segment operating income for the 2003
second  quarter  increased $7 million,  or 17%,  from the second  quarter  2002,
primarily due to improved  logging results,  where margins  increased from 7% in
2002 to 13% in 2003.  The improved  logging  results were  primarily in Nigeria,
Indonesia, India and Mexico. Drilling services decreased by $2 million primarily
due to higher equipment  maintenance  costs and the impact from the sale of Mono
Pumps in the first quarter 2003.

                                       40


         Fluids segment  operating income for the second quarter  2003 increased
$19 million,  or 39%,  from the second  quarter 2002.  Both drilling  fluids and
cementing had incremental margins of about 30%.
         Operating  income  was up in all  geographic  regions,  as a result  of
increased revenues. Drilling fluids results in the United States improved due to
a change in product mix and shift to newer environmental-friendly products.
         Production Optimization segment operating income for the second quarter
2003 of $113  million  increased  $7  million  from  the  second  quarter  2002,
including  the  gain  on the  sale of  Halliburton  Measurement  Systems  of $24
million.  Subsea 7, Inc.  operating  income increased $12 million from increased
activities in Norway and the United  Kingdom.  Also the 2002 second  quarter did
not  include  all three  months of  activity  for Subsea 7, Inc.,  as it was not
formed until May 23, 2002.  Completion  products and services  operating  income
decreased $13 million as margins were primarily  affected by contract  delays in
Indonesia  and  inventory  obsolescence  accruals.  The  production  enhancement
product line  decreased by $8 million as a result of increased  discounts in the
United States,  partially  offset by increased  activity in Mexico and Iraq. The
increased inventory obsolescence accruals in all product service lines decreased
segment operating income by $7 million.
         Geographically, operating income in North America decreased $24 million
in the second  quarter  2003  compared to the second  quarter  2002 due to lower
pricing in spite of increased rig count and higher activity, which was offset by
the $24 million gain on the sale of Halliburton Measurement Systems.
         Landmark  and Other  Energy  Services segment operating  income for the
second  quarter  2003 was $5 million,  a $132 million  increase  from the second
quarter 2002 reflecting the $61 million  impairment of our equity  investment in
Bredero-Shaw,  the $37 million in restructuring  charges  and the $32 million of
impairment  charges in integrated  solutions  projects in the second  quarter of
2002.
         Engineering  and  Construction  Group operating loss of $148 million in
the second quarter 2003  decreased  $302 million  compared to the second quarter
2002. The second quarter of 2002 included a $330 million  asbestos  charge and a
$10 million  restructuring  charge.  Income from  government-related  activities
improved  by $18  million  from the  second  quarter  2002,  mainly  related  to
operations  in the Middle East and at our  shipyard in the United  Kingdom.  The
Barracuda-Caratinga  project recognized $173 million of additional losses in the
second quarter 2003 compared to a $119 million loss in the 2002 second  quarter.
The  $173  million  charge  resulted  from  higher  cost   estimates,   schedule
extensions,  increased project  contingencies as well as other factors.  Onshore
results  declined  $11 million due mainly to a $29 million  charge for  schedule
delays on a project in Europe, which was  partly offset by higher profits on LNG
projects.
         General corporate expenses for the second quarter 2003 were $16 million
compared to $25 million for the 2002 second  quarter,  or a decrease in costs of
$9 million.  The improved  second quarter 2003 results reflect the $9 million of
restructuring charges incurred in the second quarter 2002.

NONOPERATING ITEMS

         Interest  expense of $25 million for the second  quarter 2003 decreased
$5 million  compared to the second  quarter  2002.  The decrease is due to lower
average  borrowings  in 2003  primarily  from the reduction in debt prior to the
issuance of  $1.2 billion in convertible  notes at the end of the second quarter
2003.
         Foreign  exchange  gains,  net were $19  million  in the  current  year
quarter  compared to a $5 million loss in the second  quarter of last year.  The
increase was due to foreign  exchange  gains in the United Kingdom and Canada in
the second quarter 2003 and lower foreign exchange losses primarily in Argentina
as compared to the second quarter 2002.
         Provision for income taxes of $29 million  resulted in an effective tax
rate of 39% in the second  quarter 2003,  compared to a benefit for income taxes
in the second quarter 2002 of $77 million, resulting in an effective tax rate of
18%. The second quarter 2002 effective rate was low due to the tax impact of the
impairment  loss on  Bredero-Shaw  and  charges  associated  with  our  asbestos
exposure. The  asbestos accrual generated a  United States  Federal deferred tax
asset in 2002 which may not be fully realizable based upon future taxable income
projections and thus we recorded a partial valuation allowance. The Bredero-Shaw
loss  created a capital  loss for which we have no  capital  gains to offset and
therefore  no tax benefit was booked for the loss as future  realization  of the
benefit was questionable.

                                       41


         Loss from discontinued operations, net of tax was $16 million, or $0.03
per diluted  share,  for the second  quarter 2003 compared to $140  million,  or
$0.32 per diluted  share,  for the second  quarter 2002.  The loss in the second
quarter of 2003 reflects a $30 million  pretax  charge  related to our July 2003
funding of the  debtor-in-possession  financing to Harbison-Walker in connection
with their Chapter 11 bankruptcy  proceeding  that is expected to be forgiven by
Halliburton on the earlier of the effective date of a plan of reorganization for
DII  Industries  or  the  effective  date  of  a  plan  of  reorganization   for
Harbison-Walker   acceptable  to  DII  Industries.  In  addition,   discontinued
operations  included  professional  fees  associated  with the due diligence and
other  aspects of the proposed  settlement  for asbestos and silica  liabilities
offset by a release of  environmental  and legal reserves related to indemnities
that were part of our  disposition of Dresser  Equipment Group and are no longer
needed. The loss in the second quarter 2002 was due primarily to charges of $153
million pretax,  $123 million after tax, booked on asbestos  exposures.  We also
recorded  pretax  expense  of $6  million  associated  with the  Harbison-Walker
bankruptcy filing.

RESULTS OF OPERATIONS IN 2003 COMPARED TO 2002

First Six Months of 2003 Compared with the First Six Months of 2002

REVENUES


                                               First Six Months
                                           ------------------------   Increase
Millions of dollars                           2003         2002      (decrease)
---------------------------------------------------------------------------------
                                                            
Drilling and Formation Evaluation           $    793     $    812      $  (19)
Fluids                                           998          903          95
Production Optimization                        1,322        1,246          76
Landmark and Other Energy Services               278          484        (206)
---------------------------------------------------------------------------------
   Total Energy Services Group                 3,391        3,445         (54)
---------------------------------------------------------------------------------
Engineering and Construction Group             3,268        2,797         471
---------------------------------------------------------------------------------
Total revenues                              $  6,659     $  6,242      $  417
=================================================================================

         Consolidated  revenues in the first six months of 2003 of $6.7  billion
increased 7% compared to the first six months of 2002 primarily due to increased
revenues in the Engineering and Construction Group.  International revenues were
67% of total revenues for the first six months of both 2003 and 2002.
         Drilling and Formation  Evaluation segment  revenues for the first half
of 2003 declined $19 million  compared to the first half of 2002.  International
revenues  were 72% of total  revenues  in the first six months of 2003 and 2002.
Mono  Pumps,  which was sold in  January  2003,  contributed  approximately  $40
million in  revenues  in the first six months of 2002 to our  drilling  services
product line. The loss of Mono Pumps revenue was partially offset by revenues in
the  remainder of our  drilling  services  product  line as contracts  that were
expiring in the United Kingdom were more than offset by new contracts, primarily
in West Africa and Ecuador.  Logging services  revenues  decreased by $9 million
due to lower sales in China and reduced activity in Venezuela.
         On a  geographic  basis,  the sale of Mono  Pumps  negatively  impacted
segment  revenues  in North  America by $17  million,  in  Europe/Africa  by $11
million,  and in  Middle  East/Asia  by $12 million for  the first six months of
2003  compared  to  the  first six months of 2002.  Increased  logging  services
activity in the United  States and higher  drill bit sales in the United  States
and Canada  accounted for a $10 million  increase in revenues.  Middle East/Asia
revenues for the segment were positively impacted by increased drilling services
activity.  Revenues  were $6 million lower in Latin America where an increase in
activity in Mexico was more than offset by reductions in Venezuela,  as activity
was slow to pick up after the recent civil unrest, and Brazil.
         Fluids  segment  revenues  were higher by $95 million in the first half
of 2003,  an  increase  of 11% from the first six months of 2002.  International
revenues were 55% of total  revenues in the first six months of 2003 compared to
52% in the  first  six  months  of  2002.  Drilling  fluids,  which  was up 12%,
contributed to the majority of the increase due to higher land rig counts in the
United States.

                                       42


         On a  geographic  basis,  all regions had increases  in segment revenue
due to increased activity in both drilling fluids and cementing. On a percentage
basis the largest  increase in revenues was in Middle East/Asia due to increased
activity in the former Soviet Union, Caspian and Indonesia.  In addition,  Latin
America  revenues were slightly higher due to increased work in Mexico which was
offset by lower activity in Venezuela.
         Production  Optimization segment  revenues  were $1.3 billion for the
first six months of 2003,  an increase of $76 million,  or 6% from the first six
months of 2002.  International  revenues were 54% of total revenues in the first
half of 2003 compared to 51% in the first half of 2002 as activity  picked up in
the Middle East  following the end of the war in Iraq.  The sale of  Halliburton
Measurement  Systems had a $3 million negative impact on segment revenues during
the first  half of  2003. Our  production  enhancement  product line  was up 9%,
where United States revenue was up as a result of higher land rig counts.
         On a geographic basis,  Middle East/Asia  revenues for the segment were
up $50  million  due to higher  sales to  Kazakhstan,  and  higher  activity  in
Australia, Brunei and Iraq offset by lower activity in Indonesia.  Revenues were
$12 million  higher in Latin  America  where an increase in Mexico was partially
offset by reductions in activity in Brazil and Venezuela.
         Landmark and Other Energy  Services segment  revenues were $278 million
for the first six months of 2003, a decrease of $206  million,  or 43%, from the
first half of 2002.  International  revenues  were 70% of total  revenues in the
2003  first  half  compared  to 77% in the  first  half of 2002.  Lower  segment
revenues  were  primarily  due to the  contribution  of  most of the  assets  of
Halliburton Subsea to Subsea 7, Inc. which,  beginning in May 2002, was reported
on an  equity  basis  in  the  Production  Optimization  segment.  The  sale  of
Wellstream in March 2003 and the sale of integrated solutions projects in August
2002 also contributed to the decrease.
         Engineering  and  Construction  Group revenues for the six months ended
June 30, 2003 of $3.3  billion were 17% higher than in the six months ended June
30, 2002. The  improvement  was due to revenue  increases in government  related
activities  and  onshore  projects,  partially  offset by  declines  in offshore
projects. Revenues from government services were up 78% on increased work in the
Middle East for the United  States and the United  Kingdom  governments,  offset
slightly by lower revenues on the Balkans project, which is in its final stages.
Onshore revenues were up 17%, primarily due to increases on a project in Nigeria
and  progress  on several new  projects.  The 16%  decrease in offshore  project
revenue reflects reduced activity on the  Barracuda-Caratinga  project in Brazil
and  projects in the  Philippines  and Nigeria  that are nearing the  completion
phase.  Operations and  maintenance  revenues were down 9% compared to the first
six  months  of 2002 due to the loss of  several  contracts  that  have not been
replaced.

