UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 2002

                                       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
             (Exact name of registrant as specified in its charter)

               Delaware                               75-2677995
     (State or other jurisdiction of                  (I.R.S. Employer
     incorporation or organization)                   Identification No.)


                    4100 Clinton Drive, Houston, Texas 77020
                    (Address of principal executive offices)
                   Telephone Number - Area code (713) 676-3011

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

                                                        Name of each Exchange on
         Title of each class                                which registered
         -------------------                                ----------------
Common Stock par value $2.50 per share                   New York Stock Exchange
Baroid Corporation 8% Guaranteed Senior Notes due 2003   New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None

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 if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

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

The  aggregate  market value of Common Stock held by  nonaffiliates  on June 28,
2002,  determined  using  the per  share  closing  price on the New  York  Stock
Exchange Composite tape of $15.94 on that date was approximately $6,928,000,000.

As of February 28, 2003,  there were 437,160,510  shares of Halliburton  Company
Common Stock $2.50 par value per share outstanding.

Portions of the  Halliburton  Company Proxy Statement dated March 25, 2003 (File
No. 1-3492), are incorporated by reference into Part III of this report.



PART I

Item 1. Business.
         General description of business.  Halliburton Company's predecessor was
established in 1919 and incorporated  under the laws of the State of Delaware in
1924. Halliburton Company provides a variety of services, products, maintenance,
engineering and construction to energy, industrial and governmental customers.
           We operate in two business segments:
              -   Energy Services Group; and
              -   Engineering and Construction Group.
         Dresser Equipment Group is presented as discontinued operations through
March 31, 2001 as a result of the sale in April 2001 of this business  unit. See
Note 4 to the financial statements for financial  information about our business
segments.
         Proposed global settlement.  On December 18, 2002, we announced that we
had reached an agreement  in  principle  that,  if and when  consummated,  would
result in a global  settlement of all asbestos and silica personal injury claims
against  DII  Industries,  LLC (DII  Industries),  Kellogg,  Brown & Root,  Inc.
(Kellogg, Brown & Root) and their current and former subsidiaries.
         The agreement in principle provides that:
              -   up to $2.775 billion in cash, 59.5 million  Halliburton shares
                  (valued at $1.1 billion  using the stock price at December 31,
                  2002 of $18.71) and notes with a net present value expected to
                  be less  than  $100  million  will be paid to a trust  for the
                  benefit  of  current  and  future  asbestos   personal  injury
                  claimants and current 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
                  Chapter  11 filing  for DII  Industries, Kellogg, Brown & Root
                  and some of their subsidiaries; and
              -   the  funding  of  the  settlement  amounts  would  occur  upon
                  receiving  final and non-appealable  court confirmation  of  a
                  plan of reorganization of DII  Industries and Kellogg, Brown &
                  Root and their subsidiaries in the Chapter 11 proceeding.
         Subsequently,  as of March 2003, DII  Industries  and Kellogg,  Brown &
Root have entered into definitive written agreements finalizing the terms of the
agreement  in  principle.
         In  March  2003,  we  agreed  with  Harbison-Walker  and  the  asbestos
creditors committee in the Harbison-Walker bankruptcy to consensually extend the
period of the stay contained in the  Bankruptcy  Court's  temporary  restraining
order until July 21, 2003. The court's temporary  restraining  order,  which was
originally  entered  on  February  14,  2002,  stays more than  200,000  pending
asbestos  claims  against DII  Industries.  The  agreement  provides that if the
pre-packaged  Chapter  11 filing by DII  Industries,  Kellogg,  Brown & Root and
their  subsidiaries is not made by July 14, 2003, the Bankruptcy Court will hear
motions to lift the stay on July 21, 2003. The asbestos creditors committee also
reserves  the right to monitor  progress  toward  the  filing of the  Chapter 11
proceeding and seek an earlier hearing to lift the stay if satisfactory progress
toward the Chapter 11 filing is not being made.
         See  "Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations  -  Liquidity  and Capital  Resources  - Proposed  global
settlement" and Note 12 to the financial statements.
         Description  of  services  and  products.  We  offer a broad  suite  of
products  and  services  through  the  two  business  segments.   The  following
summarizes our services and products for each business segment.
         ENERGY SERVICES GROUP
         The Energy  Services  Group  segment  consists  of  Halliburton  Energy
Services,  Landmark  Graphics and various  other  product  service  lines.  This
segment  provides a wide range of discrete  services  and  products,  as well as
integrated   solutions  to  customers  for  the  exploration,   development  and
production of oil and gas. The segment  serves major,  national and  independent
oil and gas companies throughout the world.
         Halliburton Energy Services provides discrete services and products and
integrated solutions ranging from the initial evaluation of producing formations
to drilling,  completion,  production  and well  maintenance.  Major product and
service line offerings include:

                                       1


              -   pressure pumping, including:
                  -   cementing,
                  -   production enhancement (fracturing and acidizing), and
                  -   tools and testing;
              -   drilling and formation evaluation, including:
                  -   drilling systems and services,
                  -   drill bits, and
                  -   logging and perforating;
              -   drilling fluids systems;
              -   completion products; and
              -   integrated solutions.
         Cementing  is the process  used to bond the well and well casing  while
isolating fluid zones and maximizing wellbore stability. This is accomplished by
pumping  cement and chemical  additives to fill the space between the casing and
the side of the  wellbore.  Our  cementing  service  line also  provides  casing
equipment and services.
         Production  enhancement  optimizes  oil and gas  reservoirs  through  a
variety of pressure pumping services,  including fracturing and acidizing,  sand
control, coiled tubing, well control,  nitrogen services and specialty services.
These  services are used to clean out a formation or to fracture  formations  to
allow increased oil and gas production.
         Tools and testing  includes  tubing-conveyed  perforating  products and
services, drill stem and other well testing tools, data acquisition services and
production applications.
         Sperry-Sun  provides  drilling  systems and  services.  These  services
include   directional  and  horizontal   drilling,   measurement-while-drilling,
logging-while-drilling,  multilateral wells and related completion systems,  and
rig site  information  systems.  Our  drilling  systems  feature bit  stability,
directional  control,   borehole  quality,  low  vibration  and  high  rates  of
penetration while drilling directional wells.
         Drill bits,  offered by Security  DBS,  include  roller cone rock bits,
fixed cutter bits,  coring  equipment and services and other downhole tools used
to drill wells.
         Logging  products and services include our Magnetic  Resonance  Imaging
Logging (MRIL(R)),  high-temperature  logging, as well as traditional  open-hole
and cased-hole  logging tools.  MRIL(R) tools apply magnetic  resonance  imaging
technology to the evaluation of subsurface  rock formations in newly drilled oil
and gas  wells.  Open-hole  tools  provide  information  on well  visualization,
formation   evaluation   (including   resistivity,   porosity,   lithology   and
temperature),  rock mechanics and sampling.  Cased-hole tools provide  cementing
evaluation,   reservoir   monitoring,   pipe   evaluation,   pipe  recovery  and
perforating.
         Baroid provides  drilling fluid systems and  performance  additives for
oil and gas drilling,  completion and workover operations.  In addition,  Baroid
sells  products  to a wide  variety of  industrial  customers.  Drilling  fluids
usually  contain  bentonite  or barite in a water or oil base.  Drilling  fluids
primarily  improve  wellbore  stability and  facilitate  the  transportation  of
cuttings from the bottom of a wellbore to the surface. The fluids also help cool
the drill bit, seal porous well formations and assist in pressure control within
a  wellbore.  Fluids  are often  customized  by  onsite  engineers  for  optimum
stability and enhanced oil production.
         Completion  products include  subsurface safety valves and flow control
equipment,  surface safety systems,  packers and specialty completion equipment,
production  automation,  well  screens,  well  control  services  and  slickline
equipment and services.
         Integrated  solutions provides  value-added oilfield project management
and solutions to independent,  integrated and national oil companies. Integrated
solutions  enhance  field  deliverability  and maximize a  customer's  return on
investment.  These services  leverage all Halliburton  Energy Services'  product
service lines and technologies, as well as project management capabilities.
          Landmark  Graphics is the leading  supplier of integrated  exploration
and production  software  information  systems as well as professional  and data
management  services for the upstream oil and gas industry.  Landmark's software
transforms  vast  quantities  of seismic,  well log and other data into detailed
computer  models  of  petroleum  reservoirs  to  achieve  optimal  business  and
technical  decisions in  exploration,  development  and  production  activities.
Landmark's broad range of professional  services enables our worldwide customers
to optimize technical, business and decision processes. Data management services
provides  efficient  storage,   browsing  and  retrieval  of  large  volumes  of


                                       2


exploration  and petroleum  data. The products and services  offered by Landmark
integrate data workflows and operational  processes across disciplines including
geophysics, geology, drilling, engineering,  production,  economics, finance and
corporate planning, and key partners and suppliers.
         Other  product  service  lines  provide  installation  and servicing of
subsea facilities and pipelines.
         ENGINEERING AND CONSTRUCTION GROUP
         The  Engineering and  Construction  Group segment,  operating  as  KBR,
provides  a wide  range of  services  to energy  and  industrial  customers  and
government entities worldwide.
         KBR offers the following five product lines:
              -   Onshore  operations  consist of engineering  and  construction
                  activities,   including   engineering   and   construction  of
                  liquefied  natural gas,  ammonia and crude oil  refineries and
                  natural gas plants;
              -   Offshore   operations  include  specialty  offshore  deepwater
                  engineering  and marine  technology and worldwide  fabrication
                  capabilities;
              -   Government   operations  provide   operations,   construction,
                  maintenance and logistics activities for government facilities
                  and installations;
              -   Operations and maintenance  services include plant operations,
                  maintenance  and  start-up  services  for  both  upstream  and
                  downstream  oil, gas and  petrochemical  facilities as well as
                  operations,  maintenance and logistics services for the power,
                  commercial and industrial markets; and
              -   Infrastructure  provides  civil  engineering,  consulting  and
                  project management services.
         Dispositions in 2002.  During 2002, we disposed  of non-core businesses
in our Energy Services Group listed below:
              -   in January 2002,  we sold our 50% interest in European  Marine
                  Contractors   Limited,   which  provided   offshore   pipeline
                  services, to our joint venture partner, Saipem;
              -   in   August  2002,   we  sold   several  Integrated  Solutions
                  properties that were located in the United States; and
              -   in September 2002, we sold our 50% interest in Bredero-Shaw, a
                  pipecoating joint venture, to our partner ShawCor Ltd.
         These  dispositions  will  have  an  immaterial  impact  on our  future
operations.  In addition,  in May 2002, we contributed  substantially all of our
Halliburton  Subsea assets for 50% of the  ownership in a newly formed  company,
Subsea 7, Inc.
         See  Note 2 to the  financial  statements  for  additional  information
related to 2002 dispositions and the creation of Subsea 7.
         Business  strategy.   Our  business  strategy  is  to  maintain  global
leadership  in  providing  energy  services and  products  and  engineering  and
construction  services.  We provide these services and products to our customers
as discrete  services and products and,  when  combined with project  management
services, as integrated solutions.  Our ability to be a global leader depends on
meeting four key goals:
              -   establishing and maintaining technological leadership;
              -   achieving and continuing operational excellence;
              -   creating and continuing innovative business relationships; and
              -   preserving a dynamic workforce.
         Markets and competition.  We are one of the world's largest diversified
energy services and engineering and construction services companies.  We believe
that our future  success  will  depend in large part upon our ability to offer a
wide array of services and products on a global scale. Our services and products
are sold in highly competitive markets throughout the world. Competitive factors
impacting sales of our services and products  include:  price,  service delivery
(including the ability to deliver services and products on an "as needed,  where
needed"  basis),  service  quality,  product  quality,  warranty  and  technical
proficiency.  While we provide a wide range of discrete services and products, a
number of customers  have  indicated a preference  for  integrated  services and
solutions.  In the case of the Energy  Services Group,  integrated  services and
solutions  relate to all phases of  exploration,  development  and production of
oil,  natural gas and natural gas liquids.  In the case of the  Engineering  and
Construction  Group,  integrated  services and solutions relate to all phases of
design,  procurement,   construction,  project  management  and  maintenance  of
facilities primarily for energy and government customers.

                                       3


         We conduct  business  worldwide in over 100  countries.  For 2002,  the
United  States  represented  33% of our total  revenue  and the  United  Kingdom
represented  12%.  No other  country  accounted  for more  than 10% of our total
revenue.  Since the markets for our  services  and  products  are vast and cross
numerous  geographic  lines,  a  meaningful  estimate  of the  total  number  of
competitors  cannot be made. The industries we serve are highly  competitive and
we have many  substantial  competitors.  Substantially  all of our  services and
products are marketed through our servicing and sales organizations.
         Operations  in some  countries  may be adversely  affected by unsettled
political  conditions,  acts of terrorism,  expropriation or other  governmental
actions and exchange  control and currency  problems.  We believe the geographic
diversification  of our  business  activities  reduces  the  risk  that  loss of
operations in any one country would be material to the conduct of our operations
taken as a whole.  While  Venezuela  accounted  for less than two percent of our
2002 revenues,  the current economic and political instability in Venezuela will
negatively impact our operations until resolved. In addition, as a result of the
breadth  of  our  businesses  and  the  inherently  unpredictable  impact of the
armed  conflict  in  the  Middle East,  we  are unable  to predict  their impact
on  our  results  of  operations.   Moreover, due  to  rising  levels  of  civil
disturbance, a  number of our  customers has ceased  operations in the  Nigerian
Delta region.  Energy services operations in Nigeria accounted for approximately
2% of our  revenues in 2002, and  these developments could negatively impact our
operations in 2003.  Information  regarding  our  exposures to foreign  currency
fluctuations, risk concentration and financial instruments used to minimize risk
is included in "Management's  Discussion and Analysis of Financial Condition and
Results of Operations - Financial  Instrument Market Risk" and in Note 19 to the
financial statements.
         Customers and backlog.  Our revenues from continuing  operations during
the past three years were mainly  derived from the sale of services and products
to the energy industry. Sales of services and products to the energy industry in
2002 represented 86% of revenues from continuing  operations  compared to 85% in
2001 and 84% in 2000.
         The  following   schedule   summarizes  the  backlog  from   continuing
operations of  engineering  and  construction  projects at December 31, 2002 and
2001:


 Millions of dollars                                 2002          2001
-----------------------------------------------------------------------------
                                                           
   Firm orders                                     $  8,704      $  8,118
   Government orders firm but not yet funded,
   letters of intent and contracts awarded but
   not signed                                         1,330         1,794
-----------------------------------------------------------------------------
 Total                                             $ 10,034      $  9,912
=============================================================================

         Of the total backlog at December 31, 2002,  $9,776  million  relates to
KBR operations  with the remainder  arising from our Energy  Services  Group. We
estimate  that 43% of the total  backlog  existing at December  31, 2002 will be
completed during 2003. Approximately 37% of total backlog relates to fixed-price
contracts  with the remaining 63% relating to cost  reimbursable  contracts.  In
addition,  backlog  relating  to  engineering,   procurement,  installation  and
commissioning  contracts  for the  offshore  oil and gas  industry  totaled $904
million at December 31, 2002. For contracts that are not for a specific  amount,
backlog is estimated as follows:
              -   operations and maintenance contracts that cover multiple years
                  are included in backlog based upon an estimate of the work to
                  be provided over the next twelve months; and
              -   government  contracts that cover a broad scope of work up to a
                  maximum value are included in backlog at the estimated  amount
                  of work to be completed under the contract based upon periodic
                  consultation with the customer.
         For projects where we act as project manager, we only include our scope
of each  project  in  backlog.  For  projects  related to  unconsolidated  joint
ventures,  we only  include our  percentage  ownership  of each joint  venture's
backlog.  Our backlog  excludes  contracts for  recurring  hardware and software
maintenance and support services offered by Landmark.  Backlog is not indicative
of future  operating  results because backlog figures are subject to substantial
fluctuations.  Arrangements  included in backlog are in many instances extremely