OPERATING INCOME


                                               First Six Months
                                          --------------------------   Increase
Millions of dollars                          2003          2002       (decrease)
----------------------------------------------------------------------------------
                                                             
Drilling and Formation Evaluation           $   115      $    80       $    35
Fluids                                          123          100            23
Production Optimization                         183          189            (6)
Landmark and Other Energy Services               (6)        (130)          124
----------------------------------------------------------------------------------
   Total Energy Services Group                  415          239           176
----------------------------------------------------------------------------------
Engineering and Construction Group             (167)        (508)          341
General corporate                               (35)         (13)          (22)
----------------------------------------------------------------------------------
Total operating income                      $   213      $  (282)      $   495
==================================================================================

         Consolidated  operating  income of $213 million was $495 million higher
in the first six months of 2003 compared to the first half of 2002.  This change
is attributable to several  significant  items incurred during the first half of
2003 and 2002.
         The significant items for the first six months of 2003 included:
              -   $228 million loss in the Engineering and Construction Group
                  related to the Barracuda-Caratinga project in Brazil;
              -   $15  million  loss  in  the Landmark and Other Energy Services
                  segment on the sale of Wellstream;

                                       43


              -   $24 million gain in the Production Optimization segment on the
                  sale of Halliburton Measurement Systems; and
              -   $36  million gain  in the  Drilling and  Formation  Evaluation
                  segment on the sale of Mono Pumps.
The net effect of these  second  quarter  2003 items was a loss of $183 million.
         The significant items for the first six months of 2002 included:
              -   $67 million in expense related to  restructuring  charges,  of
                  which  $42  million  related  to  Landmark  and  Other  Energy
                  Services,  $14   million  related   to  the   Engineering  and
                  Construction  Group,  and  $11  million   related  to  General
                  corporate;
              -   $119 million loss in the Engineering  and  Construction  Group
                  related to the Barracuda-Caratinga project in Brazil;
              -   $410 million  loss in  the Engineering and Construction  Group
                  related to asbestos exposures;
              -   $61 million  loss  in  the Landmark and Other Energy  Services
                  segment on  the impairment of our 50% equity investment in the
                  Bredero-Shaw joint venture; and
              -   $108 million  gain in the  Landmark and Other Energy  Services
                  segment on the sale of European Marine Contractors Ltd.
The net  effect of these  second quarter 2002  items was a loss of $549 million.
         Drilling and Formation Evaluation segment operating income totaled $115
million  for the first six months of 2003  compared  to $80 million in the first
six months of 2002.  Operating income decreased $10 million in drilling services
partly due to the $5 million  impact of having  less than a month of Mono Pumps'
operations  in 2003 due to the sale of Mono  Pumps in January  2003.  Drill bits
operating  income was down $3 million  primarily  due to lower  activity  in the
Middle East and pricing  pressures in the United States while logging  benefited
from lower discounts in the United States.  Operating income also included a $36
million gain on the sale of Mono Pumps in January of 2003.
         Geographically,  segment operating income decreased $4 million in Latin
America due to lower activity  across the segment in Venezuela and Brazil offset
by increased activity for logging services and drill bits in Mexico and due to a
new  drilling  systems  contract  in Ecuador.  A $12 million  gain on the United
Kingdom portion of the sale of Mono Pumps positively  impacted segment operating
income in  Europe/Africa,  along with higher  activity in the North Sea and West
Africa.
         Fluids segment operating  income  for the first six  months of 2003 was
up $23  million,  or 23%,  from the first six months of 2002.  The  increase was
mostly in drilling fluids.
         Geographically,  all regions showed  improved segment operating  income
in the first six months of 2003  compared to the first six months of 2002 except
North  America,  which was flat with  increased  operating  income for  drilling
fluids  offset  by  lower  operating  income  in  cementing.  Pricing  pressures
contributed to lower  operating  income in cementing in North America.  Drilling
fluids  benefited  from  higher  sales of  environmentally  friendly  fluids and
improved contract terms.
         Production  Optimization segment  operating  income  for the first half
of 2003 decreased $6 million from the first half of 2002 with  decreases  across
all product lines.  Operating  income included a $24 million gain on the sale of
Halliburton Measurement Systems in the second quarter 2003. Operating income and
margins  decreased  in all  product  lines due to  continued  pricing  pressures
throughout the six months combined with higher inventory  adjustments and higher
operating  costs in the North  American  region.  The largest  decreases came in
completion  products  and  services  which  declined  $14  million and tools and
testing which  declined $9 million.  Subsea 7, Inc.  declined $2 million for the
period due to operating losses in the first quarter of 2003.
         Segment operating  income  was  down in the first half of 2003 compared
to the first half of 2002 in all geographic regions except Latin America,  which
showed a $13 million increase reflecting  increased activity in Mexico offset by
lower results in Brazil. Europe/Africa had a $6 million decrease compared to the
first six  months of 2002 due to higher  inventory  obsolescence  and  equipment
mobilization  costs as well as costs  associated  with  early  termination  of a
contract in Norway.

                                       44


         Landmark  and  Other Energy Services segment  operating income for  the
first half of 2003  increased $124 million from the first six months of 2002 due
to the following:
              -   improved 2003 results in integrated solutions  projects in the
                  United States, Indonesia and Iraq;
              -   a  $61  million  impairment  in  our 50% equity  investment in
                  Bredero-Shaw in the second quarter 2002;
              -   $42 million of restructuring charges incurred in 2002;
              -   BJ Services litigation damage award of $98 million  accrued in
                  2002;
              -   impairment  charges   in  the  second  quarter  of  2002   for
                  integrated  solutions  projects  of  $32  million,  which were
                  partially offset by:
              -   $108 million gain on the  sale of European Marine  Contractors
                  Ltd. in the first quarter of 2002; and
              -   loss of $15 million on  the sale of our Wellstream business in
                  March 2003.
         Engineering  and  Construction  Group operating loss of $167 million in
the first six months of 2003 decreased  $341 million  compared to the first half
of 2002.  The  improvement  in  operating  results  was due to $410  million  in
asbestos charges and a $14 million  restructuring charge that impacted the first
six months of 2002 compared to a $2 million asbestos charge and no restructuring
charges  in the  first  six  months  of 2003.  Income  from  government  related
activities  improved by $29 million from the first half of 2002,  mainly related
to  operations  in the Middle East and our shipyard in the United  Kingdom.  The
Barracuda-Caratinga  project recognized a $228 million loss in the first half of
2003 compared to a $119 million loss in the first six months of 2002. The losses
on the  Barracuda-Caratinga  project in 2003 are due to  identified  higher cost
trends  and some  actual and  committed  costs  exceeding  estimated  costs.  In
addition,  schedule  delays  have added to the costs of the  project  during the
first half of the year.  Onshore  results  declined  $29  million  due mainly to
schedule  delays  on a project  in Europe  and a  project  in  Malaysia  nearing
completion.
         General  corporate  expenses  for the first six months of 2003 were $35
million  compared  to $13  million  for the  first six  months of 2002.  General
corporate  expenses were higher in 2003 as the first six months of 2002 included
a  $28  million   pretax  gain  for  the  value  of  stock   received  from  the
demutualization of an insurance provider offset by 2002 restructuring charges of
$11  million.  The higher  2003  expenses  also relate to  preparations  for the
certifications required under Section 404 of the Sarbanes-Oxley Act.

NONOPERATING ITEMS

         Interest  expense  of $52  million  for the  first  six  months of 2003
decreased $10 million  compared to the first six months of 2002. The decrease is
due to $4 million in pre-judgment  interest  recorded in the 2002 second quarter
related  to the BJ  Services  patent  infringement  judgment  and lower  average
borrowings in the first six months of 2003.
         Foreign  exchange  gains,  net were $13  million  in the  current  year
compared to a $13 million loss in the first half of last year.  The increase was
due to a $15 million gain in the United Kingdom and an $8 million gain in Canada
in 2003  combined with the absence of foreign  exchange  losses in 2002 stemming
from the economic crisis in Argentina.
         Provision for income taxes of $79 million  resulted in an effective tax
rate of 41% in the first half of 2003,  versus a benefit for income taxes in the
first half of 2002 of $41 million and an  effective  tax rate of 12%.  The first
half of 2002 effective rate was low due to the tax impact of the impairment loss
on Bredero-Shaw and charges associated with our asbestos exposure.  The asbestos
accrual  generated a United States  Federal deferred tax  asset which may not be
fully  realizable based upon future taxable income  projections.  As a result we
recorded a partial valuation allowance.  The Bredero-Shaw loss created a capital
loss for which we had no capital  gains to offset and  therefore  no tax benefit
was booked for the loss.
         Loss from discontinued  operations,  net of tax was a $24 million loss,
or $0.05 per diluted share, for the first half of 2003 compared to $168 million,
or $0.39 per diluted share, for 2002. The loss in the first half of 2003 was due
to  charges  related  to our  July  2003  funding  of  the  debtor-in-possession
financing to  Harbison-Walker  in  connection  with their  Chapter 11 bankruptcy
proceeding  that is expected to be forgiven by Halliburton on the earlier of the
effective date of a plan of  reorganization  for DII Industries or the effective
date  of  a  plan  of  reorganization  for  Harbison-Walker  acceptable  to  DII
Industries.  In addition,  discontinued  operations  included  professional fees
associated  with the due diligence and other aspects of the proposed  settlement
for asbestos liabilities offset by a release of environmental and legal reserves

                                       45


related  to  indemnities  that  were  part  of our  disposition  of the  Dresser
Equipment  Group that are no longer  needed.  The loss in the first half of 2002
was due primarily to charges recorded for asbestos  exposures.  We also recorded
pretax  expense of $6 million  associated  with the  Harbison-Walker  bankruptcy
filing.
         Cumulative  effect  of change in  accounting  principle,  net was an $8
million after-tax charge, or $0.02 per diluted share,  related to our January 1,
2003  adoption  of  Financial  Accounting  Standards  Board  Statement  No. 143,
"Accounting for Asset Retirement Obligations".

LIQUIDITY AND CAPITAL RESOURCES

         We ended the second  quarter of 2003 with cash and  equivalents of $1.9
billion, an increase of $752 million from the end of 2002.
         Cash flows from operating activities used $213 million in the first six
months of 2003  compared to  providing  $620  million in the first half of 2002.
Working  capital  items,  which  include   receivables,   sale  of  receivables,
inventories,  accounts payable and other working capital, net, used $373 million
of cash in the first six months of 2003  compared to  providing  $333 million in
the same period of 2002. The major uses of working capital during the first half
of  2003  included  the  commencement  of the  Los  Alamos  contract  by KBR and
increased  activity  in the Middle  East due to new work  related  to Iraq.  Our
government  services  activities  could continue to use  significant  amounts of
working  capital in the short  term.  Included  in  changes  to other  operating
activities for the first six months of 2002 is a $40 million  payment related to
the Harbison-Walker bankruptcy filing.
         Cash flows from investing  activities provided $50 million in the first
six  months of 2003 and used $414  million in the same  period of 2002.  Capital
expenditures of $229 million in the first half of 2003 were about 43% lower than
in the first six months of 2002. We have emphasized increased capital discipline
in 2003 and expect  our full year  capital  spending  to be  approximately  $600
million,  down  compared  to 2002.  Capital  spending  in the first half of 2003
continued to be mainly  attributable  to the Energy Services Group primarily for
directional and logging-while-drilling  tools used in the Drilling and Formation
Evaluation segment.  In addition,  in the first quarter of 2002, we invested $60
million in integrated  solutions projects.  Cash from dispositions of businesses
in the first  half of 2003  includes  $136  million  collected  from the sale of
Wellstream,  $33  million  collected  from the sale of  Halliburton  Measurement
Systems, and $23 million collected from the sale of Mono Pumps. Also included in
cash from  dispositions  is $25 million  collected on a note receivable that was
received  as  a  portion  of  the  payment  for  Bredero-Shaw.  Dispositions  of
businesses in the first half of 2002 included  $134 million  collected  from the
sale of our European  Marine  Contractors,  Ltd.  joint  venture.  The change in
restricted cash for the first half of 2003 is primarily collateral for potential
future insurance claim reimbursements. Included in the change in restricted cash
for the first half of 2002 is a $106  million  deposit  that  collateralized  an
appeal  bond for a patent  infringement  judgment  on appeal and $56  million as
collateral for potential future insurance claim reimbursements. Also included in
changes in restricted cash is $26 million  primarily  related to cash collateral
agreements for letters of credit outstanding on several  construction  projects.
Proceeds  from the sale of  securities  in the first  six  months of 2003 of $57
million  primarily  relate to the sale of 2.5 million of National Oilwell common
shares that were received in the disposition of Mono Pumps.
         Cash flows from financing activities provided $893 million in the first
six months of 2003. In the first six months of 2002,  financing  activities used
$101  million.  Proceeds  from  long-term  borrowings  include  $1.2  billion in
proceeds from the issuance of  convertible  senior notes,  net of $24 million of
debt issuance costs. We also repaid our $139 million senior  unsecured  notes in
the first six months of 2003.  Dividends  to  shareholders  used $109 million of
cash in the first half of 2003 and 2002.
         Capital resources from internally generated funds and access to capital
markets are sufficient to fund our working  capital  requirements  and investing
activities.  We will have to raise  additional funding for the proposed asbestos
and silica settlement described below. Our combined short-term notes payable and
long-term  debt was 42% of  total  capitalization  at June  30,  2003 and 30% at
December 31,  2002.  At June 30, 2003,  we had $212 million in  restricted  cash
included in "Other  assets,  net".  See Note 7 to the financial  statements.  In
addition,  on April 15, 2002,  we entered  into an  agreement  to sell  accounts
receivable to provide additional liquidity.  Subsequent to the end of the second


                                       46


quarter 2003, we reduced the balance on our accounts  receivable  securitization
facility to zero. This facility remains available to us for future use. See Note
8 to the financial statements. Currently, we expect capital expenditures in 2003
to be about $600 million. We have not finalized our capital  expenditures budget
for 2004 or later periods.
         Proposed asbestos and silica  settlement.  In December 2002, we reached
an agreement  in  principle  that,  if and when  consummated,  would result in a
settlement  of  asbestos  and  silica   personal   injury  claims   against  our
subsidiaries  DII Industries,  Kellogg Brown & Root and their current and former
subsidiaries  with  United  States  operations.   Subsequently,   in  2003,  DII
Industries and Kellogg Brown & Root entered into definitive  written  agreements
finalizing the terms of the agreements in principle with attorneys  representing
more than 90% of the current asbestos claimants. We have also reached agreements
in principle with 48% of current silica claimants.
         The definitive agreements provide that:
              -   up to $2.775 billion in cash, 59.5 million  Halliburton shares
                  (valued at $1.4 billion using the stock price at June 30, 2003
                  of $23.00) and notes with a net present  value  expected to be
                  less than $100  million will be paid to one or more trusts for
                  the benefit of current and future asbestos and silica personal
                  injury claimants upon receiving final and non-appealable court
                  confirmation of a plan of reorganization;
              -   DII  Industries and Kellogg Brown & Root will retain rights to
                  the first $2.3  billion  of any  insurance  proceeds  with any
                  proceeds  received between $2.3 billion and $3.0 billion going
                  to the trust;
              -   the  agreement  is to be  implemented  through a  pre-packaged
                  filing under Chapter 11 of the United States  Bankruptcy  Code
                  for DII Industries and Kellogg Brown & Root, and some of their
                  subsidiaries with United States operations; and
              -   the  funding  of  the  settlement  amounts  would  occur  upon
                  receiving  final and  non-appealable  court  confirmation of a
                  plan of reorganization  for DII Industries and Kellogg Brown &
                  Root  and  some  of  their  subsidiaries  with  United  States
                  operations in the Chapter 11 proceeding.
         Among the prerequisites for concluding the proposed settlement are:
              -   agreement  on the amounts to  be  contributed to the trust for
                  the benefit of silica claimants;
              -   completion of  our review  of the  current claims to establish
                  that the claimed injuries are based on exposure to products of
                  DII  Industries, Kellogg  Brown &  Root, their subsidiaries or
                  former businesses or subsidiaries;
              -   completion of our  medical review of  the injuries  alleged to
                  have been sustained by plaintiffs to establish a medical basis
                  for payment of settlement amounts;
              -   finalizing the  principal amount and terms  of the notes to be
                  contributed to the trust;
              -   agreement with a proposed  representative  of future claimants
                  and attorneys representing current claimants on procedures for
                  distribution  of  settlement  funds  to  individuals  claiming
                  personal injury;
              -   definitive  agreement with the attorneys  representing current
                  asbestos  claimants  and a proposed  representative  of future
                  claimants  on a plan  of  reorganization  for the  Chapter  11
                  filings of DII  Industries,  Kellogg  Brown & Root and some of
                  their   subsidiaries  with  United  States   operations;   and
                  agreement with the attorneys representing current asbestos and
                  silica  claimants  with  respect  to  a  disclosure  statement
                  explaining  the  pre-packaged  plan of  reorganization  to the
                  current claimants;
              -   arrangement  of financing,  in addition to the proceeds of our
                  recent   offering  of  $1.2   billion   principal   amount  of
                  convertible senior notes, for the proposed settlement on terms
                  acceptable  to us to fund the cash  amounts  to be paid in the
                  settlement;
              -   Halliburton board approval;
              -   distribution of a disclosure  statement and obtaining approval
                  of a plan of  reorganization from at least the required 75% of
                  known present asbestos  claimants and from a majority of known
                  present silica  claimants in  order to  complete the  plan  of
                  reorganization; and
              -   obtaining final  and non-appealable bankruptcy  court approval
                  and  federal  district  court  confirmation  of  the  plan  of
                  reorganization.

                                       47


         Many of these  prerequisites  are subject to matters and  uncertainties
beyond our control.  There can be no  assurance  that we will be able to satisfy
the  prerequisites  for  completion  of the  settlement.  If we were  unable  to
complete the proposed  settlement,  we would be required to resolve  current and
future  asbestos  claims in the tort  system or, in the case of  Harbison-Walker
claims  (see  Note  11  to  the  financial  statements),  possibly  through  the
Harbison-Walker bankruptcy proceedings.
         We are  currently  continuing  our  due  diligence  review  of  current
asbestos claims to be included in the proposed settlement.  We have now received
in excess of 75% of the necessary files related to medical  evidence and we have
reviewed  substantially  all of the  information  provided.  In  regards  to the
product  identification  due diligence,  the process is moving at a steady pace,
but not as rapidly as the medical due  diligence.  In addition,  we have not yet
commenced any due diligence in regards to silica claims.  While no assurance can
be given,  if we continue to receive  documentation  that is consistent with the
recent  quantity and quality of the  documentation  received to date,  we expect
that this  documentation  will provide an  acceptable  basis on which to proceed
with the  proposed  settlement.  One result of our due  diligence  review is the
preliminary  identification  of more claims than  contemplated  by the  proposed
settlement.  However, until the more recently identified claims are subject to a
complete due diligence  review, we will not be able to determine if these claims
would be  appropriately  included under the proposed  settlement.  Many of these
recently identified claims may be duplicative of previously  submitted claims or
may otherwise not be appropriately  included under the proposed  settlement.  In
the event that more claims are identified and validated than contemplated by the
proposed  settlement,  the cash  required to fund the  settlement  may  modestly
exceed $2.775 billion. If it does, we would need to decide whether to propose to
adjust the settlement  matrices to reduce the overall  amounts,  or increase the
amounts  we  would  be  willing  to pay  to  resolve  the  asbestos  and  silica
liabilities.
         If we attempt to adjust the settlement matrices or otherwise attempt to
renegotiate the terms of the proposed settlement, the attorneys representing the
current asbestos claimants may not proceed with the settlement or may attempt to
renegotiate  the  settlement  amount to  increase  the  aggregate  amount of the
settlement.  Conversely,  an  increase in the amount of cash  required  may make
completing the proposed settlement more difficult.
         In the event we elect to adjust the  settlement  matrices to reduce the
average amounts per claim, a supplemental  disclosure statement may be required,
and if so, the claimants  potentially  adversely  affected by the adjustment may
have an  opportunity to change  their votes.  The  additional  time to make such
supplemental disclosure and opportunity to change votes may result in a delay in
the Chapter 11 filing.
         Included in the next steps to complete the proposed  settlement are (1)
an agreement on the  procedures  for the  distribution  of  settlement  funds to
individuals  claiming  personal  injury  and  (2)  an  agreement  on a  plan  of
reorganization  for Kellogg  Brown & Root and DII  Industries  and some of their
subsidiaries with United States operations and the related disclosure statement.
We cannot  predict the exact timing of the  completion  of these  steps,  but we
expect  that  these  prerequisites  to making  the  Chapter  11 filing  could be
completed on a timeline that  would allow the Chapter 11 filing  to be made late
in the third quarter or very early in the fourth quarter of 2003.
         The settlement agreements with attorneys  representing current asbestos
and silica  claimants grant the attorneys a right to terminate their  definitive
agreement  on 10  days'  notice.  While no right  to  terminate  any  settlement
agreement has been exercised to date,  there can be no assurance that claimants'
attorneys will not exercise their right to terminate the settlement agreements.
         In  connection  with the  Chapter  11  filing by  Harbison-Walker,  the
Bankruptcy  Court on February  14, 2002  issued a  temporary  restraining  order
staying all further  litigation of more than 200,000  asbestos claims  currently
pending against DII Industries in numerous courts  throughout the United States.
The period of the stay  contained in the  temporary  restraining  order has been
extended  through  September 30, 2003.  Currently,  there is no assurance that a
stay  will  remain  in  effect  beyond  September  30,  2003,  that  a  plan  of
reorganization  will be proposed or confirmed for  Harbison-Walker,  or that any
plan that is confirmed  will provide relief to DII  Industries.  Should the stay
expire on September 30, 2003, the Bankruptcy Court established that discovery on
the stayed claims cannot begin until  November 1, 2003 and trial dates cannot be
set before January 1, 2004.
         Harbison-Walker  filed a proposed  plan of  reorganization  on July 31,
2003.  However,  the  proposed  plan does not provide  for a Section  524(g)/105
injunction for the benefit of DII Industries and other DII Industries businesses
that share insurance with Harbison-Walker,  and DII Industries has not consented
to the plan.  Although  possible,  at this time we do not believe it likely that