                                       4


complex, nonrepetitive in nature and may fluctuate in contract value and timing.
Many contracts do not provide for a fixed amount of work to be performed and are
subject to  modification  or  termination  by the customer.  The  termination or
modification  of any one or more  sizeable  contracts  or the  addition of other
contracts may have a substantial and immediate effect on backlog.
         Raw  materials.  Raw  materials  essential to our business are normally
readily available. Where we rely on a single supplier for materials essential to
our  business,  we are  confident  that we could make  satisfactory  alternative
arrangements in the event of an interruption in supply.
         Research  and  development  costs.  We maintain an active  research and
development  program.  The program  improves  existing  products and  processes,
develops new products and  processes  and  improves  engineering  standards  and
practices that serve the changing needs of our customers.  Our  expenditures for
research and development  activities  totaled $233 million in both 2002 and 2001
and $231 million in 2000. Further  information  relating to our expenditures for
research  and  development  is  included  in Note 1 and Note 4 to the  financial
statements.
         Patents.  We  own  a  large  number  of  patents  and  have  pending  a
substantial  number  of  patent  applications   covering  various  products  and
processes.  We are also licensed to utilize patents owned by others. Included in
"Other  assets"  are patents,  net of  accumulated  amortization,  totaling  $58
million as of December 31, 2002 and $49 million as of December  31, 2001.  We do
not  consider  any  particular  patent or group of patents to be material to our
business operations.
         Seasonality.  Weather and natural phenomena can temporarily  affect the
performance of our services,  but the widespread  geographical  locations of our
operations  serve to mitigate those effects.  Examples of how weather can impact
our business include:
              -   the severity  and duration of the  winter in North America can
                  have  a significant impact on gas storage levels and  drilling
                  activity for natural gas;
              -   the timing  and duration of the spring thaw in Canada directly
                  affects activity levels due to road restrictions;
              -   typhoons and hurricanes can disrupt offshore operations; and
              -   severe weather  during the winter  months normally results  in
                  reduced activity levels in the North Sea.
         Employees.  At December 31, 2002, we employed approximately 83,000
people worldwide  compared to 85,000 at December 31, 2001. At December 31, 2002,
approximately   five  percent  of  our  employees  were  subject  to  collective
bargaining  agreements.  Based  upon  the  geographic  diversification  of these
employees, we believe any risk of loss from employee strikes or other collective
actions would not be material to the conduct of our operations taken as a whole.
         Environmental  regulation.  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 with which we must 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 ten federal and state
superfund  sites for which we have  established a liability.  As of December 31,
2002,  those ten  sites  accounted  for $8  million  of our  total  $48  million
liability. See Note 12 to the financial statements.
         Website access.  The Company's  annual reports on Form 10-K,  quarterly
reports  on Form  10-Q,  current  reports  on Form 8-K and  amendments  to those
reports  filed or furnished  pursuant to Section  13(a) or 15(d) of the Exchange
Act of 1934 are made available free of charge on the Company's  internet website
at  www.halliburton.com  as soon as reasonably practicable after the Company has
electronically  filed such material with, or furnished it to, the Securities and
Exchange Commission.

                                       5


Item 2. Properties.
         We own or lease numerous  properties in domestic and foreign locations.
The following locations represent our major facilities:


                                        Owned/
Location                                Leased     Sq. Footage  Description
----------------------------------------------------------------------------------------------------------------------
                                                       
Energy Services Group
North America
Duncan, Oklahoma                        Owned      1,275,000    Four locations which include manufacturing capacity
                                                                totaling 655,000 square feet.  The manufacturing
                                                                facility is the main manufacturing site for the
                                                                cementing, fracturing and acidizing equipment used
                                                                by our pressure pumping product service line.  The
                                                                Duncan facilities also include a technology and
                                                                research center, training facility, administrative
                                                                offices and warehousing.

Houston, Texas                          Owned        690,000    Two suburban campus locations.  One campus is on 89
                                                                acres consisting of office, training, test well,
                                                                warehouse, manufacturing and laboratory facilities.
                                                                The manufacturing facility, which occupies 115,000
                                                                square feet, produces highly specialized downhole
                                                                equipment for our logging and drilling systems
                                                                product service lines.  The other campus is a
                                                                manufacturing facility with limited office,
                                                                laboratory and warehouse space that primarily
                                                                produces fixed cutter drill bits.

Houston, Texas                          Owned        593,000    A campus facility that is the home office for the
                                                                Energy Services Group.

Carrollton, Texas                       Owned        792,000    Manufacturing facility including warehouses,
                                                                engineering and sales, testing, training and
                                                                research.  The manufacturing plant produces
                                                                equipment for the completion products product
                                                                service line, including surface and subsurface
                                                                safety valves and packer assemblies.

Dallas, Texas                           Owned        352,000    Manufacturing facility includes office, laboratory
                                                                and warehouse space that primarily produces roller
                                                                cone drill bits.  In 2002, we announced plans to
                                                                move production from this facility to a new facility
                                                                in The Woodlands, Texas.  The planned move is
                                                                expected in 2003.

Alvarado, Texas                         Owned        238,000    Manufacturing facility including some office and
                                                                warehouse space.  The manufacturing facility
                                                                produces perforating products and exploratory and
                                                                formation evaluation tools for the tools, testing
                                                                and tubing conveyed perforating and logging product
                                                                service lines.

                                       6



                                        Owned/
Location                                Leased     Sq. Footage  Description
----------------------------------------------------------------------------------------------------------------------

Europe/Africa
Arbroath, United Kingdom                Owned        119,000    Manufacturing site that produces equipment for the
                                                                completions products product service line.

Aberdeen, United Kingdom                Owned      1,216,000    A total of 26 sites including 866,000 square feet
                                        Leased       365,000    of  manufacturing capacity used by various product
                                                                service lines.

Montrose, United Kingdom                Owned        213,000    Service operation center for CPS equipment set on a
                                                                7.5 acre site including office, workshop, warehouse,
                                                                and yard used as open storage.  Also accommodates a
                                                                development center with two training wells.

Tananger, Norway                        Leased       319,000    Service center with workshops, testing facilities,
                                                                warehousing and office facilities supporting the
                                                                Norwegian North Sea operations.

Engineering and Construction Group
North America
Houston, Texas                          Leased       851,000    Engineering and project support center which
                                                                occupies 33 full floors in 2 office buildings.  One
                                                                of these buildings is owned by a joint venture in
                                                                which we have a 50% ownership.  The remaining 50% of
                                                                the joint venture is owned by a subsidiary of Trizec
                                                                Properties Inc. (NYSE: TRZ).  Trizec is not
                                                                affiliated with Halliburton Company or any of its
                                                                directors or executive officers.

Houston, Texas                          Owned      1,017,000    A campus facility occupying 135 acres utilized
                                                                primarily for administrative and support personnel.
                                                                Approximately 221,000 square feet is dedicated to
                                                                maintenance and warehousing of construction
                                                                equipment.  This campus also serves as office
                                                                facilities for KBR's headquarters and our temporary
                                                                corporate headquarters.

Europe/Africa
Leatherhead, United Kingdom             Owned        226,000    Engineering and project support center on 55 acres
                                                                in suburban London.

         In  2002,  we  closed  our  Dallas  corporate  office  and  temporarily
relocated it to the Houston  facility that also serves as headquarters  for KBR.
In 2003, the corporate  headquarters will be moved from this location to offices
in downtown Houston which are currently being completed.
         In addition,  we have 181  international  and 108 domestic  field camps
from which Halliburton  Energy Services  delivers its products and services.  We
also have numerous small facilities that include sales offices,  project offices
and bulk  storage  facilities  throughout  the  world.  We own or  lease  marine
fabrication  facilities covering  approximately 761 acres in Texas,  England and
Scotland which are used by the Engineering and Construction Group.

                                       7


         We have mineral  rights to proven and  probable  reserves of barite and
bentonite. These rights include leaseholds, mining claims and owned property. We
process barite and bentonite for supply to many industrial  markets worldwide in
addition to using it in our drilling fluids  operations.  Based on the number of
tons of bentonite  consumed in fiscal year 2002, we estimate our 22 million tons
of proven  reserves  in areas of active  mining are  sufficient  to fulfill  our
internal and external needs for the next 15 years.  We estimate that our 750,000
tons of proven  reserves of barite in areas of active mining equate to a 27 year
supply based on current  rates of  production.  These  estimates  are subject to
change based on periodic  updates to reserve  estimates and to the extent future
consumption differs from current levels of consumption.
         We  believe all  properties that  we currently  occupy are suitable for
their intended use.

                                       8


Item 3. Legal Proceedings.
         Information  relating  to  various  commitments  and  contingencies  is
described in  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations and Note 12 to the financial statements.

Item 4. Submission of Matters to a Vote of Security Holders.
         There were no matters  submitted to a vote of security  holders  during
the fourth quarter of 2002.

                                       9


Executive Officers of the Registrant.

         The  following  table  indicates  the names  and ages of the  executive
officers of the  registrant as of February 1, 2003,  along with a listing of all
offices held by each during the past five years:


Name and Age                   Offices Held and Term of Office
------------                   -------------------------------
                            
     Jerry H. Blurton          Vice President and Treasurer of Halliburton Company, since July 1996
     (Age 58)

     Cedric W. Burgher         Vice President - Investor Relations of Halliburton Company, since September 2001
     (Age 42)                  Vice President of Enron Corp. and Enron Oil & Gas Company, March 1996 to
                                 September 2001
                               Assistant Treasurer of Baker Hughes, Inc., March 1993 to March 1996

     Margaret E. Carriere      Vice President, Secretary and Corporate Counsel of Halliburton Company, since
     (Age 51)                    September 2002
                               Vice President and Corporate Counsel of Halliburton Company,
                                 May 2002 to September 2002
                               Vice President - Human Resources of Halliburton Company, August 2000 to May
                                 2002
                               Vice President - Legal and Secretary of Halliburton Energy Services, Inc.,
                                 February 2000 to August 2000
                               Law Department Manager of Integration & Development of Halliburton
                                  Energy Services, Inc., October 1998 to February 2000
                               Region Chief Counsel (London) Europe/Africa Law Department of Halliburton
                                  Energy Services, Inc., May 1994 to September 1998

*    Albert O. Cornelison, Jr. Executive Vice President and General Counsel of Halliburton Company, since
     (Age 53)                    December 2002
                               Vice President and General Counsel of Halliburton Company, May 2002 to
                                 December 2002
                               Vice President and Associate General Counsel of Halliburton Company, October
                                 1998 to May 2002
                               Staff Vice President and Associate General Counsel of Dresser Industries, Inc.,
                                 February 1994 to September 1998

     Charles E. Dominy         Vice President - Government Affairs of Halliburton Company, since December 2000
     (Age 62)                  Vice President, Business Development of Kellogg Brown & Root, Inc., September
                                 1995 to December 2000

*    Douglas L. Foshee         Executive Vice President and Chief Financial Officer of Halliburton Company, since
     (Age 43)                    August 2001
                               Chairman, President and CEO of Nuevo Energy Company, July 1997 to May 2001
                               President and Chief Executive Officer of Torch Energy Advisors, Inc., May 1995 to
                                 July 1997

*    John W. Gibson, Jr.       Chief Executive Officer of Energy Services Group, since January 2003
     (Age 45)                  President of Halliburton Energy Services, March 2002 to December 2002
                               President and Chief Executive Officer of Landmark, May 2000 to February 2002
                               Chief Operating Officer of Landmark, July 1999 to April 2000
                               Executive Vice President of Integrated Products Group, February 1996 to June 1999

                                       10


Executive Officers of the Registrant (continued)

Name and Age                   Offices Held and Term of Office
*    Robert R. Harl            Chief Executive Officer of Kellogg Brown & Root, Inc., since March 2001
     (Age 52)                  President of Kellogg Brown & Root, Inc., since October 2000
                               Vice President of Kellogg Brown & Root, Inc., March 1999 to October 2000
                               Chief Executive Officer and President of Brown & Root Energy Services Division
                                 of Kellogg Brown & Root, Inc., April 2000 to February 2001
                               Chief Executive Officer of Brown & Root Services Division of Kellogg Brown &
                                 Root, Inc., January 1999 to April 2000
                               Chief Executive Officer and President of Brown & Root Services Corporation,
                                 November 1996 to January 1999
                               Vice President of Brown & Root, Inc., July 1989 to July 1998

     Arthur D. Huffman         Vice President and Chief Information Officer of Halliburton Company, since August
     (Age 50)                    2000
                               Chief Information Officer of Group Air Liquide, 1997 to August 2000
                               Vice President - Information Technology of Air Liquide America Corporation,
                                 1995 to 1997

*    David J. Lesar            Chairman of the Board, President and Chief Executive Officer of Halliburton
     (Age 49)                    Company, since August 2000
                               Director of Halliburton Company, since August 2000
                               President and Chief Operating Officer of Halliburton Company, May 1997 to
                                 August 2000
                               Executive Vice President and Chief Financial Officer of Halliburton Company,
                                 August 1995 to May 1997
                               Chairman of the Board of Kellogg Brown & Root, Inc., January 1999 to August 2000
                               President and Chief Executive Officer of Brown & Root, Inc., September 1996 to
                                    December 1998

     Weldon J. Mire            Vice President - Human Resources of Halliburton Company, since May 2002
     (Age 55)                  Division Vice President of Halliburton Energy Services, January 2001 to May 2002
                               Asia Pacific Sales Manager of Halliburton Energy Services, November 1999 to
                                 January 2001
                               Director of Business Development, September 1999 to November 1999
                               Global Director of Strategic Business Development, January 1999 to November
                                 1999
                               Senior Shared Service Manager Houston, November 1998 to January 1999
                               IS Project Manager III - Venezuela,  May 1998 to November 1998
                               Tools and Testing and TCP Product Manager, July 1997 to May 1998

  R. Charles Muchmore, Jr.    Vice President and Controller of Halliburton Company, since August 1996
  (Age 49)

                                       11


Executive Officers of the Registrant (continued)

Name and Age                   Offices Held and Term of Office

     David R. Smith            Vice President - Tax of Halliburton Company, since May 2002
     (Age 56)                  Vice President - Tax of Halliburton Energy Services, Inc., September 1998 to May
                                 2002
                               Vice President - Tax of Dresser Industries, Inc., 1993 to September 1998





* Members of the Policy Committee of the registrant.
There  are  no  family  relationships  between  the  executive  officers  of the
registrant or between any director and any executive officer of the registrant.



                                       12


PART II

Item 5. Market  for  the  Registrant's  Common  Stock  and  Related  Stockholder
        Matters.
         Halliburton  Company's  common  stock is traded  on the New York  Stock
Exchange and the Swiss Exchange. Information relating to the high and low market
prices of common  stock and  quarterly  dividend  payment is included  under the
caption  "Quarterly  Data and Market Price  Information"  on pages 99 and 100 of
this annual  report.  Cash dividends on common stock for 2002 and 2001 were paid
in March,  June,  September,  and December of each year.  Our Board of Directors
intends to consider the payment of quarterly dividends on the outstanding shares
of our  common  stock in the  future.  The  declaration  and  payment  of future
dividends, however, will be at the discretion of the Board of Directors and will
depend upon, among other things:
              -   future earnings;
              -   general financial condition and liquidity;
              -   success in business activities;
              -   capital requirements; and
              -   general business conditions.
         At December 31, 2002, there were approximately  25,027  shareholders of
record. In calculating the number of shareholders, we consider clearing agencies
and security position listings as one shareholder for each agency or listing.

Item 6. Selected Financial Data.
         Information  relating to selected  financial  data is included on pages
96 through 98 of this annual report.

Item 7. Management's Discussion and Analysis of Financial  Condition and Results
        of Operations.
         Information  relating  to  Management's  Discussion   and  Analysis  of
Financial Condition and Results of Operations is included on pages 15 through 46
of this annual report.

Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.
         Information  relating  to  market  risk  is  included  in  Management's
Discussion and Analysis of Financial  Condition and Results of Operations  under
the caption "Financial Instrument Market Risk" on page 39 of this annual report.

                                       13


Item 8. Financial Statements and Supplementary Data.


                                                                                                               Page No.
                                                                                                               --------
                                                                                                            
Responsibility for Financial Reporting                                                                             47
Independent Auditor's Report                                                                                    48-49
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000                         50
Consolidated Balance Sheets at December 31, 2002 and 2001                                                          51
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000            52-53
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000                      54-55
Notes to Annual Financial Statements                                                                            56-95
  1.     Significant Accounting Policies                                                                        59-60
  2.     Acquisitions and Dispositions                                                                          55-56
  3.     Discontinued Operations                                                                                60-61
  4.     Business Segment Information                                                                           61-63
  5.     Restricted Cash                                                                                           63
  6.     Receivables                                                                                               64
  7.     Inventories                                                                                               64
  8.     Unapproved Claims and Long-Term Construction Contracts                                                 64-66
  9.     Property, Plant and Equipment                                                                             66
 10.     Related Companies                                                                                         66
 11.     Lines of Credit, Notes Payable and Long-Term Debt                                                      67-68
 12.     Commitments and Contingencies                                                                          68-83
 13.     Income (loss) Per Share                                                                                   83
 14.     Reorganization of Business Operations                                                                  83-84
 15.     Change in Accounting Method                                                                               84
 16.     Income Taxes                                                                                           85-87
 17.     Common Stock                                                                                           87-89
 18.     Series A Junior Participating Preferred Stock                                                             89
 19.     Financial Instruments and Risk Management                                                              89-91
 20.     Retirement Plans                                                                                       91-95
 21.     Dresser Industries, Inc. Financial Information                                                            95
 22.     Goodwill and Other Intangible Assets                                                                      95
Selected Financial Data (Unaudited)                                                                             96-98
Quarterly Data and Market Price Information (Unaudited)                                                         99-100

         The related financial  statement  schedules are included under Part IV,
Item 15 of this annual report.

Item 9. Changes  in  and   Disagreements  with  Accountants  on  Accounting  and
        Financial Disclosure.
        None.

                                       14


                               HALLIBURTON COMPANY
        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 earnings and expenses for the year 2002 vary from 2001
                  and why our earnings and expenses for 2001 vary from 2000;
              -   capital expenditures;
              -   factors that impacted our cash flows; and
              -   other items that  materially affect our financial condition or
                  earnings.

BUSINESS ENVIRONMENT

         Our  business is organized in the  following two business  segments:
              -   Energy Services Group; 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 is 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 2002, the United States represented 33% of our
total revenue and the United Kingdom represented 12%. 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.
         Halliburton Company
         Activity  levels within  our two 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 spending levels.
Also  impacting  our  activity  is the  status  of  the  global  economy,  which
indirectly  impacts oil and gas consumption,  demand for petrochemical  products
and investment in infrastructure projects.
         Some of the more significant  barometers of current and future spending
levels  of oil  and gas  companies  are oil  and  gas  prices,  exploration  and
production  drilling  prospects,  the world economy and global  stability  which
together  drive  worldwide  drilling  activity.  As measured by rig count,  high
levels of  worldwide  drilling  activity  during the first half of 2001 began to
decline  in the  latter  part of  that  year.  Drilling  levels  reached  a low,
particularly  in the United States for gas drilling,  in April 2002. The decline
was  partially  due to general  business  conditions  caused by global  economic
uncertainty  which was  accelerated  by the  terrorist  attacks on September 11,
2001.  An  abnormally  warm  2001/2002  winter  season in the United States also
resulted in increased  working gas in storage.  The high level of gas in storage
put  pressure on gas prices,  which  resulted in reduced gas  drilling  activity
particularly in the Western portion of the United States.
         For the year 2002,  natural gas prices at Henry Hub averaged  $3.33 per
million cubic feet,  commonly  referred to as mcf,  compared to $4.07 per mcf in
2001.  Gas   prices  continued   to   decline  during  the   first  two   months
of 2002 and then steadily increased  throughout the year ending at an average of
$4.65 per mcf in December.  Based upon data from a leading research  association

                                       15


at the end of 2002, the gas price at Henry Hub was expected to average  slightly
above  $3.73  per mcf  for all of 2003  and  $4.00  per mcf for the  2003  first
quarter.  However,  actual prices have been significantly higher averaging $6.33
per mcf during January and February. These higher gas prices have not translated
into  significantly  increased  gas  drilling  rig  activity  as of  the  end of
February.
         Natural gas prices have been impacted by an abnormally  cold  2002/2003
winter  season thus far in the United  States,  resulting in reduced gas storage
levels.  As of January 31, 2003,  working gas in storage was 1,521 billion cubic
feet,   commonly   referred  to  as  bcf,   according   to  Energy   Information
Administration estimates.  These stocks were 811 bcf less than last year at this
time and 287 bcf below the  5-year  average of 1,808  bcf.  At 1,521 bcf,  total
working gas in storage is within the 5-year historical  range.  While gas prices
in the United States have  historically  varied  somewhat  geographically,  this
winter we have seen significantly  higher fluctuations in regional gas prices in
the United  States.  For example,  while the price averaged $4.27 per mcf in the
fourth  quarter at Henry Hub, it was less than $2.00 per mcf in various parts of
the Western  United States.  This is resulting in  significant  variation in gas
drilling  activity by region in the United  States and much lower  drilling  and
stimulation activity in the gas basins of the Western United States.
         Crude oil prices for West Texas  Intermediate,  commonly referred to as
WTI,  averaged  $25.92 per barrel for all of 2002  compared to $26.02 per barrel
for 2001. Oil prices have continued to trend upward since the beginning of 2002.
Quarterly  average WTI  increased  from $20.52 in the 2001  fourth  quarter,  to
$28.23 in the 2002 third  quarter and  increased  slightly to $28.34  during the
2002 fourth  quarter.  We believe that current oil prices reflect the disruption
of supplies  from  Venezuela  due to  political  unrest  related to the national
strike  and a war  premium  due to the risk of supply  disruption as a result of
the armed  conflict in the Middle East.  OPEC,  on January 12,  2003,  agreed to
raise its output ceiling by 1.5 million  barrels per day or 6.5% to 24.5 million
barrels  per day.  Prices  for the first  and  second  quarters  of 2003 will be
impacted by the length of  disruption  of  Venezuelan  crude oil  supplies,  the
ability of OPEC to manage country production  quotas,  political tensions in the
Middle  East,  global  demand  and the  level of  production  by major  non-OPEC
countries,  including  Norway,  Russia and other  members  of the former  Soviet
Union.
         Energy Services Group
         Lower natural gas and crude oil drilling  activity since the 2001 third
quarter has resulted in decreased demand for the services and products  provided
by the Energy  Services  Group.  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            2000
--------------------------------------------------------------------------------------
                                                                   
United States                                 831          1,155              916
Canada                                        266            342              344
International (excluding Canada)              732            745              652
--------------------------------------------------------------------------------------
Worldwide Total                             1,829          2,242            1,912
======================================================================================




                                Fourth       Third         Second         First        Fourth        Third
                               Quarter      Quarter        Quarter       Quarter       Quarter      Quarter
Average Rig Counts               2002         2002          2002           2002         2001         2001
--------------------------------------------------------------------------------------------------------------
                                                                                  
United States                    847          853           806            818         1,004        1,241
Canada                           283          250           147            383           278          320
International
    (excluding Canada)           753          718           725            731           748          757
--------------------------------------------------------------------------------------------------------------

Worldwide Total                1,883        1,821         1,678          1,932         2,030        2,318
==============================================================================================================

         Worldwide  rig  activity  started to decline in the latter  part of the
third quarter 2001 and averaged 1,829 rigs in 2002 as compared to 2,242 in 2001.
The decline in rig activity was most severe in North America,  particularly  the
United States,  where the rig count dropped 28% from an average of 1,155 in 2001
to 831 in 2002,  with the majority of this decline due to reduced gas  drilling.
In the past,  there has generally been a good  correlation  between the price of
oil and gas in the United  States and rig activity.  However,  this has not been

                                       16


the case in recent  months  where the rig count has  declined as compared to the
fourth quarter 2001,  while WTI oil and Henry Hub gas prices have increased.  We
believe this is due to economic uncertainty, which we expect to continue into at
least the next quarter or two, created by the following:
              -   volatility of oil and gas prices;
              -   disruption of oil supplies from Venezuela;
              -   differences in gas prices geographically in the United States;
              -   less  spending  due  to  current   uncertain  global  economic
                  environment;
              -   the armed conflict in the Middle East;
              -   budgetary constraints of some of our customers;
              -   focus on debt reduction by some of our customers;
              -   lack  of   quality  drilling  prospects   by  exploration  and
                  production companies; and
              -   level  of  United  States  working  gas in storage  during the
                  winter heating season.
         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.  The discounts applied typically
increase to partially or substantially  offset price book increases in the weeks
immediately following a price increase.  The discount applied normally decreases
over time if the  activity  levels  remain  strong.  During  periods  of reduced
activity, discounts normally increase, reducing the net revenue for our services
and conversely  during periods of higher  activity,  discounts  normally decline
resulting in net revenue increasing for our 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 and service  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%.
         The  decreased  rig activity in 2002 from 2001 in the United States has
increased  pressure on the oilfield  services  product service lines to discount
prices.  The price increases we implemented last year have mostly been eroded by
additional  discounts.  Our  pressure  pumping  product  service  line  has been
significantly impacted by the current economic slowdown due to its dependence on
United States gas drilling.
         Our  deepwater  activity  has not been as  adversely  impacted  as land
activity by the downturn in the energy industry,  due to the level of investment
and the long-term  nature of contracts.  Our drilling  systems  product  service
line,  which currently has a large percentage of its business outside the United
States and is currently  heavily  involved in deepwater oil and gas  exploration
and  development  drilling and longer term  contracts,  has remained  relatively
strong despite the overall decline in the energy  industry.  Our operations have
also been  impacted by political  and economic  instability  in Indonesia and in
Latin America.  In Latin  America,  the impact was primarily in Argentina in the
earlier  part of 2002  and then in  Venezuela  toward  the end of  2002,  due to
political unrest related to the national strike. We also experienced disruptions
due to Tropical Storm Isidore and Hurricane Lili in the Gulf of Mexico.
         Based upon data from Spears and  Associates,  drilling  activity in the
United  States and Canada in 2003 is expected  to  increase  compared to overall
2002 levels and compared to the fourth  quarter 2002.  This reflects the current
level of oil and gas prices and tight supplies.  International drilling activity
is expected to remain constant with fourth quarter 2002 levels.
         At the end of  2002,  two  brokerage  firms  released  exploration  and
production  expenditure  surveys for 2003.  Salomon  Smith Barney  reported that
worldwide  exploration  and production  spending is expected to increase 3.8% in
2003.  North America spending was forecasted to rise 1.5%. The report also noted
that a lack of quality  drilling  prospects and uncertainty  over Iraq have also
contributed to a weaker initial spending forecast.  Lehman Brothers made similar
predictions.  They are projecting a 4.2% increase in worldwide  exploration  and
production  expenditures  for  2003,  but a slight  decrease  in  United  States
spending.  Canadian exploration and production spending is estimated to increase
7.2%.  International  exploration and production  expenditures  are estimated to
grow 5.5% in 2003, led by  natinoal oil companies and European majors. According
to the Lehman report, exploration and production company budgets were based upon
an average oil price  estimate of $23.22 per barrel  (WTI) and $3.42 per mcf for
natural gas (Henry Hub).

                                       17


         Until economic and political  uncertainties impacting customer spending
become clearer,  we expect oilfield  services activity to be essentially flat in
the  short-term  and  improve in  the second half  of 2003. The  armed  conflict
in the Middle East could disrupt our  operations in the region and elsewhere for
the duration of the conflict.  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.
         Engineering and Construction Group
         Our  engineering  and  construction  projects are longer term in nature
than  our  energy  services  projects  and are  not  significantly  impacted  by
short-term  fluctuations  in oil and gas  prices.  We  believe  that the  global
economy's  recovery is continuing,  but its strength and  sustainability are not
assured. Based on the uncertain economic recovery and continuing excess capacity
in petrochemical  supplies,  customers have continued to delay project awards or
reduce the scope of projects involving hydrocarbons and manufacturing.  A number
of large-scale gas and liquefied  natural gas development,  offshore  deepwater,
government and infrastructure projects are being awarded or actively considered.
However,  in light of  terrorist  threats,  the armed  conflict  and  increasing
instability in the Middle East and the modest growth of the global economy, many
customers  are delaying  some of their  capital  commitments  and  international
investments.
         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 armed conflict
in the  Middle  East 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:
              -   having to judge 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  potentially  are more  profitable for the  contractor,
since the owners pay a premium to transfer many risks to the contractor.
         After  careful  consideration,  we have  decided  no  longer  to pursue
riskier  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

                                       18


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  segment  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,  several of which are
substantially  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:


                                   Cost
               Fixed-Price     Reimbursable
----------------------------------------------
                         
2002                47%              53%
2001                41%              59%
2000                47%              53%
==============================================

         Reorganization of Business Operations
         We have substantially completed a corporate reorganization commenced in
2002  intended to  restructure  our  businesses  into two  operating  subsidiary
groups,  the Energy  Services Group and KBR,  representing  the  Engineering and
Construction  Group.  As part  of this  reorganization,  we are  separating  and
consolidating  the entities in our Energy  Services Group together as direct and
indirect  subsidiaries  of  Halliburton  Energy  Services,   Inc.  We  are  also
separating and  consolidating  the entities in our Engineering and  Construction
Group  together  as direct  and  indirect  subsidiaries  of the  former  Dresser
Industries  Inc.,  which became a limited  liability  company  during the second
quarter of 2002 and was renamed  DII  Industries,  LLC.  The  reorganization  of
business operations  facilitated the separation,  organizationally,  financially
and  operationally,  of  our  two  business  segments,  which  we  believe  will
significantly  improve  operating   efficiencies  in  both,  while  streamlining
management and easing manpower requirements. In addition, many support functions
that were previously shared were moved into the two business groups. Although we
have no specific plans currently, the reorganization would facilitate separation
of  the  ownership  of the  two  businesses  in the  future  if we  identify  an
opportunity that produces greater value for our shareholders  than continuing to
own both businesses.
         We expect only a minimal amount of  restructuring  costs to be incurred
in 2003.  In 2002,  we  incurred  approximately  $107  million in  restructuring
charges consisting of the following:
              -   $64 million in personnel related expense;
              -   $17 million of asset related write-downs;
              -   $20 million in professional fees related to the restructuring;
                  and
              -   $6 million related to contract terminations.
         We anticipate annualized cost savings of $200 million compared to costs
prior to the corporate reorganization.
         As a part of the  reorganization,  we decided  that the  operations  of
Major Projects,  Granherne and Production  Services were better aligned with KBR
in the current  business  environment  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
operations  product  line,  Granherne is now reported in the Onshore  operations
product line, and  Production  Services is now reported under the Operations and
Maintenance product line.
         Asbestos and Silica
         On December 18, 2002, we announced  that we had reached an agreement in
principle that, if and when consummated,  would result in a global settlement of
all asbestos  and silica  personal  injury  claims.  The  agreement in principle
covers all  current  and future  personal  injury  asbestos  claims  against DII
Industries,  Kellogg, Brown & Root and their current and former subsidiaries, as
well as all current  silica  claims  asserted  presently  or in the  future.  We

                                       19


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 $3.425  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 global  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 $4.0 billion,
consisting of up to $2.775 billion in cash, 59.5 million  Halliburton  shares of
common  stock and notes with a net present  value  expected to be less than $100
million.  Assuming the revised  liability  would be $4.0 billion,  we would also
increase our probable  insurance  recoveries to $2.3 billion.  The impact on our
income  statement  would be an  additional  pretax  charge of $322 million ($288
million  after-tax).  This accrual  (which values our stock to be contributed at
$1.1 billion using our stock price at December 31, 2002 of $18.71) would then be
adjusted  periodically  based on changes in the market price of our common stock
until  the  common  stock was  contributed  to a trust  for the  benefit  of the
claimants.

RESULTS OF OPERATIONS IN 2002 COMPARED TO 2001

REVENUES


                                                                  Increase/
Millions of dollars                        2002        2001      (Decrease)
-------------------------------------------------------------------------------
                                                        
Energy Services Group                     $  6,836    $  7,811    $   (975)
Engineering and Construction Group           5,736       5,235         501
-------------------------------------------------------------------------------
Total revenues                            $ 12,572    $ 13,046    $   (474)
===============================================================================

         Consolidated  revenues  for 2002 were $12.6  billion,  a decrease of 4%
compared to 2001. International revenues comprised 67% of total revenues in 2002
and 62% in 2001. International revenues increased $298 million in 2002 partially
offsetting a $772 million  decline in the United States where oilfield  services
drilling activity declined 28%, putting pressure on pricing.
         Energy Services Group revenues  declined 12%, or $975 million,  in 2002
from  2001.  International  revenues  were  60% of  total  revenues  for 2002 as
compared to 54% for 2001.
         Revenues  from our oilfield  services  product  service lines were $6.2
billion for 2002  compared to $6.8  billion for 2001.  The decline in revenue is
attributable  to lower  levels of activity in North  America  across all product
service lines,  putting  pressure on pricing of work in the United  States.  The
decrease in North America revenue was offset by 8% higher international revenue.
The change in revenues in oilfield  services is shown by product service line as
follows:
              -   pressure  pumping  revenue  declined  13% due to  reduced  rig
                  counts and  activity  in North  America,  partially  offset by
                  increased activity in Algeria,  Nigeria, Mexico, Brazil, Saudi
                  Arabia, Oman, Egypt and China;
              -   logging  revenue  was  down  13% due to  lower  North American
                  activity,  partially offset by increased  activity in Nigeria,
                  Mexico, Saudi Arabia and China;
              -   completion  products  revenue  was down 10% due to lower North
                  American activity,  partially offset by increased  activity in
                  the UK, Nigeria, Indonesia and Malaysia;
              -   drilling  fluids  revenue was down 10%,  principally  in North
                  America,  partially  offset  by  increased  sales in  Nigeria,
                  Angola, Mexico, Saudi Arabia and Indonesia;
              -   drill bits revenue was down 12% principally due to lower North
                  American  activity,  partially  offset by  increased  sales in
                  Algeria,  UK,  Angola,   Mexico,   Brazil,  Saudi  Arabia  and
                  Indonesia; and
              -   drilling  systems revenue was up 8% due to increased  activity
                  in Saudi Arabia, Thailand,  Mexico, Brazil and the United Arab
                  Emirates, offset by lower North American activity.

                                       20


         On a geographic basis, our oilfield services revenues were as follows:
              -   North  American  revenue  decreased  24%  across  all  product
                  service lines due to lower rig activity;
              -   Latin American  revenue decreased 8%  primarily as a result of
                  decreases  in Argentina  due to  currency  devaluation  and in
                  Venezuela due to lower activity brought on by uncertain market
                  and political conditions and the national strike; and
              -   revenues increased in Europe/Africa, the Middle East, and Asia
                  Pacific due to increased activity.
         Revenues  for the  remainder  of the  segment  decreased  $308  million
year-over-year.  We account  for our 50%  ownership  interest in Subsea 7, which
began  operations in May 2002, on the equity method of accounting.  Prior to the
formation of Subsea 7, the revenue of our subsea  operations was included in our
consolidated  results.  Had it not been for the change to the  equity  method of
accounting in connection with the  transaction,  revenues for the balance of the
segment  would have  decreased  $79  million for 2002 as compared to 2001 due to
lower subsea activity.  Partially offsetting the lower subsea activity, Landmark
revenues   increased  12%  compared  to  2001  due  to  increased  software  and
professional services revenues.
         Engineering and Construction Group revenues increased $501 million,  or
10%, in 2002 compared to 2001.  Year-over-year revenues were 10% higher in North
America and 9% higher outside North America.  Our revenue  comparison by product
line is as follows:
              -   Offshore  revenues  increased  26%  due  to  progress  on  the
                  Barracuda-Caratinga  project in Brazil and the Belenak project
                  in Indonesia;
              -   Infrastructure  revenues  increased  by 22%  due to  increased
                  progress on the Alice  Springs to Darwin Rail Line  project in
                  Australia and revenues from Europe/Africa;
              -   Onshore revenues increased by 25% primarily due to progress on
                  several new projects in 2002 including gas and LNG projects in
                  Algeria, Nigeria, Chad, Cameroon and Egypt;
              -   Government   Operations   revenues   were  15%  lower  due  to
                  completion  of a major  project at our  shipyard in the United
                  Kingdom  and  lower  volumes  of  logistical  support  in  the
                  Balkans; and
              -   Operations  and Maintenance revenue  declined 3% primarily due
                  to reduced downstream maintenance activity.

OPERATING INCOME


                                                                        Increase/
Millions of dollars                        2002            2001        (Decrease)
-------------------------------------------------------------------------------------
                                                              
Energy Services Group                     $    638       $ 1,036         $   (398)
Engineering and Construction Group            (685)          111             (796)
General corporate                              (65)          (63)              (2)
-------------------------------------------------------------------------------------
Operating income (loss)                   $   (112)      $ 1,084         $ (1,196)
=====================================================================================

         Consolidated  operating  loss was $112  million  for 2002  compared  to
operating  income of $1.1 billion in 2001.  In 2002,  our results of  operations
included:
              -   $107  million  in  pretax  expense  related  to  restructuring
                  charges,  of which $64 million  related to the Energy Services
                  Group, $18 million related to the Engineering and Construction
                  Group and $25 million related to General corporate;
              -   $117 million pretax loss in the Engineering and Construction
                  Group on the Barracuda-Caratinga project in Brazil;
              -   $564   million   pretax   expense   in  the   Engineering  and
                  Construction Group related to asbestos and silica liabilities;
              -   $79 million  pretax loss  in the Energy Services  Group on the
                  sale of  our 50% equity  investment in  the Bredero-Shaw joint
                  venture;
              -   $108  million pretax  gain in the Energy Services Group on the
                  sale of our 50% interest in European Marine Contractors;
              -   $98  million  pretax expense  in  the  Energy  Services  Group
                  related to patent infringement litigation;

                                       21


              -   $80 million  pretax  expense  resulting  from the write-off of
                  billed  and  accrued  receivables  related  to  the  Highlands
                  Insurance   Company   litigation   in  the   Engineering   and
                  Construction  Group,  formerly reported in General  corporate;
                  and
              -   $29 million  pretax gain for the value of stock  received from
                  the  demutualization  of  an  insurance  provider  in  General
                  corporate.
         In 2002, we recorded no amortization of goodwill due to the adoption of
SFAS No.  142.  For the year ended  2001,  we  recorded  $42 million in goodwill
amortization,  of which $24 million related to the Energy Services Group and $18
million related to the Engineering and Construction Group.
         Energy Services Group operating  income for 2002 declined $398 million,
or 38%, as compared to 2001. Excluding a $79 million loss on the sale of our 50%
interest in the Bredero-Shaw  joint venture,  a $108 million gain on the sale of
our interest in European  Marine  Contractors,  a $98 million accrual related to
the BJ Services litigation and $64 million in restructuring charges in 2002, and
goodwill  amortization of $24 million in 2001, operating income declined 27%. On
the same basis, operating margin for 2002 was 11% compared to 14% for 2001.
         Operating income in our oilfield services product service line declined
$469 million or 46%  compared to 2001.  Excluding  the  above-noted  items,  the
decline was $323 million,  or 32%,  reflecting  lower rig activity  primarily in
North  America  and net pretax  losses of $51  million on  integrated  solutions
properties.  The change in operating income in oilfield  services is detailed by
product service line as follows:
              -   pressure  pumping  operating income decreased 35%, as a result
                  of reduced oil and gas  drilling in North  America,  offset by
                  increased international activity;
              -   our logging,  drilling fluids and drill bits product  services
                  lines were also  affected by the reduced oil and gas  drilling
                  in  North  America  with  operating  income  declining  64% in
                  logging, 42% in drilling fluids and 30% in drill bits;
              -   our drilling  systems  product  service line operating  income
                  increased   19%,   benefiting   from  improved   international
                  activity; and
              -   our completion  products and services product service line had
                  a 6% increase in operating  income.
         We also recorded  impairments of $66  million on  integrated  solutions
properties primarily in the United States,  Indonesia and Colombia, net of gains
of $45 million on disposals of  integrated  solutions  properties  in the United
States.
         Operating income in the United States for our oilfield services product
service line  decreased  $459 million due to lower  activity  levels and pricing
pressures.  International operating income decreased $10 million where losses on
integrated solutions properties of $37 million offset improved operating results
of Sperry-Sun, pressure pumping and completion products and services.
         Operating income for the remainder of the segment increased $71 million
in 2002 compared to 2001.  Excluding the $79 million loss on the sale of our 50%
interest in the Bredero-Shaw  joint venture,  a $108 million gain on the sale of
our  interest in European  Marine  Contractors  and $9 million in  restructuring
charges in 2002,  and goodwill  amortization  of $17 million in 2001,  operating
income for the  remainder of the segment  increased  $34 million due to improved
profitability in software sales and professional services at Landmark and in our
subsea operations.
         Engineering and  Construction  Group operating  income declined by $796
million   compared   to  2001.   Excluding   the  $117   million   loss  on  the
Barracuda-Caratinga  project in Brazil,  $644 million of expenses related to net
asbestos and silica liabilities,  $18 million in restructuring  costs,  goodwill
amortization  in  2001 of $18  million  and  asbestos  charges  for  2001 of $11
million,  operating  income declined $46 million.  On the same basis,  operating
margin for 2002 was 2% as compared to 3% for 2001.  Operating income in Offshore
operations decreased $40 million in 2002 compared to 2001 primarily due to a $36
million  loss on a  project in  the Philippines.  Operating income  decreased in
Onshore  operations by $30 million in 2002 compared to 2001 due to lower results
in the construction  segment and completion of a project in Algeria.  Offsetting
the declines was  increased  operating  income of $21 million in  Infrastructure
primarily  due  to the  Alice  Springs  to  Darwin  Rail  Line  project,  and in
Government  operations  where  operating  income  increased  $22  million due to
improved  results  from  projects  in  Asia  Pacific,  Europe/Africa  and in the
Americas.
         Recognizing income due to an increase in our total probable  unapproved
claims during 2002 reduced reported losses by approximately $158 million.

                                       22


         General corporate expenses were $65 million for 2002 as compared to $63
million  in 2001.  Excluding  restructuring  charges  and gain from the value of
stock received from  demutualization  of an insurance  provider,  expenses would
have been $69 million.

NONOPERATING ITEMS

         Interest  expense  of $113  million  for  2002  decreased  $34  million
compared to 2001.  The decrease is due to  repayment  of debt and lower  average
borrowings in 2002,  partially  offset by the $5 million in interest  related to
the patent infringement judgment which we are appealing.
         Interest  income was $32  million in 2002  compared  to $27  million in
2001. The increased  interest income is for interest on a note receivable from a
customer which had been deferred until collection.
         Foreign currency  losses,  net were $25 million in 2002 compared to $10
million  in 2001.  The  increase  is due to  negative  developments  in  Brazil,
Argentina and Venezuela.
         Other,  net was a loss of $10  million in 2002,  which  includes a $9.1
million  loss on the sale of ShawCor Ltd.  common stock  acquired in the sale of
our 50% interest in Bredero-Shaw.
         Provision  for  income  taxes was $80  million  in 2002  compared  to a
provision for income taxes of $384 million in 2001.  Exclusive of the tax effect
on the asbestos and silica accrual (net of insurance recoveries) and the loss on
sale of Bredero-Shaw, our 2002 effective tax rate from continuing operations was
38.9% for 2002  compared  to 40.3% in 2001.  The  asbestos  and  silica  accrual
generates  a United  States  Federal  deferred  tax  asset  which  was not fully
benefited  because  we  anticipate  that a portion  of the  asbestos  and silica
deduction  will  displace  foreign  tax credits  and those  credits  will expire
unutilized.  As a result, we have recorded a $114 million valuation allowance in
continuing  operations and $119 million in  discontinued  operations  associated
with the asbestos and silica accrual, net of insurance recoveries.  In addition,
continuing  operations has recorded a valuation allowance of $49 million related
to potential excess foreign tax credit carryovers.  Further, our impairment loss
on  Bredero-Shaw  cannot be fully benefited for tax purposes due to book and tax
basis  differences  in that  investment and the limited  benefit  generated by a
capital loss carryback.  Settlement of unrealized prior period tax exposures had
a favorable impact to the overall tax rate.
         Minority interest in net income of subsidiaries in 2002 was $38 million
as compared to $19 million in 2001.  The increase was primarily due to increased
activity in Devonport Management Limited.
         Loss from  continuing  operations  was $346 million in 2002 compared to
income from continuing operations of $551 million in 2001.
         Loss from discontinued operations was $806 million pretax, $652 million
after-tax,  or $1.51 per diluted share in 2002 compared to a loss of $62 million
pretax, $42 million  after-tax,  or $0.10 per diluted share in 2001. The loss in
2002 was due primarily to charges recorded for asbestos and silica  liabilities.
The pretax loss for 2001 represents operating income of $37 million from Dresser
Equipment  Group through March 31, 2001 offset by a $99 million pretax  asbestos
accrual primarily related to Harbison-Walker.
         Gain on disposal of discontinued  operations of $299 million after-tax,
or $0.70 per diluted  share,  in 2001  resulted  from the sale of our  remaining
businesses in the Dresser Equipment Group in April 2001.
         Cumulative  effect  of  accounting  change,  net in 2001 of $1  million
reflects the impact of adoption of Statement  of Financial  Accounting Standards
No. 133,  "Accounting for Derivative  Instruments  and for Hedging  Activities."
After recording the cumulative effect of the change our estimated annual expense
under  Financial  Accounting  Standards No. 133 is not expected to be materially
different from amounts expensed under the prior accounting treatment.
         Net loss for 2002 was $998  million,  or $2.31 per diluted  share.  Net
income for 2001 was $809 million, or $1.88 per diluted share.