                                       48


Harbison-Walker will propose or will be able to confirm a plan of reorganization
in its bankruptcy  proceeding  that is acceptable to DII  Industries  within the
meaning of the letter agreements with RHI Refractories.
         As an  alternative,  DII  Industries  has entered into a settlement  in
principle  with  Harbison-Walker  which would resolve  substantially  all of the
issues  between them.  This  agreement is subject to  negotiation  of definitive
documentation  and court  approval  in  Harbison-Walker's  bankruptcy  case.  If
approved by the court in Harbison-Walker's bankruptcy case, this agreement would
provide for:
              -   channeling  of  asbestos  and silica  personal  injury  claims
                  against  Harbison-Walker  and certain of its affiliates to the
                  trusts created in the Chapter 11 cases being  contemplated for
                  DII Industries and Kellogg Brown & Root;
              -   release by Harbison-Walker and its affiliates of any rights in
                  insurance  shared with DII  Industries  on  occurrence  of the
                  effective date of plan of reorganization for DII Industries;
              -   release by  DII Industries  of any right  to be indemnified by
                  Harbison-Walker for asbestos or silica personal injury claims;
              -   forgiveness  by DII  Industries  of  all of  Harbison-Walker's
                  obligations under the debtor-in-possession  financing provided
                  by DII  Industries on the earlier of the  effective  date of a
                  plan of  reorganization  for DII  Industries  or the effective
                  date  of  a  plan  of   reorganization   for   Harbison-Walker
                  acceptable to DII Industries;
              -   purchase by DII  Industries of  Harbison-Walker's  outstanding
                  insurance  receviables  for an  amount  of  approximately  $50
                  million on the earliest of the  effective date  of a  plan  of
                  reorganization   for  DII  Industries, the effective date of a
                  plan of  reorganization for Harbison-Walker  acceptable to DII
                  Industries or December 31, 2003. It is expected that a portion
                  of   this   receivable    could   require    a   reserve   for
                  uncollectibility  due to the insolvency of insurance carriers.
                  This receivable and  related allowance will be recorded in the
                  third quarter 2003;
              -   guarantee  of  the insurance   receivable  purchase  price  by
                  Halliburton on a subordinated basis; and
              -   negotiation  between   the  parties  on  a  mutually-agreeable
                  structure for resolving other products or mass tort claims.
         Of the up to  $2.775  billion  cash  amount  included  as  part  of the
proposed  settlement,  approximately  $450 million  primarily  relates to claims
previously settled but unpaid by  Harbison-Walker  (see Note 11 to the financial
statements),  but not  previously  agreed  to by us.  As  part  of the  proposed
settlement,  we have  agreed  that,  if a Chapter  11 filing by DII  Industries,
Kellogg  Brown & Root and their  subsidiaries  were to occur,  we would pay this
amount within four years if not paid sooner pursuant to a final bankruptcy court
approved plan of  reorganization  for DII  Industries,  Kellogg Brown & Root and
their subsidiaries  with United States  operations. Effective November 30, 2002,
we are making cash payments in lieu of interest at a rate of 5% per annum to the
holders of these claims. These cash payments in lieu of interest will be made in
arrears at the end of  February,  May,  August  and  November,  beginning  after
certain  conditions are met, until the earlier of the date that the $450 million
is paid or the date the proposed settlement is abandoned.
         We continue to track legislative  proposals for asbestos reform pending
in the United States  Congress.  We understand  that the United States Senate is
currently  working on draft  legislation that would set up a national trust fund
as the exclusive  means for recovery for  asbestos-related  disease.  We are not
certain as to what  contributions  we would be required to make to such a trust,
although  we  anticipate  that they  would be  substantial  and that they  would
continue for a significant  number of years.  In determining  whether to approve
the proposed settlement and proceed with the Chapter 11 filing of DII Industries
and  Kellogg  Brown & Root and some of their  subsidiaries  with  United  States
operations,  the  Halliburton  Board of  Directors  will take into  account  the
then-current status of these legislative initiatives.
         Proposed  bankruptcy  of DII  Industries,  Kellogg  Brown  &  Root  and
subsidiaries.  Under the terms of the proposed settlement,  the settlement would
be  implemented  through a  pre-packaged  Chapter 11 filing for DII  Industries,
Kellogg  Brown  & Root  and  some  of  their  subsidiaries  with  United  States
operations.  Other than those debtors,  none of the  subsidiaries of Halliburton
(including  Halliburton  Energy Services) or Halliburton itself will be a debtor

                                       49


in the Chapter 11  proceedings.  We  anticipate  that  Halliburton,  Halliburton
Energy  Services and each of the debtors'  non-debtor  affiliates  will continue
normal operations and continue to fulfill all of their respective obligations in
the ordinary course as they become due.
         As part of any proposed plan of  reorganization,  the debtors intend to
seek  approval of the  bankruptcy  court for  debtor-in-possession  financing to
provide  for  operating  needs and to provide  additional  liquidity  during the
pendency  of  the  Chapter  11  proceeding.   Halliburton   intends,   with  the
understanding of its lenders, to provide the  debtor-in-possession  financing to
DII  Industries  and Kellogg Brown & Root.  Arranging  for  debtor-in-possession
financing is a condition precedent to the filing of any Chapter 11 proceeding.
         Any  plan of  reorganization  will  provide  that  all of the  debtors'
obligations  under letters of credit,  surety bonds,  corporate  guaranties  and
indemnity  agreements  (except for  agreements  relating  to asbestos  claims or
silica claims) will be  unimpaired.  In addition,  the Bankruptcy  Code allows a
debtor to assume most executory  contracts without regard to bankruptcy  default
provisions, and it is the intention of DII Industries,  Kellogg Brown & Root and
the other filing  entities to assume and continue to perform all such  executory
contracts.  Representatives  of DII  Industries,  Kellogg Brown & Root and their
subsidiaries have advised their customers of this intention.
         After filing any Chapter 11 proceeding, the debtors would seek an order
of the bankruptcy  court  scheduling a hearing to consider  confirmation  of the
plan of reorganization.  In order to be confirmed,  the Bankruptcy Code requires
that  impaired  classes of creditors  vote to accept the plan of  reorganization
submitted by the debtors.  In order to carry a class,  approval of over one-half
in number and at least two-thirds in amount are required. In addition, to obtain
an  injunction  under  Section  524(g) of the  Bankruptcy  Code, at least 75% of
voting   current   asbestos   claimants   must  vote  to  accept   the  plan  of
reorganization.  In addition to obtaining the required votes,  the  requirements
for a bankruptcy court to approve a plan of reorganization  include, among other
judicial findings, that:
              -   the plan of reorganization complies with applicable provisions
                  of the Bankruptcy Code;
              -   the debtors have  complied with the  applicable provisions  of
                  the Bankruptcy Code;
              -   the trust will value and pay similar present and future claims
                  in substantially the same manner;
              -   the plan of reorganization has been proposed in good faith and
                  not by any means forbidden by law; and
              -   any payment made or promised by the debtors to any person  for
                  services, costs  or expenses  in  or in  connection  with  the
                  Chapter 11  proceeding or the plan  of reorganization has been
                  or is reasonable.
         Section 524(g) of the Bankruptcy Code  authorizes the bankruptcy  court
to enjoin entities from taking action to collect,  recover or receive payment or
recovery  with  respect to any  asbestos  claim or demand  that is to be paid in
whole or in part by a trust created by a plan of  reorganization  that satisfies
the  requirements  of the Bankruptcy  Code.  Section 105 of the Bankruptcy  Code
authorizes  a similar injunction for  silica claims. The injunction also may bar
any action based on such claims or demands against the debtors that are directed
at third  parties.  The order  confirming the plan must be issued or affirmed by
the  federal  district  court  that has  jurisdiction  over the case.  After the
expiration of the time for appeal of the order, the injunction becomes valid and
enforceable.
         The debtors  believe  that,  if they  proceed with a Chapter 11 filing,
they will be able to satisfy all the requirements of Section 524(g),  so long as
the requisite  number of holders of asbestos claims vote in favor of the plan of
reorganization.  If the 524(g) and 105  injunctions  are issued,  all  unsettled
current asbestos claims,  all future asbestos claims and all silica claims based
on exposure that has already  occurred will be channeled to a trust for payment,
and the debtors and related parties (including  Halliburton,  Halliburton Energy
Services and other  subsidiaries  and affiliates of Halliburton and the debtors)
will be released from any further liability under the plan of reorganization.
         A prolonged  Chapter 11 proceeding  could adversely affect the debtors'
relationships  with  customers,  suppliers  and  employees,  which in turn could
adversely  affect the debtors'  competitive  position,  financial  condition and
results of  operations.  A weakening of the  debtors'  financial  condition  and
results of operations  could adversely  affect the debtors' ability to implement
the plan of reorganization.
         Financing  the  proposed  asbestos and silica  settlement.  The plan of
reorganization  through which the proposed  settlement will be implemented  will
require us to  contribute  approximately  $2.775  billion in cash to the Section
524(g)/105 trust established for the benefit of claimants, which we will need to
finance on terms  acceptable  to us. On June 30, 2003, we issued $1.2 billion of

                                       50


3.125% convertible senior notes due July 15, 2023. We intend to use a portion of
the net proceeds  from the  offering to fund a portion of the cash  contribution
required by the proposed  settlement.  In addition,  we are pursuing a number of
additional  financing  alternatives for the cash amount to be contributed to the
trust.  The availability of these  alternatives  depends in large part on market
conditions. We are currently negotiating with several banks and non-bank lenders
over the terms of multiple credit  facilities.  A proposed banking  syndicate is
currently  performing  due  diligence in an effort to make a funding  commitment
before the bankruptcy filing. We will not proceed with the Chapter 11 filing for
DII  Industries,  Kellogg  Brown & Root  and some of  their  subsidiaries  until
financing commitments are in place.
         The anticipated credit facilities include:
              -   a  revolving  line  of  credit  for  general  working  capital
                  purposes;
              -   a master  letter of credit  facility  intended  to ensure that
                  existing letters of credit  supporting our contracts remain in
                  place during the filing; and
              -   a delayed-draw term  facility to be available for cash funding
                  of the trust for the benefit of claimants.
         The delayed-draw term facility is intended to eliminate uncertainty the
capital   markets  might  have  concerning  our  ability  to  meet  our  funding
requirement  once  final  and  non-appealable  court  confirmation  of a plan of
reorganization has been obtained.
         None of these credit  facilities are currently in place,  and there can
be no assurances that we will complete these facilities. We are not obligated to
enter into these  facilities if the terms are not  acceptable  to us.  Moreover,
these  facilities  would only be  available  for limited  periods of time.  As a
result,  if the  debtors  were  delayed in filing the Chapter 11  proceeding  or
delayed in completing the plan of reorganization  after a Chapter 11 filing, the
credit facilities may expire and no longer be available.  In such circumstances,
we would have to terminate the proposed settlement if replacement financing were
not available on acceptable terms.
         We have  sufficient  authorized and  unrestricted  shares to issue 59.5
million shares to the trust. No shareholder approval is required for issuance of
the shares.
         Credit  ratings.  Late in 2001 and  early in 2002,  Moody's  Investors'
Services  lowered its ratings of our long-term senior unsecured debt to Baa2 and
our short-term credit and commercial paper ratings to P-2. In addition, Standard
& Poor's  lowered its ratings of our long-term  senior  unsecured debt to A- and
our  short-term  credit and  commercial  paper  ratings to A-2 in late 2001.  In
December  2002,  Standard & Poor's  lowered these ratings to BBB and A-3.  These
ratings were lowered primarily due to our asbestos  exposure,  and both agencies
have  indicated  that the ratings  continue  under  consideration  for  possible
downgrade pending the results of the proposed settlement. Although our long-term
ratings continue at investment grade levels, the cost of new borrowing is higher
and our  access to the debt  markets  is more  volatile  at the  current  rating
levels.  Investment  grade  ratings are BBB- or higher for Standard & Poor's and
Baa3 or higher for Moody's  Investors'  Services.  Our  current  ratings are one
level  above  BBB- on  Standard  & Poor's  and one level  above  Baa3 on Moody's
Investors' Services.
         We have $350 million of  committed  lines of credit from banks that are
available if we maintain an investment  grade rating.  This facility  expires on
August 16, 2006. As of June 30, 2003, no amounts have been borrowed  under these
lines.  If our credit ratings were to fall below  investment  grade,  our credit
line would be unavailable  absent a successful  renegotiation with our banks. In
such  event,  we must also  enter  into  good  faith  negotiations  to amend our
accounts receivable facility. Absent an agreed amendment within 60 days, amounts
outstanding  would  be  declared  due and  payable.  As of June  30,  2003,  the
outstanding balance of our accounts receivable facility was $180 million,  which
was subsequently reduced to zero in July 2003.
         If our debt ratings fall below  investment  grade,  we would also be in
technical  breach of a bank agreement  covering $52 million of letters of credit
at June 30, 2003, which might entitle the bank to set-off rights. In addition, a
$151  million  letter of credit  line,  of which $141  million has been  issued,
includes provisions that allow the banks to require cash  collateralization  for
the full line if debt ratings of either  rating  agency fall below the rating of
BBB by Standard & Poor's or Baa2 by Moody's Investors'  Services.  These letters
of credit and bank guarantees generally relate to our guaranteed  performance or
retention payments under our long-term contracts and self-insurance.

                                       51


         Our  Halliburton  Elective  Deferral Plan has a provision  which states
that if the Standard & Poor's rating falls below BBB the amounts credited to the
participants'  accounts will be paid to the participants in a lump-sum within 45
days. At June 30, 2003 this was approximately $48 million.
         In the event the ratings of our debt by either agency fall, we may have
to issue  additional  debt or  equity  securities  or obtain  additional  credit
facilities in order to satisfy the cash collateralization requirements under the
instruments  referred to above and meet our other liquidity needs. We anticipate
that any such new financing would not be on terms as attractive as those we have
currently  and that we would also be subject to  increased  borrowing  costs and
interest rates.
         Letters of credit. In the normal course of business, we have agreements
with banks under which  approximately  $1.3 billion of letters of credit or bank
guarantees  were issued,  including  at least $195  million  which relate to our
joint  ventures'  operations.  The agreements with these banks contain terms and
conditions that define when the banks can require cash  collateralization of the
entire line.  Agreements with banks covering at least $150 million of letters of
credit  allow the bank to require  cash  collateralization  for any reason,  and
agreements covering another at least $890 million of letters of credit allow the
bank to require  cash  collateralization  for the entire  line in the event of a
bankruptcy or insolvency event involving one of our subsidiaries  that will be a
party to the proposed Chapter 11.
         Our letters of credit also  contain  terms and  conditions  that define
when they may be drawn.  At least $230  million of letters of credit  permit the
beneficiary  of such  letters of credit to draw  against the line for any reason
and another at least $560 million of letters of credit permit the beneficiary of
such letters of credit to draw against the line in the event of a bankruptcy  or
insolvency  event  involving  one of our  subsidiaries  who will be party to the
proposed reorganization proceedings.
         Effective  October 9, 2002,  we amended an  agreement  with banks under
which   $261   million  of   letters   of  credit   had   been   issued  on  the
Barracuda-Caratinga  project.  The amended  agreement removes the provision that
previously  allowed  the  banks  to  require  collateralization  if  ratings  of
Halliburton  debt fell below  investment  grade ratings.  The revised  agreement
includes  provisions that require us to maintain ratios of debt to total capital
and of total earnings before interest,  taxes,  depreciation and amortization to
interest expense.  The definition of debt includes our asbestos  liability.  The
definition  of  total  earnings  before   interest,   taxes,   depreciation  and
amortization  excludes any non-cash  charges related to the proposed  settlement
through December 31, 2003.
         As such,  requirements for us to cash  collateralize  letters of credit
and surety  bonds by issuers and  beneficiaries  of these  instruments  could be
caused by:
              -   our plans to place DII  Industries,  Kellogg  Brown & Root and
                  some of their  subsidiaries with United States operations into
                  a  pre-packaged  Chapter 11 proceeding as part of the proposed
                  settlement;
              -   in  the  absence  of  the  proposed  settlement,  one or  more
                  substantial adverse judgments;
              -   not  being  able  to  recover   on   a timely  basis insurance
                  reimbursement; or
              -   a reduction in credit ratings.
         Uncertainty may also hinder our ability to access new letters of credit
in the future.  This could  impede our  liquidity  and/or our ability to conduct
normal operations.
         Our anticipated  credit facilities related to the proposed asbestos and
silica  settlement would include a master letter of credit facility  intended to
replace any cash  collateralization  rights of issuers of substantially  all our
existing  letters of credit  during the pendency of the  anticipated  Chapter 11
proceedings  by DII  Industries  and  Kellogg  Brown & Root  and  some of  their
subsidiaries with United States operations. The master letter of credit facility
would also provide  collateral for issuers of our existing  letters of credit if
such  letters  of credit  are  drawn  and the  issuing  bank  provides  cash for
collateral or reimbursement. If any of such existing letters of credit are drawn
during the bankruptcy and the bank issuing the letter of credit provides cash to
collateralize  or reimburse for such draws, it is anticipated that the letter of
credit  facility  would  provide  the  cash  needed  for  such  draws,  with any
borrowings  being  converted  into term loans.  However,  this master  letter of
credit  facility is not  currently  in place,  and, if we were  required to cash
collateralize  letters of credit prior to obtaining  the  facility,  we would be
required to use cash on hand or existing  credit  facilities.  Substantial  cash
collateralization  requirements  prior to our  being  able to  enter  into a new
master  letter of credit  facility  may have a  material  adverse  effect on our
financial  condition.  We will not enter into the pre-packaged Chapter 11 filing
without having this credit facility in place.  There can be no assurance that we

                                       52


will be able to enter  into  such a  facility  on  reasonable  terms or on terms
acceptable  to us or at all. In  addition,  representatives  of DII  Industries,
Kellogg Brown & Root and their  subsidiaries are having  continuing  discussions
with their customers in order to reduce the  possibility  that any material draw
on the existing  letters of credit will occur due to the anticipated  Chapter 11
proceedings.
         In the past, no  significant  claims have been made against  letters of
credit issued on our behalf.
         Barracuda-Caratinga Project. In June 2000, KBR entered into a  contract
with the project owner,  Barracuda & Caratinga  Leasing Company B.V., to develop
the Barracuda and Caratinga crude oil fields, which are located off the coast of
Brazil. The project manager and owner's  representative is Petroleo Brasilero SA
(Petrobras),  the Brazilian  national oil company.  When completed,  the project
will  consist  of two  converted  supertankers  which  will be used as  floating
production,   storage  and  offloading  platforms,   or  FPSOs,  33  hydrocarbon
production wells, 18 water injection wells and all sub-sea flow lines and risers
necessary to connect the underwater wells to the FPSOs.
         KBR's performance under the contract is secured by:
              -   three  performance  letters of credit,  which together have an
                  available credit of approximately  $266 million as of June 30,
                  2003 and which  represent  approximately  10% of the  contract
                  amount, as amended to date by change orders;
              -   a  retainage  letter of  credit in  an amount  equal  to  $141
                  million  as of June 30, 2003  and which will increase in order
                  to  continue to  represent 10% of the  cumulative cash amounts
                  paid to KBR; and
              -   a  guarantee   of  KBR's  performance   of  the  agreement  by
                  Halliburton Company in favor of the project owner.
         In the event that KBR is alleged to be in default  under the  contract,
the project owner may assert a right to draw upon the letters of credit.  If the
letters of credit were to be drawn,  KBR would be required to fund the amount of
the draw to the issuing  banks.  To the extent KBR cannot fund the amount of the
draw,  Halliburton  would be  required  to do so,  which  could  have a material
adverse effect on Halliburton's financial condition and results of operations.
         In addition, the proposed Chapter 11 pre-packaged  bankruptcy filing by
KBR in  connection  with the proposed  settlement  of its asbestos  claims would
constitute  an event of default  under the  contract  that would allow the owner
(with the  approval of the lenders  financing  the project) to assert a right to
draw the letters of credit unless waivers are obtained.  The proposed Chapter 11
filing  would  also  constitute  an event of  default  under  the  owner's  loan
agreements  with the lenders  that would allow the lenders to cease  funding the
project.  We believe that it is unlikely  that the owner will make a draw on the
letters of credit as a result of the proposed Chapter 11 filing. We also believe
it is unlikely  that the lenders will  exercise  any right to cease  funding the
project given the current status  of the project and the  fact that a failure to
pay KBR may allow KBR to cease work on the project  without  Petrobras  having a
readily available substitute contractor. However, there can be no assurance that
the lenders will continue to fund the project or that the owner will not require
funding of the letters of credit by KBR.
         In the event that KBR was determined after an arbitration proceeding to
have been in default under the contract with  Petrobras,  and if the project was
not  completed  by KBR as a result of such  default  (i.e.,  KBR's  services are
terminated  as a result of such  default),  the  project  owner may seek  direct
damages (including completion costs in excess of the contract price and interest
on borrowed funds,  but excluding  consequential  damages) against KBR for up to
$500  million  plus  the  return  of up to  $300  million  in  advance  payments
previously received by KBR to the extent they have not been repaid.
         In  addition  to the  amounts  described  above,  KBR  may  have to pay
liquidated  damages  if the  project is delayed  beyond  the  original  contract
completion  date. KBR expects that the project will likely be completed at least
16 months  later  than the  original  contract  completion  date.  Although  KBR
believes that the project's delay is due primarily to the actions of the project
owner,  in  the  event  that  any  portion  of the  delay  is  determined  to be
attributable  to KBR and  any  phase  of the  project  is  completed  after  the
milestone  dates  specified  in the  contract,  KBR  could  be  required  to pay
liquidated damages.  These damages would be calculated on an escalating basis of
approximately  $1 million per day of delay caused by KBR, subject to a total cap
on liquidated  damages of 10% of the final  contract  amount  (yielding a cap of
approximately $266 million as of June 30, 2003).

                                       53


         As of June 30, 2003, the project was approximately 75% complete and KBR
had recorded a pretax loss of $345 million related to the project, of which $173
million was  recorded in the second  quarter of 2003.  The second  quarter  2003
charge was due to higher cost estimates, schedule extensions,  increased project
contingencies  and other factors  identified  during the quarterly review of the
project.  The probable unapproved claims included in determining the loss on the
project were $182  million as of June 30, 2003.  The claims for the project most
likely will not be settled within one year. Accordingly, based upon the contract
being approximately 75% complete,  probable unapproved claims of $134 million at
June 30,  2003 have been  recorded to  long-term  unbilled  work on  uncompleted
contracts.  Those  amounts are  included in "Other  assets,  net" on the balance
sheet. KBR has asserted claims for compensation  substantially in excess of $182
million. The project owner, through its project manager,  Petrobras,  has denied
responsibility for all such claims. Petrobras has, however, issued formal change
orders  worth  approximately  $61  million   which are not  included in the $182
million in probable unapproved claims.
         In June 2003, Halliburton,  KBR and Petrobras, on behalf of the project
owner,  entered into a non-binding heads of agreement that would resolve some of
the disputed  issues between the parties,  subject to final agreement and lender
approval.  The original  completion date for the Barracuda  project was December
2003 and the original  completion date for the Caratinga project was April 2004.
Under the heads of agreement, the project owner would grant an extension of time
to the  original  completion  dates  and other  milestone  dates  that  averages
approximately  12 months,  delay any attempt to assess the  original  liquidated
damages  against  KBR for project  delays  beyond 12 months and up to 18 months,
delay any drawing of letters of credit with respect to such  liquidated  damages
and delay the return of any of the $300 million in advance  payments until after
arbitration.  The heads of agreement  also  provides  for a separate  liquidated
damages  calculation  of  $450,000  per day for  each of the  Barracuda  and the
Caratinga  vessels  for a delay  from the  original  schedule  beyond  18 months
(subject  to the total cap on  liquidated  damages of 10% of the final  contract
amount).  The heads of agreement does not delay the drawing of letters of credit
for these liquidated damages. The extension of the original completion dates and
other  milestones  would  significantly  reduce the  likelihood of KBR incurring
liquidated damages on the project.  Nevertheless, KBR continues to have exposure
for substantial liquidated damages for delays in the completion of the project.
         Under the heads of  agreement,  the project owner has agreed to pay $59
million of KBR's  disputed  claims  (which are  included in the $182  million of
probable  unapproved  claims as of June 30,  2003) and to  arbitrate  additional
claims. The maximum recovery from the claims to be arbitrated would be capped at
$375 million.  The heads of agreement also allows the project owner or Petrobras
to arbitrate  additional claims against KBR, not including  liquidated  damages,
the maximum  recovery from which would be capped at $380  million.  KBR believes
the  claims  made to date by the  project  owner are based on a delay in project
completion. KBR's contract with the project owner excludes consequential damages
and, as indicated above,  provides for liquidated  damages in the event of delay
in  completion  of the  project.  While  there  can  be no  assurance  that  the
arbitrator  will agree,  KBR believes if it is determined that KBR is liable for
delays,  the project owner would be entitled to liquidated damages in amounts up
to those referred to above, and not to an additional $380 million.
         The finalization of the heads of agreement is subject to project lender
approval.  The parties have had discussions  with the lenders and based on these
discussions  have agreed to certain  modifications  to the original terms of the
heads of  agreement to conform to the  lenders'  requirements.  They have agreed
that the $300  million  in  advance  payments  would be due on the  earliest  of
December 7, 2004,  the  completion of any  arbitration  or the resolution of all
claims  between  the  project  owner  and KBR.  Likewise,  the  project  owner's
obligation to defer drawing letters of credit with respect to liquidated damages
for delays  between 12 and 18 months would  extend only until  December 7, 2004.
The  discussions  with the lenders are not yet  complete,  and no agreement  for
their  approval  has yet been  obtained.  While we believe the  lenders  have an
incentive  to approve the heads of agreement  and complete the  financing of the
project, and the parties have agreed to the modifications described above to the
heads of agreement to secure the lenders'  approval,  there is no assurance that
they will do so.  If the  lenders  do not  consent  to the  heads of  agreement,
Petrobras may be forced to secure other  funding to complete the project.  There
is no  assurance  that  Petrobras  will  pursue or will be able to  secure  such
funding.
         Absent lender approval of the heads of agreement,  KBR could be subject
to additional  liquidated damages and other claims, be subject to the letters of
credit  being  drawn and be  required  to return  the $300  million  in  advance
payments in accordance with the original  contract terms. The original  contract
terms require repayment through $300 million of credits to the last $350 million