                                       23



RESULTS OF OPERATIONS IN 2001 COMPARED TO 2000

REVENUES


                                                                  Increase/
Millions of dollars                        2001        2000      (Decrease)
-------------------------------------------------------------------------------
                                                        
Energy Services Group                     $  7,811    $  6,233    $  1,578
Engineering and Construction Group           5,235       5,711        (476)
-------------------------------------------------------------------------------
Total revenues                            $ 13,046    $ 11,944    $  1,102
===============================================================================

         Consolidated  revenues for 2001 were $13.0  billion,  an increase of 9%
compared to 2000. International revenues comprised 62% of total revenues in 2001
and 66% in 2000 as activity and pricing  increased in our Energy  Services Group
more rapidly in the United States than internationally particularly in the first
half of 2001. Our Engineering  and  Construction  Group revenues,  which did not
benefit  from the  positive  factors  contributing  to the  growth of the Energy
Services  Group,   decreased  8%.  Engineering  and  construction  projects  are
long-term in nature and  customers  continued to delay major  projects  with the
slowdown in the economy occurring in the latter part of 2001.
         Energy  Services Group revenues  increased by $1.6 billion,  or 25%, in
2001 from 2000. International revenues were 54% of the total segment revenues in
2001  compared  to 59% in 2000.  Revenues  in 2001  from our  oilfield  services
product service lines were $6.8 billion.  Our oilfield  services product service
lines experienced  revenue growth of 29% despite a 14% decline in oil prices and
a 3% decrease in natural gas prices between December 2000 and December 2001. The
revenue increase was primarily due to higher drilling  activity,  as measured by
the  annual  average  oil  and  gas  rig  counts,   and  pricing   improvements,
particularly in the United States. Revenues increased across all product service
lines in 2001 compared to 2000 as follows:
              -   pressure  pumping product service lines  experienced growth of
                  34% in 2001;
              -   logging,  drilling  services  and   drilling  fluids  revenues
                  increased approximately 28%;
              -   drill bit revenues were 19% higher in 2001; and
              -   completion products revenues increased 13%.
         Logging and drilling services revenues  increases occurred primarily in
the United States, as the product service lines benefited from higher prices and
increased drilling activity.  Geo-Pilot(TM) and other new products introduced in
the  drilling  services  product  service  line  improved  revenue  in  2001  by
approximately  $50 million.  We design and assemble  the Geo-Pilot(TM) tool from
parts  manufactured  to our  specifications  by third  parties.  Drilling  fluid
revenues increased in 2001 with higher activity levels in the Gulf of Mexico.
         Geographically,  all  regions  within  the  oilfield  services  product
service lines prospered with North America revenues  increasing 37% from 2000 to
2001 as follows:
              -   pressure pumping revenues  in North America were 48% higher in
                  2001 primarily due to higher levels of drilling activity;
              -   revenues  from Latin  America increased  27% with  significant
                  increases in Venezuela and Brazil; and
              -   Europe/Africa  and Middle East  revenues were about 20% higher
                  in 2001 than 2000, arising primarily in Russia and Egypt.
           Revenues for the  remainder of the segment of $980 million  increased
by $58 million, or 6%, primarily due to Landmark.  Landmark revenues were higher
by 19% partially due to the acquisition of PGS Data Management as well as growth
in software sales and professional services.
         Engineering and Construction Group revenues decreased $476 million,  or
8%, from 2000 to 2001.  The  decline  was  primarily  due to the  completion  of
several large international onshore and offshore projects which had not yet been
fully replaced with new project awards and delays in the awards of new projects.
International  revenues were  approximately 75%  in 2001 as  compared to  73% in
2000.  Revenues  for the  Asia/Pacific  region  were down  nearly 40% due to the
effects of completing two major  projects,  partially  offset by a new liquefied
natural gas project and the  start-up of  construction  on the Alice  Springs to
Darwin Rail Line project.  In Europe/Africa,  revenues were down 6%. The decline
was  primarily  due to the  completion  of a major  project  in Norway and lower

                                       24


activity on the  logistical  support  contract in the Balkans which moved to the
sustainment phase, which involved providing support at the facilities which were
constructed during the initial phase of the contract.  The decline was partially
offset by  increases  in  activities  at our  shipyard in the United  Kingdom of
approximately  $67 million which  related to a contract with the United  Kingdom
Ministry of Defense.  North American  revenues declined in 2001 partially due to
the completion of highway and paving  construction jobs and the baseball stadium
in Houston.  These declines in North America were  partially  offset by a slight
increase in operations  and  maintenance  revenues as our  customers  focused on
maintaining  current  facilities  and plant  operations  rather  than adding new
facilities.  These  declines  were  partially  offset by increases in revenue in
Latin  America due to the  Barracuda-Caratinga  project in Brazil which began in
the third quarter of 2000.

OPERATING INCOME


                                                                        Increase/
Millions of dollars                        2001            2000        (Decrease)
-------------------------------------------------------------------------------------
                                                              
Energy Services Group                     $  1,036       $   589          $  447
Engineering and Construction Group             111           (54)            165
General corporate                              (63)          (73)             10
-------------------------------------------------------------------------------------
Operating income                          $  1,084       $   462          $  622
-------------------------------------------------------------------------------------

         Consolidated  operating  income  increased $622 million,  or 135%, from
2000 to 2001. In 2000 our results of operations  include two significant  items:
an $88 million  pretax gain on the sale of marine vessels and a pretax charge of
$36 million related to the  restructuring  of the  engineering and  construction
businesses. Excluding these items, operating income increased by more than 160%.
         Energy Services Group operating income increased $447 million,  or 76%,
in 2001 over  2000.  Excluding  the sale of  marine  vessels,  operating  income
increased more than 100% compared to 2000.  Increased  operating income reflects
increased  activity levels,  higher equipment  utilization and improved pricing,
particularly in the United States in the first nine months of 2001. Our oilfield
services  product  service lines  operating  income in 2001 exceeded $1 billion,
more than double from 2000.  Operating margins for our oilfield services product
service  lines  increased  from 8.6% in 2000 to 14.8% in 2001,  resulting  in an
incremental  margin of 37%.  Incremental  margins are  calculated  by taking the
change in  operating  income over the  applicable  periods  and  dividing by the
change in revenues over the same period.  Operating income was higher in 2001 as
compared  to 2000 in all  product  service  lines and  geographic  regions.  The
largest  increase was in pressure  pumping in North America,  which rose by over
130%.  Substantial  increases in operating income were also made in the logging,
drill bits and drilling  services  product  service lines.  Operating  income in
North  America  was  higher by 72% in 2001 as  compared  to 2000.  International
regions,   particularly  Latin  America  and  Europe/Africa,   made  significant
improvements in operating income.  Excluding the sale of marine vessels in 2000,
operating  income  for the  remainder  of the  segment  decreased  $27  million,
primarily due to lower operating margins in our  Surface/Subsea  product service
line.
         Engineering  and  Construction  Group operating  income  increased $165
million  from 2000 to 2001.  Operating  margins  improved to 2.1% in 2001.  This
increase was primarily due to the $167 million recorded in the fourth quarter of
2000 as a result of higher than estimated costs on specific jobs and unfavorable
claims  negotiations on other jobs. We also recorded a  restructuring  charge of
$36 million in the fourth quarter of 2000 related to the  reorganization  of the
engineering and construction  businesses under Kellogg,  Brown & Root. Excluding
these fourth quarter 2000 charges,  operating income  decreased $38 million,  or
26%,  consistent  with the  decline  in  revenues  and due to a  revised  profit
estimate on the Barracuda-Caratinga project.
         General corporate expenses were $63 million for 2001 as compared to $73
million in 2000. In 2000 general corporate expenses included $9 million of costs
related to the early  retirement  of our previous  chairman and chief  executive
officer, which was recorded in the third quarter of 2000.

                                       25


NONOPERATING ITEMS

         Interest  expense of $147 million in 2001 was $1 million higher than in
2000. Our outstanding short-term debt was substantially higher in the first part
of 2001 due to  repurchases  of our common  stock in the fourth  quarter of 2000
under our repurchase  program and borrowings  associated with the acquisition of
PGS Data  Management in March 2001.  Cash proceeds of $1.27 billion  received in
April  2001  from  the  sale of the  remaining  businesses  within  the  Dresser
Equipment  Group  were used to repay our  short-term  borrowings;  however,  our
average  borrowings  for 2001 were slightly  higher than in 2000.  The impact of
higher  average  borrowings  was  mostly  offset  by  lower  interest  rates  on
short-term borrowings.
         Interest income was $27 million in 2001, an increase of $2 million from
2000.
         Foreign currency losses, net were $10 million in 2001 as compared to $5
million in 2000. Argentina's financial crisis accounted for $4 million of the $5
million increase.
         Other,  net was a loss of $1 million in 2000 and less than a $1 million
gain in 2001.
         Provision for income taxes  was $384 million for an  effective tax rate
of 40.3% in 2001 compared to 38.5% in 2000.
         Minority interest in net income of subsidiaries in 2001 was $19 million
as compared to $18 million in 2000.
         Income  (loss) from  discontinued  operations in 2001 was a $42 million
loss,  or $0.10 per  diluted  share,  due to accrued  expenses  associated  with
asbestos  claims  of  disposed  businesses.  See Note 3. The loss was  partially
offset by net income for the first quarter of 2001 from Dresser  Equipment Group
of $0.05 per diluted share. Income from discontinued  operations of $98 million,
or $0.22 per diluted share, represents the net income of Dresser Equipment Group
for the full year of 2000.
         Gain on disposal of  discontinued  operations  in 2001 was $299 million
after-tax,  or $0.70 per diluted share.  The 2001 gain resulted from the sale of
our remaining  businesses  within the Dresser Equipment Group in April 2001. The
gain of $215 million  after-tax,  or $0.48 per diluted  share,  in 2000 resulted
from the sale of our 51%  interest in  Dresser-Rand,  formerly a part of Dresser
Equipment Group, in January 2000.
         Cumulative effect of accounting  change, net of $1 million reflects the
adoption of SFAS No. 133  "Accounting  for  Derivative  Instruments  and Hedging
Activities" in the first quarter of 2001.
         Net income for 2001 was $809 million,  or $1.88 per diluted  share,  as
compared to net income of $501 million, or $1.12 per diluted share in 2000.

LIQUIDITY AND CAPITAL RESOURCES

         We ended 2002 with cash and cash  equivalents of $1.1 billion  compared
with $290 million at the end of 2001 and $231 million at the end of 2000.
         Cash flows from  operating  activities  provided  $1.6 billion for 2002
compared to providing  $1.0  billion in 2001 and using $57 million in 2000.  The
net loss in 2002 was due to an  after-tax  asbestos  and  silica  charge of $1.1
billion which has no effect on 2002 cash flows. Some factors which accounted for
cash flows from operations for 2002 were as follows:
              -   we collected  large milestone  payments  on several  long-term
                  contracts;
              -   we  collected several  large  receivables  during  2002 in our
                  Energy Services Group;
              -   we  sold  an  undivided  ownership  interest  to  unaffiliated
                  companies  under  the   accounts   receivable   securitization
                  agreement for a net cash inflow of $180 million (see Note 6 to
                  the financial statements); and
              -   we managed inventory at lower levels during 2002.
         Cash flows from investing activities used $473  million for 2002, $858
million for 2001 and $411 million for 2000. Capital expenditures of $764 million
in 2002 were  about 4% lower  than in 2001 and about  32%  higher  than in 2000.
Capital  spending in 2002  continued  to be  primarily  directed to  Halliburton
Energy    Services,    for   fracturing    equipment   and    directional    and
logging-while-drilling equipment.  In addition, we  invested $60  million in  an
integrated solutions project. Included in sales of property, plant and equipment

                                       26


is $130 million collected from the sale of integrated  solutions  properties and
cash  collected  from other asset  sales.  Dispositions  of  businesses  in 2002
include $134 million collected from the sale of our European Marine  Contractors
Ltd. joint venture.  Proceeds from the sale of securities of $62 million was for
the sale of ShawCor shares. Included in the restricted cash balance for 2002 are
the following:
              -   $107 million deposit that  collateralizes  a bond for a patent
                  infringement  judgment  and  interest,  which  judgment  is on
                  appeal;
              -   $57 million as collateral for potential future insurance claim
                  reimbursements; and
              -   $26 million  primarily related  to  cash collateral agreements
                  for outstanding  letters  of credit  for  several construction
                  projects.
         In  March  2001,  we  acquired  the PGS  Data  Management  division  of
Petroleum  Geo-Services  ASA for $164  million  cash.  In  addition we spent $56
million for various other acquisitions in 2001.
         Cash flows from financing  activities  used $248 million in 2002,  $1.4
billion  in 2001 and $584  million in 2000.  Proceeds  from  exercises  of stock
options provided cash flows of less than $1 million in 2002, $27 million in 2001
and $105 million in 2000. We paid dividends of $219 million to our  shareholders
in 2002, $215 million in 2001 and $221 million in 2000.
         Included in payments on long-term  borrowings of $81 million in 2002 is
a repayment of a $75 million  medium-term  note. In the fourth  quarter of 2002,
our 51% owned and consolidated subsidiary,  Devonport Management Limited, signed
an agreement  for a credit  facility of (pound)80  million  ($126  million as of
December 31, 2002) maturing in September 2009. Devonport Management Limited drew
down $66 million from this  facility in the fourth  quarter.  Proceeds  from the
sale of the remaining  businesses in Dresser  Equipment Group in April 2001, the
sale of  Dresser-Rand in early 2000 and the collection of a note from the fourth
quarter 1999 sale of Ingersoll-Dresser  Pump received in early 2000 were used to
reduce short-term debt. On July 12, 2001, we issued $425 million in two and five
year medium-term notes under our medium-term note program.  The notes consist of
$275  million  of 6% fixed  rate  notes due  August 1, 2006 and $150  million of
floating  rate notes due July 16, 2003.  Net proceeds  from the two  medium-term
note  offerings  were also used to reduce  short-term  debt.  Net  repayments of
short-term debt in 2001 used $1.5 billion.
         On April 25, 2000, our Board of Directors approved plans to implement a
share repurchase program for up to 44 million shares. We repurchased 1.2 million
shares at a cost of $25  million  in 2001 and 20.4  million  shares at a cost of
$759 million in 2000.  We currently  have no plan to  repurchase  the  remaining
shares under the approved plan. In addition, we repurchased $4 million of common
stock in 2002,  $9 million in 2001 and $10  million  in 2000 from  employees  to
settle their income tax liabilities primarily for restricted stock lapses.
         Cash flows from discontinued  operations  provided $1.3 billion in 2001
and $826  million  in 2000.  No cash  flows from  discontinued  operations  were
provided in 2002. Cash flows for 2001 include  proceeds from the sale of Dresser
Equipment  Group of  approximately  $1.27  billion.  Cash flows for 2000 include
proceeds  from  the  sale of  Dresser-Rand  and  Ingersoll-Dresser  Pump of $913
million.
         Capital resources from internally generated funds and access to capital
markets are sufficient to fund our working  capital  requirements  and investing
activities.  Our combined short-term notes payable and long-term debt was 30% of
total  capitalization at the end of 2002, 24% at the end of 2001, and 40% at the
end of 2000.  Short-term debt was reduced significantly in the second quarter of
2001 with the proceeds from the sale of Dresser Equipment Group and in the third
quarter  from the  issuance of $425  million of  medium-term  notes.  In 2000 we
reduced our  short-term  debt with proceeds from the sales of  Ingersoll-Dresser
Pump and Dresser-Rand joint ventures early in the year. We increased  short-term
debt in the third  quarter of 2000 to fund share  repurchases.  At December  31,
2002,  we had $190 million in  restricted cash  included in "Other assets".  See
Note 5 to the  financial  statements.  In addition on April 15, 2002, we entered
into an agreement to sell accounts  receivable to provide additional  liquidity.
See  Note  6  to  the  financial  statements.   Currently,   we  expect  capital
expenditures in 2003 to be about $700 million. We have not finalized our capital
expenditures budget for 2004 or later periods.
         Proposed global settlement.  On December 18, 2002, we announced that we
had reached an agreement  in  principle  that,  if and when  consummated,  would
result in a global  settlement of all asbestos and silica personal injury claims
against  DII  Industries,  Kellogg,  Brown & Root and their  current  and former
subsidiaries.