                                       54


of  invoices  on the  contract.  No  assurance  can be given  that the  heads of
agreement  will be  finalized  or that the  lenders  will  approve  the heads of
agreement  or that the  lenders  will  approve  the heads of  agreement  without
revisions that could adversely affect KBR.
         The project owner has procured project finance funding obligations from
various  lenders to finance  the  payments  due to KBR under the  contract.  The
project owner currently has no other committed source of funding on which we can
necessarily rely other than the project finance funding for the project.  If the
lenders cease to fund the project, the project owner may not have the ability to
continue to pay KBR for its services.  The original loan documents  provide that
the lenders are not obligated to continue to fund the project if the project has
been delayed for more than 6 months.  In November  2002,  the lenders  agreed to
extend the 6-month period to 12 months.  Other  provisions in the loan documents
may provide for additional time extensions. However, delays beyond 12 months may
require lender consent in order to obtain additional  funding.  While we believe
the lenders have an incentive to complete the financing of the project, there is
no assurance that they would do so. If the lenders did not consent to extensions
of time or otherwise ceased funding the project, we believe that Petrobras would
provide for or secure other funding to complete the project,  although  there is
no  assurance  that it would  do so.  To  date,  the  lenders  have  made  funds
available,  and the project  owner has  continued  to  disburse  funds to KBR as
payment for its work on the project even though the project  completion has been
delayed.
         In addition, although the project financing includes borrowing capacity
in excess of the original contract amount,  only $250 million of this additional
borrowing  capacity is reserved for increases in the contract  amount payable to
KBR and its subcontractors.  Under the loan documents, the availability date for
loan draws  expires  December 1, 2003.  As a condition to approving the heads of
agreement,  the lenders  will  require the project  owner to draw all  remaining
available  funds  prior to  December  1,  2003,  and to escrow the funds for the
exclusive use of paying project costs.  No funds may be paid to Petrobras or its
subsidiary  (which is  funding  the  drilling  costs of the  project)  until all
amounts due to KBR,  including  amounts due for the claims,  are  liquidated and
paid. While this  potentially  increases the funds available for payment to KBR,
KBR is not party to the  arrangement  between the lenders and the project  owner
and can give no assurance  that there will be adequate  funding to cover current
or future KBR claims and change orders.
         KBR has now begun to fund operating cash  shortfalls on the project and
would be obligated to fund such shortages over the remaining  project life in an
amount  we  currently  estimate  to  be  approximately  $500  million  (assuming
generally  that neither we nor the project  owner are  successful  in recovering
claims against the other and that no liquidated damages are imposed).  Under the
same  assumptions,  except assuming that KBR recovers  unapproved  claims in the
amounts   currently   recorded  on  our  books,  the  cash  shortfall  would  be
approximately $320 million. While KBR believes it will recover amounts in excess
of the amount of unapproved claims on its books,  there can be no assurance that
it will do so.
         Current  maturities.  We had $166  million  of  current  maturities  of
long-term debt as of June 30, 2003. Subsequent to second quarter 2003, we repaid
a $150 million medium-term note due July 2003.
         Cash and  cash  equivalents.  We ended  June  30,  2003  with  cash and
equivalents of $1.9 billion.

OFF BALANCE SHEET RISK

         On April 15,  2002,  we  entered  into an  agreement  to sell  accounts
receivable to a bankruptcy-remote  limited-purpose funding subsidiary. Under the
terms of the agreement,  new receivables are added on a continuous  basis to the
pool of receivables, and collections reduce previously sold accounts receivable.
This funding  subsidiary sells an undivided  ownership  interest in this pool of
receivables to entities  managed by unaffiliated  financial  institutions  under
another agreement. Sales to the funding subsidiary have been structured as "true
sales" under applicable  bankruptcy  laws. The assets of the funding  subsidiary
are  not  available  to pay  any  creditors  of ours or of our  subsidiaries  or
affiliates,  until such time as the agreement with the unaffiliated companies is
terminated  following  sufficient   collections  to  liquidate  all  outstanding
undivided  ownership  interests.  The funding subsidiary retains the interest in
the pool of receivables that are not sold to the  unaffiliated  companies and is
fully consolidated and reported in our financial statements.

                                       55


         The amount of undivided interests, which can be sold under the program,
varies based on the amount of eligible Energy Services Group  receivables in the
pool at any given time and other factors.  The funding subsidiary initially sold
a $200 million undivided ownership interest to the unaffiliated  companies,  and
may from time to time sell additional undivided ownership  interests.  The total
amount outstanding under this facility was $180 million as of June 30, 2003. The
amount of undivided  ownership  interest in the pool of receivables  sold to the
unaffiliated companies is reflected as a reduction of accounts receivable in our
consolidated balance  sheet.  In  July 2003,  the balance outstanding under this
facility was reduced to zero.

ENVIRONMENTAL MATTERS

         We  are  subject  to  numerous  environmental,   legal  and  regulatory
requirements  related to our operations  worldwide.  In the United States, these
laws  and  regulations   include  the  Comprehensive   Environmental   Response,
Compensation and Liability Act, the Resources Conservation and Recovery Act, the
Clean Air Act, the Federal Water Pollution  Control Act and the Toxic Substances
Control Act,  among  others.  In addition to the federal  laws and  regulations,
states where we do business may have equivalent laws and regulations by which we
must also abide.
         We evaluate and address the  environmental  impact of our operations by
assessing  and  remediating  contaminated  properties  in order to avoid  future
liabilities and comply with environmental, legal and regulatory requirements. On
occasion  we are  involved  in  specific  environmental  litigation  and claims,
including  the  remediation  of  properties  we own or have  operated as well as
efforts to meet or correct compliance-related matters.
         We do not expect costs  related to these  remediation  requirements  to
have a material  adverse effect on our  consolidated  financial  position or our
results of operations.  We have subsidiaries that have been named as potentially
responsible  parties  along with other third  parties for nine federal and state
superfund sites for which we have established a liability.  As of June 30, 2003,
those nine sites accounted for approximately $7 million of our total $36 million
liability. See Note 12 to the financial statements.

FORWARD-LOOKING INFORMATION

         Looking ahead,  we believe United States  activity levels will increase
modestly  in the second half of this year.  In  particular, we expect  continued
strong drilling  activity  onshore in North America  provided natural gas or oil
prices do not decline significantly from current levels.  Activity in the United
States Gulf of Mexico has been  disappointing in the first half of this year and
we expect only a modest improvement  through year end. Outside of North America,
we expect rig counts  will be flat to up  slightly  for the balance of the year.
Mexico has also shown a significant increase in drilling activity, and we expect
this high  level of  activity  to  continue  in the near  term.  Pricing  on new
contracts  for  certain of our  products  and  services  began to improve in the
second quarter.  We expect that the pricing  environment will gradually  improve
for the balance of the year. We are currently  implementing  price increases and
discount reductions in selected product lines and geographies.
         In the  longer-term,  we expect  increased  global  demand  for oil and
natural gas,  additional customer spending to replace depleting reserves and our
continued technological advances to provide growth opportunities.
         The Private  Securities  Litigation  Reform Act of 1995  provides  safe
harbor provisions for forward-looking  information.  Forward-looking information
is  based  on  projections  and  estimates,  not  historical  information.  Some
statements in this Form 10-Q are  forward-looking and use words like "may", "may
not", "believes",  "do not believe",  "expects", "do not expect", "plans", "does
not plan", "anticipate", "do not anticipate", and other expressions. We may also
provide  oral or  written  forward-looking  information  in other  materials  we
release  to  the  public.   Forward-looking   information   involves  risks  and
uncertainties and reflects our best judgment based on current  information.  Our
results of operations  can be affected by inaccurate  assumptions  we make or by
known or unknown risks and uncertainties.  In addition, other factors may affect
the accuracy of our forward-looking information. As a result, no forward-looking
information  can be guaranteed.  Actual events and the results of operations may
vary materially.

                                       56


         While it is not possible to identify  all factors,  we continue to face
many risks and uncertainties  that could cause actual results to differ from our
forward-looking  statements  and  potentially  adversely  affect  our  financial
condition and results of operations, including risks relating to:
         Asbestos
              -   completion  of the proposed  settlement,  prerequisites  which
                  include:
                      -   agreement on the total  number of current asbestos and
                          silica   personal  injury  claims  and  the  aggregate
                          compensation for such  claims within the parameters of
                          the proposed settlement;
                      -   agreement  on  the  amounts  to be  contributed to the
                          trust for the  benefit of current silica claimants;
                      -   our  due diligence  review  for  product  exposure and
                          medical basis for claims;
                      -   agreement on procedures for distribution of settlement
                          funds to individuals claiming personal injury;
                      -   determining   whether,   after   diligence   and   the
                          identification  of  duplicate  claims, payment  of the
                          claims submitted would exceed the $2.775 billion  cash
                          portion of  the asbestos  settlement,  and the  manner
                          in  which  we  and  the  claimants  respond  to  these
                          matters;
                      -   definitive  agreement on a  plan of reorganization and
                          disclosure   statement   relating   to   the  proposed
                          settlement;
                      -   arrangement  of   acceptable  financing  to  fund  the
                          proposed settlement;
                      -   Board of Directors approval;
                      -   obtaining  approval   from  75%  of  current  asbestos
                          claimants and  the requisite  silica  claimants to the
                          plan  of  reorganization  implementing   the  proposed
                          settlement;
                      -   obtaining  final and  non-appealable  bankruptcy court
                          approval  and federal district  court confirmation  of
                          the plan of reorganization;
                      -   finalizing    the     settlement    agreement     with
                          Harbison-Walker   and   obtaining   bankruptcy   court
                          approval thereof; and
                      -   Harbison-Walker  obtaining  approval  of  its proposed
                          plan of reorganization in a form satisfactory to us;
              -   the  results   of  being  unable  to   complete  the  proposed
                  settlement, including:
                      -   continuing asbestos  and silica litigation against us,
                          which  would include the  possibility  of  substantial
                          adverse  judgments,  the timing  of which could not be
                          controlled  or   predicted,   and  the  obligation  to
                          provide  appeals bonds  pending any appeal of any such
                          judgment, some or all of which may  require us to post
                          cash collateral;
                      -   current and  future  asbestos  claims  settlement  and
                          defense costs,  including  the inability to completely
                          control  the timing of such costs and the  possibility
                          of increased costs to resolve personal injury claims;
                      -   the possibility of an increase  in the number and type
                          of  asbestos  and  silica  claims against  us  in  the
                          future;
                      -   future  events  in   the  Harbison-Walker   bankruptcy
                          proceeding,     including     the    possibility    of
                          discontinuation  of  the temporary  restraining  order
                          entered by the  Harbison-Walker  bankruptcy court that
                          applies  to over 200,000  pending  claims  against DII
                          Industries; and
                      -   any  adverse   changes  to  the  tort system  allowing
                          additional claims or judgments against us;
              -   the results of being unable to  recover, or being  delayed  in
                  recovering, insurance reimbursement in the amounts anticipated
                  to cover a part  of the costs incurred  defending asbestos and
                  silica  claims,  and  amounts paid  to  settle  claims or as a
                  result of court judgments, due to:
                      -   the inability  or  unwillingness of insurers to timely
                          reimburse for claims in the future;
                      -   disputes  as  to  documentation  requirements  for DII
                          Industries in order to recover claims paid;