                                       27


         The agreement in principle provides that:
              -   up to $2.775 billion in cash, 59.5 million  Halliburton shares
                  (valued at $1.1 billion  using the stock price at December 31,
                  2002 of $18.71) and notes with a net present value expected to
                  be less  than  $100  million  will be paid to a trust  for the
                  benefit  of  current  and  future  asbestos   personal  injury
                  claimants and current 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
                  Chapter  11  filing for  DII  Industries  and Kellogg, Brown &
                  Root, and some of their subsidiaries; and
              -   the  funding  of  the  settlement  amounts  would  occur  upon
                  receiving  final and  non-appealable court  confirmation of  a
                  plan of  reorganzation of  DII Industries and Kellogg, Brown &
                  Root and their subsidiaries in the Chapter 11 proceeding.
         Subsequently,  as of March 2003, DII  Industries  and Kellogg,  Brown &
Root have entered into definitive written agreements finalizing the terms of the
agreement in principle.  The proposed  global  settlement  also includes  silica
claims as a result of current or past  exposure.  These  silica  claims are less
than  1%  of  the  personal  injury  claims  included  in  the  proposed  global
settlement. We have approximately 2,500 open silica claims.
         Among the  prerequisites  for reaching a conclusion  of the  settlement
are:
              -   agreement  on the  amounts to  be contributed to the trust for
                  the benefit of silica claimants;
              -   our  review  of  the  more  than  347,000  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 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;   and   agreement   with  the  attorneys
                  representing  current asbestos  claimants with respect to, and
                  completion and mailing of, a disclosure  statement  explaining
                  the  pre-packaged  plan of  reorganization  to the  more  than
                  347,000 current claimants;
              -   arrangement of financing on terms acceptable to us to fund the
                  cash amounts to be paid in the settlement;
              -   Halliburton board approval;
              -   obtaining affirmative votes to the plan of reorganization from
                  at least the required 75% of known present asbestos  claimants
                  and from a  requisite  number  of silica  claimants  needed 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  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  12  to  the  financial   statements),  possibly  through  the
Harbison-Walker bankruptcy proceedings.
         The template settlement  agreement with attorneys  representing current
claimants grants  the attorneys a  right to  terminate the definitive settlement
agreement  on  ten  days'  notice  if  DII  Industries  does  not  file  a  plan

                                       28


of reorganization on or before April 1, 2003. We are conducting due diligence on
the  asbestos  claims,  which is not  expected to be completed by April 1, 2003.
Therefore,  we do not expect  DII  Industries  to file a plan of  reorganization
prior to April 1.  Although  there can be no  assurances,  we do not believe the
claimants'  attorneys will terminate the settlement  agreements on April 1, 2003
as long as adequate progress is being made toward a Chapter 11 filing.
         We  have begun  our due  diligence review  of current asbestos  claims.
While these  results are   preliminary  and not  necessarily  indicative  of the
eventual  results  of  a  completed  review of all  current asbestos claims,  it
appears that a substantial  portion of the records  for claims  reviewed to date
do not provide detailed  product  identification.  We  expect that many of these
records could be supplemented by attorneys representing the claimants to provide
additional information on product  identification.  However, no assurance can be
given that the additional  product  identification  documentation will be timely
provided or  sufficient  for us or the  plaintiffs  to proceed with the proposed
global settlement. In addition, although the medical information in the files we
preliminarily reviewed appears significantly more complete, if a material number
of claims ultimately do not meet the medical criteria for alleged  injuries,  no
assurance  can be given that a  sufficient  number of  plaintiffs  would vote to
ratify the plan of reorganization that would implement the global settlement. In
such case, we would not proceed with a Chapter 11 filing.
         In  March  2003,  we  agreed  with  Harbison-Walker  and  the  asbestos
creditors committee  in the  Harbison-Walker  bankruptcy to  consensually extend
the  period  of  the  stay  contained  in   the  Bankruptcy  Court's   temporary
restraining order until July 21, 2003. The court's temporary  restraining order,
which was  originally  entered on February  14,  2002,  stays more than  200,000
pending  asbestos claims against DII Industries.  The agreement provides that if
the pre-packaged Chapter 11 filing by DII Industries, Kellogg,  Brown & Root and
their  subsidiaries is not made by July 14, 2003, the Bankruptcy Court will hear
motions to lift the stay on July 21, 2003.  The  asbestos  creditors committee
also reserves the right to monitor progress toward the filing of the Chapter  11
proceeding  and  seek  an  earlier  hearing  to  lift  the  stay if satisfactory
progress toward the Chapter 11 filing is not being made.
         Of  the up  to $2.775  billion  cash  amount included  as  part  of the
proposed global settlement,  approximately  $450  million primarily  relates  to
claims  previously  settled  but unpaid by  Harbison-Walker  (see Note 12 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.  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 are being 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.
         Proposed  bankruptcy  of DII  Industries,  Kellogg,  Brown  & Root  and
subsidiaries.  Under the terms of the proposed global settlement, the settlement
would  be  implemented  through  a  pre-packaged   Chapter  11  filing  for  DII
Industries,  Kellogg,  Brown & Root and some of their  subsidiaries.  Other than
those debtors,  none of the subsidiaries of Halliburton  (including  Halliburton
Energy  Services)  or  Halliburton  itself  will be a debtor 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. We currently are negotiating with several
banks and non-bank lenders over the  terms of such facility. See "Financing  the
proposed settlement".  Obtaining a commitment for debtor-in-possession financing
is a condition precedent to 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.

                                       29


         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 an impaired  class 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
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 debtor's
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 settlement.  The plan of reorganization  through
which the proposed  settlement will be implemented will require us to contribute
up to $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.
We are  pursuing a number  of financing alternatives  for the  cash amount to be
contributed  to the  trust.  The availability  of these alternatives  depend  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  iling.  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:
              -   debtor-in-possession financing  to provide  for the  operating
                  needs of the filing entities;
              -   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 funding of up
                  to $2.775 billion to 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.

                                       30


         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 we 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  global  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
new 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 December 31, 2002,  no amounts have been  borrowed  under
these lines.
         If our debt ratings fall below  investment  grade,  we would also be in
technical breach of a bank agreement  covering $160 million of letters of credit
at December  31,  2002,  which  might  entitle  the bank to set-off  rights.  In
addition,  a $151 million  letter of credit line, of which $121 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,  one downgrade from our current  ratings.  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 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.
         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 December 31, 2002 this was approximately $49 million.
         Letters of credit. In the normal course of business, we have agreements
with banks under which  approximately  $1.4 billion of letters of credit or bank
guarantees  were issued,  including  at least $204  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 the full line 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.
         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.
         Our  anticipated  credit  facilities  described  above 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. The master letter of credit facility is also intended to

                                       31


provide  reasonably  sufficient  credit lines for us to be able to fund any such
cash  requirements.  If any of such existing  letters of credit are drawn during
the bankruptcy and we are required to provide 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 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.  We will not enter into the  pre-packaged  Chapter 11 filing
without having this credit  facility in place. In addition,  representatives  of
DII  Industries,  Kellogg,  Brown & Root and  their  subsidiaries  have  been in
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.
         Effective  October 9, 2002,  we amended an  agreement  with banks under
which   $261   million  of   letters   of  credit   have  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 global
settlement through December 31, 2003.
         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 representative is Petrobras, the Brazilian
national oil company. See Note 12 to the financial statements.
         KBR's performance under the contract is secured by:
              -   two  performance  letters of credit,  which  together  have an
                  available  credit  of  approximately  $261  million  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 $121
                  million as of  December  31,  2002 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  contract  by
                  Halliburton Company in favor of the project owner.
         As of December 31, 2002, the project was approximately 63% complete and
KBR had  recorded a loss of $117 million  related to the  project.  The probable
recovery from unapproved  claims included in determining the loss on the project
was $182 million as of December 31, 2002.
         The project owner has procured project finance funding obligations from
various banks 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.  While
we believe the banks have an incentive to complete the financing of the project,
there is no  assurance  that they would do so. If the banks  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 will do so. To
date, the banks 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 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  drawn,  KBR would be required to fund the amount of the
draw to the  issuing  bank.  In the  event  that  KBR was  determined  after  an
arbitration  proceeding to have been in default  under the contract,  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
that  would  otherwise  have been  credited  back to the  project  owner had the
contract not been terminated.

                                       32


         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  other than Petrobras.  Because our claims,  together
with change orders that are  currently under negotiation, exceed this amount, we
cannot give assurance that there is adequate  funding to cover current or future
KBR claims.  Unless the project owner provides additional funding  or permits us
to defer  repayment of the  $300 million advance, and assuming the project owner
does not allege default on our part, we  may be obligated to fund operating cash
flow  shortages  over  the  remaining  project life  in  an  amount we currently
estimate to be up to approximately $400 million.
         The  possible  Chapter 11  pre-packaged  bankruptcy  filing by Kellogg,
Brown & Root in connection with the settlement of its asbestos and silica claims
would  constitute  an event of default under the loan  documents  with the banks
unless  waivers are  obtained.  KBR believes  that it is unlikely that the banks
will exercise any right to cease funding 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.
         Current  maturities.  We have  approximately  $295  million  of current
maturities of long-term debt as of December 31, 2002.  This includes a repayment
of a $139 million senior note due April 2003 and a $150 million medium-term note
due July 2003.
         Cash and cash  equivalents.  We ended 2002 with cash and equivalents of
$1.1 billion.

CRITICAL ACCOUNTING ESTIMATES

         The preparation of financial  statements  requires the use of judgments
and estimates. Our critical accounting policies are described below to provide a
better  understanding  of how we develop our  judgments  about future events and
related estimations and how they can impact our financial statements. A critical
accounting policy is one that requires our most difficult, subjective or complex
estimates and  assessments  and is fundamental to our results of operations.  We
identified our most critical accounting policies to be:
              -   percentage  of   completion   accounting   for  our  long-term
                  engineering and construction contracts;
              -   allowance for bad debts;
              -   forecasting our effective  tax rate,  including our ability to
                  utilize foreign tax  credits and the realizability of deferred
                  tax assets; and
              -   loss contingencies, primarily related to:
                      -    asbestos litigation; and
                      -    other litigation.
         We base our  estimates on  historical  experience  and on various other
assumptions we believe to be reasonable under the circumstances,  the results of
which form the basis for making  judgments  about the carrying  values of assets
and  liabilities  that  are  not  readily  apparent  from  other  sources.  This
discussion  and analysis  should be read in  conjunction  with our  consolidated
financial statements and related notes included in this report.
         Percentage of completion
         We account for our revenues on long-term  engineering and  construction
contracts  on the  percentage-of-completion  method.  This method of  accounting
requires us to calculate job profit to be recognized  in each  reporting  period
for each job based upon our predictions of future outcomes which include:
              -   estimates of the total cost to complete the project;
              -   estimates of project schedule and completion date;
              -   estimates of the percentage the project is complete; and
              -   amounts of any probable unapproved  claims  and change  orders
                 included in revenues.
         At the onset of each  contract,  we  prepare a detailed analysis of our
estimated  cost to complete the  project.  Risks  relating to service  delivery,
usage,  productivity and other factors are considered in the estimation process.
Our project  personnel  periodically  evaluate the estimated  costs,  claims and
change orders,  and percentage of completion at the project level. The 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, less costs incurred
and estimated costs to complete. Anticipated losses on contracts are recorded in
full in the period in which they become evident. Profits are recorded based upon
the total estimated  contract profit times the current  percentage  complete for
the contract.

                                       33


         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  probable  unapproved  claims  in  this
calculation  increases the operating  income  or decreases  the  operating  loss
that  would  otherwise  be  recorded  without   consideration  of  the  probable
unapproved  claims.  Probable  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.
We actively engage in claims  negotiations with our customers and the success of
claims  negotiations have a direct impact on the profit or loss recorded for any
related long-term  contract.  Unsuccessful  claims  negotiations could result in
decreases  in  estimated  contract  profits or  additional  contract  losses and
successful claims  negotiations  could result in increases in estimated contract
profits or recovery of previously recorded contract losses.
         Significant  projects are reviewed in detail by senior  engineering and
construction management at least quarterly. Preparing project cost estimates and
percentages  of  completion  is a core  competency  within our  engineering  and
construction  businesses.  We have a long history of dealing with multiple types
of projects and in preparing  cost  estimates.  However,  there are many factors
that impact future costs, including but not limited to weather, inflation, labor
disruptions and timely availability of materials,  and other factors as outlined
in our  "Forward-Looking  Information"  section.  These  factors  can affect the
accuracy of our estimates and materially impact our future reported earnings.
         Allowance for bad debts
         We evaluate our  accounts  receivable  through a continuous  process of
assessing  our  portfolio  on an  individual  customer and overall  basis.  This
process comprises a thorough review of historical collection experience, current
aging status of the customer accounts, financial condition of our customers, and
other  factors such as whether the  receivables  involve  retentions  or billing
disputes. We also consider the economic environment of our customers,  both from
a  marketplace  and geographic  perspective,  in  evaluating  the  need  for  an
allowance.  Based  on our  review  of  these  factors,  we  establish  or adjust
allowances  for specific customers and the  accounts receivable  portfolio  as a
whole.  This process  involves a high  degree of  judgment  and  estimation  and
frequently  involves significant  dollar amounts.  Accordingly,  our  results of
operations  can  be  affected by  adjustments  to  the  allowance  due to actual
write-offs that differ from estimated amounts.
         Tax accounting
         We  account  for our  income  taxes in  accordance  with  Statement  of
Financial  Accounting  Standards No. 109  "Accounting  for Income Taxes",  which
requires the  recognition  of the amount of taxes payable or refundable  for the
current year; and an asset and liability  approach in recognizing  the amount of
deferred tax  liabilities  and assets for the future tax  consequences of events
that have been recognized in our financial  statements or tax returns.  We apply
the following basic principles in accounting for our income taxes at the date of
the financial statements:
              -   a  current tax  liability  or  asset  is  recognized  for  the
                  estimated taxes  payable or refundable  on tax returns for the
                  current year;
              -   a deferred  tax  liability or  asset  is  recognized  for  the
                  estimated  future  tax   effects  attributable   to  temporary
                  differences and carryforwards;
              -   the  measurement of current and deferred tax  liabilities  and
                  assets is based on  provisions  of the enacted tax law and the
                  effects of potential  future  changes in tax laws or rates are
                  not considered; and
              -   the value of deferred tax assets is reduced, if necessary,  by
                  the  amount  of any tax  benefits  that,  based  on  available
                  evidence, are not expected to be realized.
         We determine  deferred taxes  separately for each tax-paying  component
(an entity or a group of entities that is consolidated for tax purposes) in each
tax jurisdiction. That determination includes the following procedures:
              -   identify   the  types   and  amounts   of  existing  temporary
                  differences;
              -   measure the total deferred tax liability for taxable temporary
                  differences using the applicable tax rate;
              -   measure the total deferred tax asset for deductible  temporary
                  differences  and  operating  loss   carryforwards   using  the
                  applicable tax rate;

                                       34


              -   measure the  deferred  tax  assets for each type of tax credit
                  carryforward; and
              -   reduce  the deferred  tax assets by a  valuation allowance if,
                  based on available evidence, it is more  likely than  not that
                  some  portion  or all of   the deferred tax assets will not be
                  realized prior to expiration,  or that future deductibility is
                  uncertain.
         This methodology  requires a significant  amount of judgment  regarding
assumptions  and the use of estimates,  which can create  significant  variances
between actual results and estimates.  Examples  include the  forecasting of our
effective tax rate and the potential  realization  of deferred tax assets in the
future, such as utilization of foreign tax credits. This process involves making
forecasts of current and future  years' United States  taxable  income,  foreign
taxable  income and related  taxes in order to estimate the foreign tax credits.
Unforeseen  events,  such as the timing of asbestos or silica  settlements,  and
other tax timing issues may significantly affect these estimates.  These factors
can  affect  the  accuracy  of our tax  account  balances  and impact our future
reported earnings.
         Loss contingencies
         Asbestos.  Prior  to June  2002,  we  provided  for  known  outstanding
asbestos and  silica claims because  we did not have  sufficient  information to
make a  reasonable  estimate  of  future  unknown  asbestos  and  silica  claims
liability.  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.
         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 historical asbestos and silica settlements  and
                  defense costs;
              -   an analysis  of the  pending  inventory of asbestos and silica
                  related claims;
              -   an  analysis  of the claims  filing  history for  asbestos and
                  silica  related claims  since  January  2000  (two-year  claim
                  history) and alternatively since January 1997 (five-year claim
                  history);
              -   an analysis of  the population likely to  have been exposed or
                  claim  exposure  to  specific  products  or  construction  and
                  renovation projects; and
              -   epidemiological studies  to estimate  the number of people who
                  might allege exposure to products.
         Dr. Rabinovitz's estimates are based on historical data supplied by DII
Industries,  Kellogg,  Brown & Root and  Harbison-Walker  and publicly available
studies,   including  annual  surveys  by  the  National  Institutes  of  Health
concerning the incidence of mesothelioma deaths. In her analysis, Dr. Rabinovitz
projected that the elevated and historically unprecedented rate of claim filings
of the last two 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:
              -   an assumption  that  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.
         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  approximately   347,000
claims  currently pending).  The lower end of the range is  calculated  by using
an average of the last five years of asbestos and silica  claims  experience and
the upper end of the range is calculated using the more recent two-year elevated
rate of  asbestos and  silica claim  filings in  projecting the  rate  of future
claims.