                                       57


                      -   the  inability to  access  insurance policies   shared
                          with, or the  dissipation of  shared  insurance assets
                          by,    Harbison-Walker    Refractories    Company   or
                          Federal-Mogul Products, Inc.;
                      -   the  insolvency  or  reduced  financial  viability  of
                          insurers;
                      -   the   cost   of   litigation   to   obtain   insurance
                          reimbursement; and
                      -   adverse  court decisions  as  to our  rights to obtain
                          insurance reimbursement;
              -   the  results of  recovering,  or  agreeing  in  settlement  of
                  litigation to recover,  less insurance  reimbursement than the
                  insurance receivable recorded in our financial statements;
              -   continuing  exposure  to liability  even  after  the  proposed
                  settlement is completed, including exposure to:
                      -   any claims by claimants  exposed outside of the United
                          States;
                      -   possibly  any  claims  based  on  future  exposure  to
                          silica;
                      -   property damage  claims  as a result of  asbestos  and
                          silica use; or
                      -   any claims against any other subsidiaries or  business
                          units  of Halliburton  that  would not  be released in
                          the   Chapter   11   proceeding   through  the  524(g)
                          injunction;
              -   liquidity  risks  resulting  from being  unable to  complete a
                  settlement or timely recovery of insurance  reimbursement  for
                  amounts paid, each as discussed further below; and
              -   an adverse  effect on our financial  condition  or  results of
                  operations as a result of any of the foregoing;
         Liquidity
              -   adverse financial developments that could affect our available
                  cash or lines of credit, including:
                      -   the  effects described  above  of not  completing  the
                          proposed  settlement  or  not  being  able  to  timely
                          recover  insurance  reimbursement  relating to amounts
                          paid  as  part of  a settlement  or  as  a  result  of
                          judgments  against  us  or  settlements  paid  in  the
                          absence of a settlement;
                      -   our inability  to provide cash  collateral for letters
                          of credit or any bonding  requirements  from customers
                          or  as a  result  of  adverse  judgments  that  we are
                          appealing; and
                      -   a reduction  in our  credit ratings as a result of the
                          above or due to other adverse developments;
              -   requirements  to cash  collateralize  letters  of  credit  and
                  surety bonds by issuers and beneficiaries of these instruments
                  in reaction to:
                      -   our  plans to place DII  Industries,  Kellogg  Brown &
                          Root   and  some   of   their   subsidiaries   into  a
                          pre-packaged  Chapter  11  bankruptcy  as part of  the
                          proposed settlement;
                      -   in   the  absence  of  a   settlement,  one   or  more
                          substantial adverse judgments;
                      -   not   being    able   to   timely   recover  insurance
                          reimbursement; or
                      -   a reduction in credit ratings;
              -   our ability  to secure  financing on acceptable  terms to fund
                  our proposed settlement;
              -   defaults that could occur under our and our subsidiaries' debt
                  documents  as a result  of a Chapter  11 filing  unless we are
                  able to obtain consents or waivers to those events of default,
                  which events of default  could cause  defaults  under other of
                  our credit  facilities and possibly result in an obligation to
                  immediately pay amounts due;
              -   actions by issuers  and  beneficiaries  of current  letters of
                  credit to draw  under  such  letters  of  credit  prior to our
                  completion of a new letter of credit facility that is intended
                  to provide  reasonably  sufficient  credit  lines for us to be
                  able to fund any such cash requirements;
              -   reductions  in our  credit ratings  by rating  agencies, which
                  could result in:
                      -   the  unavailability  of  borrowing  capacity under our
                          existing $350 million  line of credit facility,  which
                          is  only  available to us if we maintain an investment
                          grade credit rating;
                      -   reduced  access to lines of credit, credit markets and
                          credit from suppliers under acceptable terms;
                      -   borrowing costs in the future; and
                      -   inability to issue  letters of credit and surety bonds
                          with or without cash collateral;
              -   working capital requirements from time to time;

                                       58


              -   debt and letter of credit covenants;
              -   volatility in the surety bond market;
              -   availability of financing from the United States Export/Import
                  Bank;
              -   ability to raise capital via the sale of stock; and
              -   an adverse effect on our financial condition or results of
                  operations as a result of any of the foregoing;
         Legal
              -   litigation,  including,  for example, class action shareholder
                  and   derivative   lawsuits,    contract   disputes,    patent
                  infringements, and environmental matters;
              -   any adverse  outcome of the SEC's current  investigation  into
                  Halliburton's  accounting  policies,  practices and procedures
                  that could  result in  sanctions  and the  payment of fines or
                  penalties, restatement of financials for years under review or
                  additional shareholder lawsuits;
              -   trade  restrictions  and  economic  embargoes  imposed  by the
                  United States and other countries;
              -   restrictions on  our ability to  provide products and services
                  to  Iran,  Iraq  and  Libya,  all  of  which  are  significant
                  producers of oil and gas;
              -   protective  government  regulation  in  many  of the countries
                  where we operate, including, for example, regulations that:
                      -   encourage    or   mandate   the    hiring   of   local
                          contractors; and
                      -   require foreign  contractors to employ citizens of, or
                          purchase supplies from, a particular jurisdiction;
              -   potentially adverse reaction,  and time and expense responding
                  to,  the  increased  scrutiny  of  Halliburton  by  regulatory
                  authorities, the media and others;
              -   potential liability and adverse regulatory reaction in Nigeria
                  to the theft from us  of radioactive material used in wireline
                  logging operations;
              -   environmental laws  and  regulations, including,  for example,
                  those that:
                      -   require    emission    performance    standards    for
                          facilities; and
                      -   the  potential  regulation in the United States of our
                          Energy Services Group's  hydraulic fracturing services
                          and products as underground injection; and
              -   the proposed excise tax in the United States targeted at heavy
                  equipment of the type we own and use in our  operations  would
                  negatively impact our Energy Services Group operating income;
         Effect of Chapter 11 Proceedings
              -   the adverse effect on the ability of the subsidiaries that are
                  proposed to  file a Chapter 11 proceeding to obtain new orders
                  from current or prospective customers;
              -   the potential reluctance of current and prospective  customers
                  and  suppliers  to honor  obligations  or continue to transact
                  business with the Chapter 11 filing entities;
              -   the  potential adverse  effect of  the  Chapter  11  filing of
                  negotiating  favorable  terms with  customers,  suppliers  and
                  other vendors;
              -   a prolonged  Chapter 11 proceeding that could adversely affect
                  relationships with customers,  suppliers and employees,  which
                  in turn  could  adversely  affect  our  competitive  position,
                  financial  condition and results of operations and our ability
                  to implement the proposed plan of reorganization; and
              -   the adverse  affect on our financial  condition or  results of
                  operations as a result of the foregoing;
         Geopolitical
              -   unrest in the Middle East that could:
                      -   impact the demand and pricing for oil and gas;
                      -   disrupt  our operations  in the  region and elsewhere;
                          and
                      -   increase our costs for security worldwide;
              -   unsettled political  conditions,  consequences of war or other
                  armed  conflict,  the  effects  of  terrorism,  civil  unrest,
                  strikes,  currency  controls and governmental  actions in many
                  oil  producing  countries  and  countries  in which we provide
                  governmental  logistical  support that could adversely  affect
                  our revenues and profit. Countries where we operate which have
                  significant  amounts of political  risk  include  Afghanistan,

                                       59


                  Algeria,  Angola, Colombia,  Indonesia,  Iraq, Libya, Nigeria,
                  Russia,  and Venezuela.  For example,  the national  strike in
                  Venezuela  as  well  as  seizures  of  offshore  oil  rigs  by
                  protestors   and  cessation  of  operations  by  some  of  our
                  customers in Nigeria  disrupted  our Energy  Services  Group's
                  ability to provide  services and products to our  customers in
                  these  countries  during  first  quarter  2003 and likely will
                  continue to do so throughout the remainder of 2003; and
              -   changes in  foreign exchange  rates and  exchange controls  as
                  were experienced in  Argentina in late 2001 and early 2002 and
                  in Venezuela in fourth quarter 2002;
         Weather related
              -   severe weather that impacts our business,  particularly in the
                  Gulf of Mexico where we have significant  operations.  Impacts
                  may include:
                      -   evacuation of personnel and curtailment of services;
                      -   weather  related damage  to  offshore   drilling  rigs
                          resulting in suspension of operations;
                      -   weather related damage to our facilities;
                      -   inability   to  deliver   materials  to   jobsites  in
                          accordance with contract schedules; and
                      -   loss of productivity; and
              -   demand  for  natural  gas  in  the  United   States  drives  a
                  disproportionate  amount of our Energy Services Group's United
                  States  business.  As a result,  warmer than normal winters in
                  the  United  States  are  detrimental  to the  demand  for our
                  services  to gas  producers.  Conversely,  colder  than normal
                  winters in the United  States  result in increased  demand for
                  our services to gas producers;
         Customers
              -   the magnitude of  governmental  spending and  outsourcing  for
                  military and  logistical  support of the type that we provide,
                  including,  for example,  support  services in the Balkans and
                  Iraq;
              -   changes in capital  spending by  customers  in the oil and gas
                  industry for exploration, development, production, processing,
                  refining, and pipeline delivery networks;
              -   changes in capital spending by governments for  infrastructure
                  projects of the sort that we perform;
              -   consolidation of customers including, for example, the  merger
                  of  Conoco  and  Phillips  Petroleum, has caused  customers to
                  reduce their  capital spending which  has negatively  impacted
                  the demand for our services and products;
              -   potential adverse customer reaction, including potential draws
                  upon letters of  credit, due to their concerns about our plans
                  to place  DII Industries, Kellogg  Brown &  Root  and  some of
                  their  subsidiaries into a pre-packaged  bankruptcy as part of
                  the proposed settlement;
              -   customer personnel  changes due  to mergers  and consolidation
                  which  impacts   the  timing  of   contract  negotiations  and
                  settlements of claims;
              -   claim negotiations with engineering and construction customers
                  on cost and  schedule  variances  and  change  orders on major
                  projects,  including,  for  example,  the  Barracuda-Caratinga
                  project in Brazil;
              -   delay in customer  spending due to consolidation and strategic
                  changes such as sales of the shallow  water  properties in the
                  Gulf of Mexico and recent sale of properties in the North Sea.
                  Spending is typically  delayed when new  operators  take over;
                  and
              -   ability of our customers to timely pay the amounts due us;
         Industry
              -   changes  in oil  and gas  prices, among  other things,  result
                  from:
                      -   the uncertainty  as to the timing  of return  of Iraqi
                          oil production;
                      -   OPEC's ability  to set and maintain production  levels
                          and prices for oil;
                      -   the level of oil production by non-OPEC countries;
                      -   the policies of  governments regarding exploration for
                          and  production  and  development  of  their  oil  and
                          natural gas reserves;
                      -   the  level   of  demand  for  oil   and  natural  gas,
                          especially natural gas in the United States; and
                      -   the  level  of gas  storage in  the  northeast  United
                          States;