                                       35


         Proposed global settlement.  On December 18, 2002, we announced that we
had reached an agreement  in  principle  that,  if and when  consummated,  would
result in a global  settlement of all asbestos and silica personal injury claims
against  DII  Industries,  Kellogg,  Brown & Root and their  current  and former
subsidiaries. The agreement in principle provides that:
              -   up to $2.775 billion in cash, 59.5 million  Halliburton shares
                  (valued at $1.1 billion using the stock price at December  31,
                  2002 of $18.71) and notes with a net present value expected to
                  be less  than $100  million  will be paid  to a trust  for the
                  benefit  of  current  and  future  asbestos  personal   injury
                  claimants  and current  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
                  Chapter 11  filing for DII  Industries, Kellogg,  Brown & Root
                  and some of their subsidiaries; and
              -   the  funding  of  the  settlement  amounts  would  occur  upon
                  receiving  final and non-appealable  court  confirmation  of a
                  plan of  reorganization  of  DII Industries,  Kellogg, Brown &
                  Root and their subsidiaries in the Chapter 11 proceeding.
         Subsequently,  as of March 2003, DII  Industries  and Kellogg,  Brown &
Root have entered into definitive written agreements finalizing the terms of the
agreement in principle.
         Please see  "Liquidity  and Capital  Resources" for a discussion of the
prerequisites to reaching a conclusion of the settlement.
         Asbestos and  Silica  Liability  Estimate  as of December 31, 2002.  We
currently do not believe that  completion  of the proposed global  settlement is
probable as defined by Statement of Financial  Accounting  Standards  No. 5.  If
the proposed global  settlement is not  completed,  we will  continue to resolve
asbestos and silica claims in the tort system or, in the case of Harbison-Walker
claims  (see  Note  12  to  the  financial  statements),  possibly  through  the
Harbison-Walker bankruptcy proceedings.  Given the uncertainties surrounding the
completion of the global  settlement and the  uncertainty as to the amounts that
could be paid under the proposed global settlement, we  believe Dr. Rabinovitz's
study continues to provide the best possible range of estimated loss  associated
with known and future  asbestos and silica  claims  liabilities.  As a result of
negotiating the proposed  global  settlement,  we have  determined that the best
estimate of the probable loss is $3.4 billion ($3.5 billion  estimate as of June
30, 2002 in Dr. Rabinovitz's study less $50 million in payments in the third and
fourth  quarter of  2002) and we  have adjusted  our liability to this amount at
December 31, 2002.
         Insurance  Recoveries.  In 2002,  we retained  Peterson  Consulting,  a
nationally-recognized consultant in liability and insurance,  to work with us to
project the amount of probable insurance recoveries using the current and future
asbestos and silica  liabilities  recorded by us at December 31, 2002. Using Dr.
Rabinovitz's  estimate of liabilities  through 2052 using the two-year  elevated
rate of asbestos and silica 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  and
                  silica  related  claims,  including  DII  Industries  15  year
                  litigation and settlement history;
              -   reviewed  the  terms  of  DII  Industries' prior  and  current
                  coverage-in-place settlement agreements;
              -   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 these reviews,  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

                                       36


insurers  and  the  relevant  case  law  to  determine  the  probable  insurance
recoveries for asbestos and silica  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  DII  Industries'
insurance programs.
         Based  on  Peterson  Consulting  analysis  of  the  probable  insurance
recoveries,  we increased our  insurance  receivable to $2.1 billion at December
31, 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 accurate. The insurance receivables recorded at December 31,
2002 do not  exhaust  applicable  insurance  coverage  for  asbestos  and silica
related liabilities.
         Projecting  future events is subject to many  uncertainties  that could
cause the asbestos and silica related liabilities and insurance recoveries to be
higher or lower than those projected and accrued, 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.
         Possible Additional Accruals.  Should  the proposed  global  settlement
become  probable as defined by 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 would
be up to $4.0 billion, consisting of up to $2.775 billion in cash, 59.5  million
Halliburton shares and notes with a net  present value expected  to be less than
$100  million.  Assuming the  revised liability would be $4.0 billion,  we would
also increase our probable insurance recoveries to $2.3 billion.  The  impact on
our income statement  would be an additional pretax charge of $322 million ($288
million after-tax).  This accrual (which values our stock to be  contributed at
$1.1 billion using our stock price at December 31, 2002 of $18.71) 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.
         Continuing Review.  Given  the inherent  uncertainty  in making  future
projections,  we plan  to have  the  projections  periodically  reexamined,  and
update them 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 our proposed global settlement. 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  their  insurance  companies,
factors related to the global settlement, if consummated, and other developments
that may impact the probable insurance recoveries.
         Litigation.  We are currently  involved in other legal  proceedings not
involving  asbestos  and silica.  As  discussed  in Note 12 of our  consolidated
financial  statements,  as of December 31, 2002,  we have accrued an estimate of
the probable  costs for the  resolution of these claims.  Attorneys in our legal
department  specializing  in  litigation  claims,  monitor and manage all claims
filed  against us. The  estimate of probable  costs  related to these  claims is
developed in  consultation  with outside  legal counsel  representing  us in the
defense of these  claims.  Our estimates are based upon an analysis of potential
results,  assuming a combination  of litigation and  settlement  strategies.  We
attempt to resolve claims through mediation and arbitration  where possible.  If
the actual settlement costs and final judgments,  after appeals, differ from our
estimates, our future financial results may be adversely affected.

OFF BALANCE SHEET RISK

         On April 15, 2002,  we entered into an agreement to sell certain of our
accounts receivable to a bankruptcy-remote  limited-purpose  funding subsidiary.
Under the terms of the  agreement,  new  receivables  are added on a  continuous

                                       37


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, and the
assets of the funding  subsidiary  are not  available  to pay any  creditors  of
Halliburton  or of its  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  sold a $200
million undivided ownership interest to the unaffiliated companies, and may from
time to time  sell  additional  undivided  ownership  interests.  No  additional
amounts were received  from our accounts  receivable  facility  since the second
quarter of 2002.  The total  amount  outstanding  under this  facility  was $180
million as of December 31, 2002. We continue to service,  administer and collect
the  receivables on behalf of the purchaser.  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  and as an  increase  in  cash  flows  from  operating  activities  in our
consolidated statement of cash flows.

LONG-TERM CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

         The  following  table  summarizes  our  various  long-term  contractual
obligations:


                                            Payments due
                           ------------------------------------------------
Millions of dollars           2003      2004     2005     2006      2007    Thereafter     Total
---------------------------------------------------------------------------------------------------
                                                                    
Long-term debt              $   295     $   21   $  20   $  293    $    8     $   826    $  1,463
Operating leases                119         83      63       55        40         249         609
Capital leases                    1          1       1        -         -           -           3
---------------------------------------------------------------------------------------------------
Total contractual
   obligations              $   415     $  105   $  84   $  348    $   48     $ 1,075    $  2,075
===================================================================================================

         Included in long-term debt is an additional $13 million at December 31,
2002 related to the terminated interest rate swaps.
         We also have $350 million of committed  lines of credit from banks that
are  available  if we maintain an  investment  grade  rating.  Investment  grade
ratings are BBB- or higher for  Standard & Poor's and Baa3 or higher for Moody's
Investors'  Services  and we are  currently  above these  levels.  In the normal
course of business we have agreements with banks under which  approximately $1.4
billion of letters of credit or bank  guarantees  were  issued,  including  $204
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 have been issued.  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  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 and silica  liability.  The  definition of total  earnings
before interest,  taxes,  depreciation  and  amortization  excludes any non-cash
charges related to the proposed global settlement through December 31, 2003.
         If our debt ratings fall below  investment  grade,  we would also be in
technical breach of a bank agreement covering another $160 million of letters of
credit at December 31, 2002, which might entitle the bank to set-off rights.  In
addition,  a $151 million  letter of credit line, of which $121 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,  one downgrade from our current  ratings.  These letters of credit and
bank  guarantees  generally  relate to our  guaranteed  performance or retention
payments under our long-term contracts and self-insurance.

                                       38



FINANCIAL INSTRUMENT 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 program 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.  See  Note 1 to
the financial  statements for additional information on our  accounting policies
on  derivative  instruments.  See  Note  19  to  the  financial  statements  for
additional disclosures related to derivative instruments.
         Interest  rate risk.  We have  exposure to interest  rate risk from our
long-term debt and related interest rate swaps.
         The following table represents  principal amounts of our long-term debt
at December  31, 2002 and related  weighted  average  interest  rates by year of
maturity for our long-term debt.


Millions of dollars           2003       2004      2005      2006      2007    Thereafter    Total
------------------------------------------------------------------------------------------------------
                                                                       
Long-term debt:
Fixed rate debt               $ 140      $  2     $   1     $  274    $   -     $  825      $ 1,242
Weighted average
    interest rate              8.0%      7.7%      7.0%       6.0%        -       7.4%         7.1%
Variable rate debt            $ 155      $ 19     $  19     $   19    $   8     $    1      $   221
Weighted average
    interest rate              2.3%      5.4%      5.4%       5.4%     5.4%       5.8%         3.2%
======================================================================================================

         Fair market value of long-term debt was $1.3 billion as of December 31,
2002.
         In the second  quarter  2002,  we  terminated  our  interest  rate swap
agreement on our 8% senior notes.  The notional amount of the swap agreement was
$139 million. This interest rate swap was designated as a fair value hedge under
SFAS No. 133.  Upon  termination,  the fair value of the interest  rate swap was
$0.5 million.  In the fourth  quarter 2002, we terminated our interest rate swap
agreement on our 6% fixed rate  medium-term  notes.  The notional  amount of the
swap  agreement  was $150 million.  This interest rate swap was  designated as a
fair value  hedge under SFAS No. 133.  Upon  termination,  the fair value of the
interest rate swap was $13 million.  These swaps had previously  been classified
in "Other assets" on the balance sheet.  The fair value adjustment to these debt
instruments  that were  hedged will remain and be  amortized  as a reduction  in
interest  expense using the "Effective  Yield Method" over the remaining life of
the notes.

                                       39


REORGANIZATION OF BUSINESS OPERATIONS

         On March 18, 2002 we announced plans to restructure our businesses into
two operating subsidiary groups, the Energy Services Group and KBR, representing
the  Engineering and  Construction  Group.  As part of this  reorganization,  we
are  separating  and  consolidating  the entities in our Energy  Services  Group
together as direct and indirect  subsidiaries  of Halliburton  Energy  Services,
Inc. We are also  separating and  consolidating  the entities in our Engineering
and  Construction  Group  together as direct and  indirect  subsidiaries  of the
former Dresser Industries, Inc., which became a limited liability company during
the  second  quarter  of  2002  and  was  renamed  DII   Industries,   LLC.  The
reorganization    of   business    operations    facilitated   the   separation,
organizationally,  financially, and operationally, of our two business segments,
which we believe will  significantly  improve  operating  efficiencies  in both,
while  streamlining  management and easing manpower  requirements.  In addition,
many support functions,  which were previously  shared,  were moved into the two

                                       39


business  groups.  As a result,  we took actions  during 2002 to reduce our cost
structure by reducing personnel, moving previously shared support functions into
the two business groups and realigning  ownership of international  subsidiaries
by group.  In 2002,  we  incurred  approximately  $107  million  for the year of
personnel  reduction  costs and asset  related  write-offs.  Of this amount,  $8
million  remains in accruals for severance  arrangements  and  approximately  $2
million for other items. We expect these remaining  payments will be made during
2003. Reorganization charges for 2002 consisted of the following:
              -   $64 million in personnel related expense;
              -   $17 million of asset related write-downs;
              -   $20 million in professional fees related to the restructuring;
                  and
              -   $6 million related to contract terminations.
         Although we have no specific plans currently,  the reorganization would
facilitate separation of the ownership of the two businesses in the future if we
identify an opportunity that produces  greater value for our  shareholders  than
continuing to own both businesses. See Note 14 to the financial statements.
         In the fourth  quarter of 2000 we  approved  a plan to  reorganize  our
engineering   and   construction   businesses   into  one  business  unit.  This
restructuring was undertaken because our engineering and construction businesses
continued  to  experience  delays in customer  commitments  for new upstream and
downstream  projects.  With the  exception  of  deepwater  projects,  short-term
prospects for increased  engineering and  construction  activities in either the
upstream  or  downstream  businesses  were  not  positive.  As a  result  of the
reorganization of the engineering and construction  businesses,  we took actions
to rationalize  our operating  structure, including  write-offs of equipment and
licenses  of $10  million,  engineering  reference  designs  of $4  million  and
capitalized software of $6 million, and recorded severance costs of $16 million.
Of these charges,  $30 million was reflected under the captions cost of services
and $6 million as general and administrative in our 2000 consolidated statements
of income.  Severance and related costs of $16 million were for the reduction of
approximately 30 senior management  positions.  In January 2002, the last of the
personnel actions was completed and we have no remaining accruals related to the
2000 restructuring. See Note 14 to the financial statements.

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 ten federal and state
superfund  sites for which we have  established a liability.  As of December 31,
2002,  those ten  sites  accounted  for $8  million  of our  total  $48  million
liability. See Note 12 to the financial statements.

FORWARD-LOOKING INFORMATION

         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-K are  forward-looking and use words like "may," "may
not,"  "believes,"  "do  not  believe,"  "expects,"  "do  not  expect,"  "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

                                       40


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.
         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 global settlement, prerequisites to
                  which include:
                      -    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;
                      -    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 to the plan of reorganization  implementing
                           the proposed global settlement; and
                      -    obtaining final  and non-appealable  bankruptcy court
                           approval and  federal district  court confirmation of
                           the plan of reorganization;
              -   the results  of being  unable  to complete the proposed global
                  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;
                      -    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:

                                       41


                      -    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
                  global   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  global  settlement  or not  being  able  to
                           timely recover  insurance  reimbursement  relating to
                           amounts paid as part of a global  settlement  or as a
                           result of judgments against us or settlements paid in
                           the absence of a global 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 global settlement;
                      -    in the absence  of a global  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 global 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 thereunder;
              -   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;
              -   obtaining  debtor-in-possession  financing for DII Industries,
                  Kellogg, Brown & Root and their subsidiaries prior to filing a
                  Chapter 11 proceeding;
              -   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;
              -   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;

                                       42


         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
              -   armed conflict 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,
                  Algeria, Angola, Colombia,  Indonesia, 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
                  have disrupted our Energy Services Group's ability  to provide
                  services  and  products to our  customers  in these  countries
                  during 2002 and likely will continue to do so in 2003; and

                                       43


              -   changes in foreign  exchange  rates and  exchange  controls as
                  were experienced in Argentina in late 2001 and early 2002. For
                  example,  the changes in Argentina exchange rates in late 2001
                  and early  2002 were  detrimental  to  results  of our  Energy
                  Services Group operations in Argentina;
         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;
              -   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 global 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; 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 armed conflict in the Middle East;
                      -    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; and
                      -    the  level  of  demand  for  oil   and  natural  gas,
                           especially natural gas in the United States;
              -   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;
              -   nonperformance,  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

                                       44


              -   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
              -   integration   of   acquired   businesses   into   Halliburton,
                  including:
                      -    standardizing information systems or integrating data
                           from multiple systems;
                      -    maintaining uniform standards, controls,  procedures,
                           and policies; and
                      -    combining  operations   and  personnel   of  acquired
                           businesses with ours;
              -   effectively  restructuring  operations  and  personnel  within
                  Halliburton  including,  for example,  the  segregation of our
                  business   into  two   operating   subsidiary   groups   under
                  Halliburton;
              -   ensuring acquisitions and new products and services add value
                  and complement our core businesses; and
              -   successful completion of planned 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-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 global settlement;
              -   in the absence of a global 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 global
                  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.