                                       60


              -   obsolescence  of our  proprietary  technologies, equipment and
                  facilities, or work processes;
              -   changes in the  price or the availability of commodities  that
                  we use;
              -   our ability  to obtain  key insurance  coverage  on acceptable
                  terms;
              -   non-performance,  default  or   bankruptcy  of  joint  venture
                  partners, key suppliers or subcontractors;
              -   performing  fixed-price   projects,  where   failure  to  meet
                  schedules, cost estimates or  performance targets could result
                  in reduced profit margins or losses;
              -   entering into complex  business  arrangements  for technically
                  demanding  projects where failure by one or more parties could
                  result in monetary penalties; and
              -   the use  of derivative  instruments  of the  sort that  we use
                  which  could  cause  a  change  in  value  of  the  derivative
                  instruments as a result of:
                      -   adverse movements in  foreign exchange rates, interest
                          rates, or commodity prices; or
                      -   the  value  and  time  period of  the derivative being
                          different  than the  exposures  or  cash  flows  being
                          hedged;
         Systems
              -   the successful identification, procurement and installation of
                  a new financial  system to replace  the current system for the
                  Engineering and Construction Group;
         Personnel and mergers/reorganizations/dispositions
              -   ensuring acquisitions  and new products and services add value
                  and complement our core businesses; and
              -   successful completion of dispositions.
         In  addition,   future  trends  for  pricing,   margins,  revenues  and
profitability  remain difficult to predict in the industries we serve. We do not
assume  any  responsibility  to  publicly  update  any  of  our  forward-looking
statements  regardless of whether factors change as a result of new information,
future  events  or for any  other  reason.  You  should  review  any  additional
disclosures  we make in our press  releases  and Forms 10-K,  10-Q and 8-K filed
with the United States Securities and Exchange Commission.  We also suggest that
you listen to our quarterly  earnings  release  conference  calls with financial
analysts.
         No assurance  can be given that our  financial  condition or results of
operations would not be materially and adversely  affected by some of the events
described above, including:
              -   the inability to complete a settlement;
              -   in the absence of a settlement,  adverse  developments  in the
                  tort system, including adverse judgments and increased defense
                  and settlement costs relating to claims against us;
              -   liquidity   issues   resulting  from  failure  to  complete  a
                  settlement, adverse developments in the tort system, including
                  adverse  judgments and increased defense and settlement costs,
                  and resulting or concurrent  credit ratings  downgrades and/or
                  demand  for cash  collateralization  of  letters  of credit or
                  surety bonds;
              -   the  filing   of  Chapter  11   proceedings  by  some  of  our
                  subsidiaries or a prolonged Chapter 11 proceeding; and
              -   adverse  geopolitical developments, including armed  conflict,
                  civil  disturbance  and  unsettled  political   conditions  in
                  foreign countries in which we operate.

                                       61


Item 3.  Quantitative and Qualitative Disclosures about Market Risk
-------------------------------------------------------------------

         We are exposed to  financial  instrument  market  risk from  changes in
foreign  currency  exchange  rates,  interest  rates  and to a  limited  extent,
commodity  prices.  We  selectively  manage these  exposures  through the use of
derivative  instruments  to mitigate our market risk from these  exposures.  The
objective of our risk  management  is to protect our cash flows related to sales
or purchases of goods or services from market  fluctuations  in currency  rates.
Our use of derivative instruments includes the following types of market risk:
              -   volatility of the currency rates;
              -   time horizon of the derivative instruments;
              -   market cycles; and
              -   the type of derivative instruments used.
         We do not use derivative  instruments for trading  purposes.  We do not
consider any of these risk management activities to be material.

Item 4.  Controls and Procedures
--------------------------------

         In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out
an evaluation,  under the supervision and with the  participation of management,
including  our Chief  Executive  Officer  and  Chief  Financial Officer,  of the
effectiveness  of our  disclosure  controls and  procedures as of the end of the
period covered by this report.  Based on that  evaluation,  our Chief  Executive
Officer and Chief Financial Officer  concluded that our disclosure  controls and
procedures  were effective as of June 30, 2003 to provide  reasonable  assurance
that  information  required to be  disclosed  in our reports  filed or submitted
under the Exchange Act is recorded,  processed,  summarized and reported  within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
         There  has been no  change  in our  internal  controls  over  financial
reporting  that  occurred  during the three  months ended June 30, 2003 that has
materially affected,  or is reasonably likely to materially affect, our internal
controls over financial reporting.

                                       62


PART II.  OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds
--------------------------------------------------

         On June 30, 2003, we issued $1.2 billion of 3.125%  convertible  senior
notes due July 15, 2023.  Citigroup Global Markets Inc.,  Goldman,  Sachs & Co.,
J.P. Morgan Securities Inc., ABN AMRO  Incorporated,  HSBC and The Royal Bank of
Scotland plc, the initial purchasers of the notes, agreed to sell the notes only
to persons whom they reasonably believe are "qualified  institutional buyers" in
reliance on Rule 144A under the Securities  Act of 1933. The initial  purchasers
offered  the  notes  at  100%  of the  principal  amount  thereof.  The  initial
purchasers purchased the notes from us at 98% of the principal amount thereof.
         The  notes  are  convertible  into our  common  stock  under any of the
following circumstances:
              -   during any  calendar  quarter  (and only during such  calendar
                  quarter) if the last  reported  sale price of our common stock
                  for  at  least  20  trading  days  during  the  period  of  30
                  consecutive trading days ending on the last trading day of the
                  previous  quarter  is  greater  than or  equal  to 120% of the
                  conversion  price per share of our  common  stock on such last
                  trading day;
              -   if the notes have been called for redemption;
              -   upon the occurrence of certain corporate transactions; or
              -   during any period in which the credit ratings  assigned to the
                  notes by both Moody's and Standard & Poor's are lower than Ba1
                  and BB+, respectively,  or the notes are no longer rated by at
                  least one of these rating services or their successors.
         The  initial  conversion  price is $37.65  per share and is  subject to
adjustment.  Upon  conversion,  we will  have the right to  deliver,  in lieu of
shares of our common stock, cash or a combination of cash and common stock.

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

         At  our  Annual  Meeting  of   Stockholders   held  on  May  21,  2003,
stockholders  were asked to consider and act upon:
         (1)  the election of Directors for the ensuing year;
         (2)  ratification  of   the  selection  of   KPMG  LLP  as  independent
              accountants  to examine  the financial  statements and  books  and
              records of Halliburton for the year 2003;
         (3)  a proposal to amend and restate the Halliburton Company 1993 Stock
              and Incentive Plan; and
         (4)  a stockholder proposal on executive severance agreements.
         The  following  table sets  out, for each matter  where applicable, the
number  of  votes  cast  for,  against  or  withheld,  as well  as the number of
abstentions and broker non-votes.


         (1)    Election of Directors:
                                                                                

                Name of Nominee                           Votes For                   Votes Withheld

                Robert L. Crandall                        357,966,842                  10,979,634
                Kenneth T. Derr                           358,416,648                  10,529,828
                Charles J. DiBona                         359,872,432                   9,074,044
                W. R. Howell                              358,195,287                  10,751,189
                Ray L. Hunt                               358,394,321                  10,552,155
                David J. Lesar                            357,989,553                  10,956,923
                Aylwin B. Lewis                           359,982,433                   8,964,043
                J. Landis Martin                          359,981,448                   8,965,028
                Jay A. Precourt                           360,122,772                   8,823,704
                Debra L. Reed                             360,079,926                   8,866,550
                C. J. Silas                               358,308,083                  10,638,393

                                       63


         (2)    Ratification of KPMG LLP as independent accountants:

                Number of Votes For                        356,903,869
                Number of Votes Against                      9,486,518
                Number of Votes Abstain                      2,556,089
                Number of Broker Non-Votes                           0

         (3)    Proposal to amend and restate the Halliburton Company 1993 Stock
                and Incentive Plan:

                Number of Votes For                        268,381,549
                Number of Votes Against                     27,714,726
                Number of Votes Abstain                      3,472,864
                Number of Broker Non-Votes                  69,377,337

         (4)    Stockholder proposal on executive severance agreements:

                   Number of Votes For                     109,768,116
                   Number of Votes Against                 181,647,039
                   Number of Votes Abstain                   7,000,984
                   Number of Broker Non-Votes               70,530,337


Item 6.  Exhibits and Reports on Form 8-K
-----------------------------------------

         (a)    Exhibits

*       4.1     Senior Indenture  dated as of  June 30, 2003 between Halliburton
                and JPMorgan Chase Bank, as Trustee.

*       4.2     Form  of note  of  3.125% Convertible  Senior Notes due July 15,
                2023 (included as Exhibit A to Exhibit 4.1 above).

*      10.1     Halliburton  Company 1993  Stock and  Incentive Plan, as amended
                and restated effective February 12, 2003.

*      31.1     Certification of Chief Executive Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002.

*      31.2     Certification of Chief Financial Officer pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002.

*      32.1     Certification of Chief Executive Officer pursuant to Section 906
                of the Sarbanes-Oxley Act of 2002.

*      32.2     Certification of Chief Financial Officer pursuant to Section 906
                of the Sarbanes-Oxley Act of 2002.


                *    Filed with this Form 10-Q

                                       64


         (b)    Reports on Form 8-K


                         Date of
Date Filed               Earliest Event         Description of Event
-------------------------------------------------------------------------------------------------------------------

During the second quarter of 2003:
                                          
April 29, 2003           April 28, 2003         Items 9 and 12. Regulation FD Disclosure and Disclosure of
                                                Results of Operations and Financial Condition for a press release
                                                announcing 2003 first quarter results.

May 9, 2003              May 8, 2003            Item 9. Regulation FD furnishing Certifications to the SEC
                                                pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
                                                906 of the Sarbanes-Oxley act of 2002, signed by David J. Lesar
                                                and C. Christopher Gaut.

May 23, 2003             May 21, 2003           Item 9. Regulation FD Disclosure for a press release announcing a
                                                2003 second quarter dividend.

May 23, 2003             May 21, 2003           Item 9. Regulation FD Disclosure for a press release announcing a
                                                correction of the 2003 second quarter dividend announcement.

May 30, 2003             May 30, 2003           Item 9. Regulation FD Disclosure for a press release announcing
                                                an agreement reached to settle class action lawsuits.

June 10, 2003            June 6, 2003           Item 9. Regulation FD Disclosure for a press release updating the
                                                status of the proposed global settlement.

June 11, 2003            June 9, 2003           Item 9. Regulation FD Disclosure for a press release announcing a
                                                conference call on July 31, 2003 to discuss 2003 second quarter
                                                financial results.

June 20, 2003            June 20, 2003          Item 9. Regulation FD Disclosure for a press release announcing
                                                updates on the Barracuda-Caratinga project, second quarter
                                                earnings guidance, and findings of due diligence on the proposed
                                                asbestos settlement.

June 25, 2003            June 23, 2003          Item 9. Regulation FD Disclosure for a press release announcing
                                                the offering of convertible senior notes to qualified
                                                institutional buyers pursuant to Rule 144A under the Securities
                                                Act of 1933.

June 25, 2003            June 24, 2003          Item 9. Regulation FD Disclosure for a press release announcing
                                                the pricing of convertible senior notes which were offered to
                                                qualified institutional buyers pursuant to Rule 144A under the
                                                Securities Act of 1933.

                                       65


                         Date of
Date Filed               Earliest Event         Description of Event
-------------------------------------------------------------------------------------------------------------------

During the third quarter of 2003:

July 18, 2003            July 17, 2003          Item 9. Regulation FD Disclosure for a press release announcing a
                                                2003 third quarter dividend.

July 21, 2003            July 21, 2003          Item 9. Regulation FD Disclosure for a press release announcing
                                                asbestos plaintiffs agree to extend the current stay on asbestos
                                                claims until September 30, 2003.

July 23, 2003            July 22, 2003          Item 9. Regulation FD Disclosure for a press release announcing
                                                the Harbison-Walker bankruptcy court approved an agreement to
                                                extend the current stay on asbestos claims through September 30,
                                                2003.

August 4, 2003           July 31, 2003          Item 12.Disclosure of Results of Operations and Financial
                                                Condition for a press release announcing 2003 second quarter
                                                results.


                                       66


                                   SIGNATURES


         As required by the Securities  Exchange Act of 1934, the registrant has
authorized  this  report  to be  signed  on  behalf  of  the  registrant  by the
undersigned authorized individuals.


                                       HALLIBURTON COMPANY




Date:    August 11, 2003               By:  /s/  C. Christopher Gaut
     ------------------------             ----------------------------------
                                                 C. Christopher Gaut
                                            Executive Vice President and
                                               Chief Financial Officer







                                            /s/  R. Charles Muchmore, Jr.
                                          ----------------------------------
                                                 R. Charles Muchmore, Jr.
                                           Vice President and Controller and
                                              Principal Accounting Officer

                                       67