NEW ACCOUNTING PRONOUNCEMENTS

         In August  2001, the Financial  Accounting Standards Board  issued 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. We currently  account for
liabilities   associated  with  asset  retirement   obligations  under  existing
accounting  standards,  such as SFAS 19, SFAS 5, SOP 96-1, and EITF 89-30, which
do  not require the asset  retirement  obligations to be recorded  at fair value
and in some  instances do not require the costs to be recognized in the carrying
amount of the related  asset.  The new  standard is  effective  for us beginning
January 1, 2003,  and the effects of this  standard  will be  immaterial  to our
future  financial  condition  and we estimate will require a charge of less than
$10  million  after-tax  as a  cumulative  effect  of  a  change  in  accounting
principle.

                                       45


         In July 2002 the Financial  Accounting  Standards Board issued SFAS No.
146,  "Accounting for Costs  Associated with Exit or Disposal  Activities".  The
standard requires  companies to recognize costs associated with exit or disposal
activities  when  the  liabilities  are  incurred  rather  than at the date of a
commitment  to an exit or  disposal  plan.  Examples  of  costs  covered  by the
standard include lease termination costs and some employee  severance costs that
are associated with a restructuring,  discontinued operation,  plant closing, or
other exit or disposal activity.  SFAS No. 146 is to be applied prospectively to
exit or disposal  activities  initiated  after  December 31, 2002 and would only
affect  the  timing of  charges  associated  with any  future  exit or  disposal
activity.
         In November 2002, the Financial  Accounting Standards Board 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,  including a rollforward of the
entity's product warranty liabilities.  We will apply the recognition provisions
of FIN 45  prospectively  to  guarantees  issued after  December  31, 2002.  The
disclosure  provisions  of FIN 45 are  effective  for  financial  statements  of
interim and annual periods ending December 15, 2002. The adoption of FIN 45 will
not have a material effect on our consolidated financial position and results of
operations.
         In January 2003, the Financial  Accounting  Standards Board issued FASB
Interpretation  No.  46,   "Consolidation  of  Variable  Interest  Entities,  an
Interpretation  of ARB No.  51" (FIN  46).  This  statement  requires  specified
variable interest entities to be consolidated by the primary  beneficiary of the
entity if the equity investors in the entity do not have the  characteristics of
a controlling  financial  interest or do not have sufficient  equity at risk for
the entity to finance its activities without additional  subordinated  financial
support from other  parties.  FIN 46 is effective for all new variable  interest
entities  created or acquired  after January 31, 2003 and beginning July 1, 2003
for variable  interest  entities  created or acquired prior to February 1, 2003.
Our  exposure  to variable  interest  entities is limited  and,  therefore,  the
adoption of FIN 46 is not expected to have a material impact on our consolidated
financial position and results of operations.

                                       46


RESPONSIBILITY FOR FINANCIAL REPORTING


         We are  responsible  for the preparation and integrity of our published
financial statements.  The financial statements have been prepared in accordance
with accounting  principles  generally  accepted in the United States of America
and,  accordingly,  include amounts based on judgments and estimates made by our
management. We also prepared the other information included in the annual report
and  are  responsible  for its  accuracy  and  consistency  with  the  financial
statements.
         Our 2002  financial  statements  have been  audited by the  independent
accounting  firm,  KPMG  LLP.  KPMG LLP was  given  unrestricted  access  to all
financial  records  and  related  data,  including  minutes of all  meetings  of
stockholders,  the Board of Directors and committees of the Board. Halliburton's
Audit  Committee  of the Board of Directors  consists of  directors  who, in the
business judgment of the Board of Directors,  are independent under the New York
Stock Exchange listing standards. The Board of Directors,  operating through its
Audit Committee, provides oversight to the financial reporting process. Integral
to this process is the Audit  Committee's  review and discussion with management
and the external auditors of the quarterly and annual financial statements prior
to their respective filing.
         We  maintain a system of internal  control  over  financial  reporting,
which is intended to provide reasonable assurance to our management and Board of
Directors  regarding the  reliability  of our financial  statements.  The system
includes:
              -   a   documented  organizational   structure  and   division  of
                  responsibility;
              -   established  policies  and  procedures,  including  a code  of
                  conduct  to  foster  a  strong   ethical   climate   which  is
                  communicated throughout the company; and
              -   the careful selection, training and development of our people.
Internal  auditors  monitor the  operation  of the internal  control  system and
report  findings and  recommendations  to management and the Board of Directors.
Corrective  actions  are  taken  to  address  control   deficiencies  and  other
opportunities  for  improving the system as they are  identified.  In accordance
with the Securities and Exchange  Commission's  rules to improve the reliability
of financial statements,  our 2002 interim financial statements were reviewed by
KPMG LLP.
         There are inherent  limitations in the  effectiveness  of any system of
internal control, including the possibility of human error and the circumvention
or  overriding  of controls.  Accordingly,  even an effective  internal  control
system can provide only reasonable  assurance with respect to the reliability of
our financial statements.  Also, the effectiveness of an internal control system
may change over time.
         We have  assessed our internal  control  system in relation to criteria
for effective internal control over financial  reporting  described in "Internal
Control-Integrated   Framework"   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission. Based upon that assessment, we believe
that,  as of December 31, 2002,  our system of internal  control over  financial
reporting met those criteria.


Halliburton Company
by



        /s/ DAVID J. LESAR                         /s/   DOUGLAS L. FOSHEE
-------------------------------------          ---------------------------------
            David J. Lesar                               Douglas L. Foshee
         Chairman of the Board,                     Executive Vice President and
             President and                            Chief Financial Officer
         Chief Executive Officer

                                       47


INDEPENDENT AUDITOR'S REPORT





TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF HALLIBURTON COMPANY:


We have  audited the  accompanying  consolidated  balance  sheet of  Halliburton
Company and  subsidiaries as of December 31, 2002, and the related  consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended.  These  consolidated  financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial statements based on our audit. The accompanying 2001 and
2000 consolidated  financial  statements of Halliburton Company and subsidiaries
were  audited by other  auditors  who have  ceased  operations.  Those  auditors
expressed an unqualified  opinion on those  consolidated  financial  statements,
before  the  restatement  described  in  Note  4 to the  consolidated  financial
statements  and before the  revision  described  in Note 22 to the  consolidated
financial  statements,  in their  report  dated  January 23, 2002  (except  with
respect to matters  discussed  in Note 9 to those  financial  statements,  as to
which the date was February 21, 2002).

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the 2002 consolidated  financial  statements  referred to above
present fairly, in all material respects,  the financial position of Halliburton
Company and  subsidiaries  as of  December  31,  2002,  and the results of their
operations  and their  cash  flows for the year then  ended in  conformity  with
accounting principles generally accepted in the United States of America.

As discussed  above,  the 2001 and 2000  consolidated  financial  statements  of
Halliburton  Company and  subsidiaries  were audited by other  auditors who have
ceased  operations.  As described in Note 4, the Company changed the composition
of its  reportable  segments  in  2002,  and the  amounts  in the  2001 and 2000
consolidated  financial  statements  relating to  reportable  segments have been
restated to conform to the 2002 composition of reportable  segments.  We audited
the  adjustments  that were applied to restate the  disclosures  for  reportable
segments reflected in the 2001 and 2000 consolidated  financial  statements.  In
our opinion,  such  adjustments are appropriate and have been properly  applied.
Also, as described in Note 22, these consolidated financial statements have been
revised to  include  the  transitional  disclosures  required  by  Statement  of
Financial  Accounting  Standards No. 142, Goodwill and Other Intangible  Assets,
which was  adopted by the  Company as of January 1, 2002.  In our  opinion,  the
disclosures for 2001 and 2000 in Note 22 are appropriate.  However,  we were not
engaged  to  audit,  review,  or  apply  any  procedures  to the  2001  and 2000
consolidated  financial statements of Halliburton Company and subsidiaries other
than with respect to such adjustments and revisions and, accordingly,  we do not
express  an  opinion  or any  other  form of  assurance  on the  2001  and  2000
consolidated financial statements taken as a whole.


  /s/  KPMG LLP
-------------------
       KPMG LLP

Houston, Texas
March 13, 2003

                                       48


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



This report is a copy of a previously issued report, the predecessor auditor has
not reissued  this report,  the  previously  issued  report  refers to financial
statements  not  physically  included  in this  document,  and the  prior-period
financial statements have been revised or restated.



TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF HALLIBURTON COMPANY:


We have audited the  accompanying  consolidated  balance  sheets of  Halliburton
Company (a Delaware  corporation)  and  subsidiary  companies as of December 31,
2001 and 2000, and the related  consolidated  statements of income,  cash flows,
and  shareholders'  equity  for  each of the  three  years in the  period  ended
December 31, 2001.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position  of  Halliburton  Company and
subsidiary  companies as of December 31, 2001 and 2000, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting  principles  generally accepted
in the United States of America.



Arthur Andersen LLP
Dallas, Texas

January 23, 2002 (Except with respect to certain matters discussed in Note 9, as
to which the date is February 21, 2002.)

                                       49



                               HALLIBURTON COMPANY
                      Consolidated Statements of Operations
             (Millions of dollars and shares except per share data)
                                                                              Years ended December 31
                                                                  -------------------------------------------------
                                                                       2002             2001            2000
  -----------------------------------------------------------------------------------------------------------------
                                                                                            
  Revenues:
  Services                                                          $  10,658        $  10,940       $  10,185
  Product sales                                                         1,840            1,999           1,671
  Equity in earnings of unconsolidated affiliates                          74              107              88
  -----------------------------------------------------------------------------------------------------------------
  Total revenues                                                    $  12,572        $  13,046       $  11,944
  -----------------------------------------------------------------------------------------------------------------
  Operating costs and expenses:
  Cost of services                                                  $  10,737        $   9,831       $   9,755
  Cost of sales                                                         1,642            1,744           1,463
  General and administrative                                              335              387             352
  Gain on sale of marine vessels                                            -                -             (88)
  Gain on sale of business assets                                         (30)               -               -
  -----------------------------------------------------------------------------------------------------------------
  Total operating costs and expenses                                $  12,684        $  11,962       $  11,482
  -----------------------------------------------------------------------------------------------------------------
  Operating income (loss)                                                (112)           1,084             462
  Interest expense                                                       (113)            (147)           (146)
  Interest income                                                          32               27              25
  Foreign currency losses, net                                            (25)             (10)             (5)
  Other, net                                                              (10)               -              (1)
  -----------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations before income taxes,
      minority interest, and change in accounting method, net            (228)             954             335
  Provision for income taxes                                              (80)            (384)           (129)
  Minority interest in net income of subsidiaries                         (38)             (19)            (18)
  -----------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations before change in
      accounting method, net                                             (346)             551             188
  -----------------------------------------------------------------------------------------------------------------
  Discontinued operations:
  Income (loss) from discontinued operations, net of tax
      (provision) benefit of $154, $20, and ($60)                        (652)             (42)             98
  Gain on disposal of discontinued operations, net of tax
  provision
      of $0, $199, and $141                                                 -              299             215
  -----------------------------------------------------------------------------------------------------------------
  Income (loss) from discontinued operations, net                        (652)    -        257             313
  -------------------------------------------------------------------------------- --------------------------------
  Cumulative effect of change in accounting method, net                     -                1               -
  -----------------------------------------------------------------------------------------------------------------
  Net income (loss)                                                 $    (998)       $     809       $     501
  =================================================================================================================

  Basic income (loss) per share:
  Income (loss) from continuing operations before change
      in accounting method, net                                     $    (0.80)      $     1.29      $     0.42
  Income (loss) from discontinued operations                             (1.51)           (0.10)           0.22
  Gain on disposal of discontinued operations                                -             0.70            0.49
  -----------------------------------------------------------------------------------------------------------------
  Net income (loss)                                                 $    (2.31)      $     1.89      $     1.13
  =================================================================================================================

  Diluted income (loss) per share:
  Income (loss) from continuing operations before change
      in accounting method, net                                     $    (0.80)      $     1.28      $     0.42
  Income (loss) from discontinued operations                             (1.51)           (0.10)           0.22
  Gain on disposal of discontinued operations                                -             0.70            0.48
  -----------------------------------------------------------------------------------------------------------------
  Net income (loss)                                                 $    (2.31)      $     1.88      $     1.12
  =================================================================================================================

  Basic average common shares outstanding                                  432              428             442
  Diluted average common shares outstanding                                432              430             446







   See notes to annual financial statements.



                                       50



                               HALLIBURTON  COMPANY
                           Consolidated Balance Sheets
             (Millions of dollars and shares except per share data)
                                                                                          December 31
                                                                                   --------------------------
                                                                                        2002        2001
  -----------------------------------------------------------------------------------------------------------
                                                                                            
                                        Assets
    Current assets:
    Cash and equivalents                                                              $  1,107    $    290
    Receivables:
    Notes and accounts receivable (less allowance for bad debts of $157 and $131)        2,533       3,015
    Unbilled work on uncompleted contracts                                                 724       1,080
  -----------------------------------------------------------------------------------------------------------
    Total receivables                                                                    3,257       4,095
    Inventories                                                                            734         787
    Current deferred income taxes                                                          200         154
    Other current assets                                                                   262         247
  -----------------------------------------------------------------------------------------------------------
    Total current assets                                                                 5,560       5,573
    Net property, plant and equipment                                                    2,629       2,669
    Equity in and advances to related companies                                            413         551
    Goodwill                                                                               723         720
    Noncurrent deferred income taxes                                                       607         410
    Insurance for asbestos and silica related liabilities                                2,059         612
    Other assets                                                                           853         431
  -----------------------------------------------------------------------------------------------------------
    Total assets                                                                      $ 12,844    $ 10,966
  ===========================================================================================================
                          Liabilities and Shareholders' Equity
    Current liabilities:
    Short-term notes payable                                                          $     49    $     44
    Current maturities of long-term debt                                                   295          81
    Accounts payable                                                                     1,077         917
    Accrued employee compensation and benefits                                             370         357
    Advance billings on uncompleted contracts                                              641         611
    Deferred revenues                                                                      100          99
    Income taxes payable                                                                   148         194
    Other current liabilities                                                              592         605
  -----------------------------------------------------------------------------------------------------------
    Total current liabilities                                                            3,272       2,908
    Long-term debt                                                                       1,181       1,403
    Employee compensation and benefits                                                     756         570
    Asbestos and silica related liabilities                                              3,425         737
    Other liabilities                                                                      581         555
    Minority interest in consolidated subsidiaries                                          71          41
  -----------------------------------------------------------------------------------------------------------
    Total liabilities                                                                    9,286       6,214
  -----------------------------------------------------------------------------------------------------------
    Shareholders' equity:
    Common shares, par value $2.50 per share - authorized 600 shares,
         issued 456 and 455 shares                                                       1,141       1,138
    Paid-in capital in excess of par value                                                 293         298
    Deferred compensation                                                                  (75)        (87)
    Accumulated other comprehensive income                                                (281)       (236)
    Retained earnings                                                                    3,110       4,327
  -----------------------------------------------------------------------------------------------------------
                                                                                         4,188       5,440
    Less 20 and 21 shares of treasury stock, at cost                                       630         688
  -----------------------------------------------------------------------------------------------------------
    Total shareholders' equity                                                           3,558       4,752
  -----------------------------------------------------------------------------------------------------------
    Total liabilities and shareholders' equity                                        $ 12,844    $ 10,966
  ===========================================================================================================

      See notes to annual financial statements.



                                       51



                               HALLIBURTON COMPANY
                 Consolidated Statements of Shareholders' Equity
                        (Millions of dollars and shares)
                                                                         Years ended December 31
                                                                -------------------------------------------
                                                                     2002          2001          2000
-----------------------------------------------------------------------------------------------------------
                                                                                      
  Common stock (number of shares)
  Balance at beginning of year                                         455           453           448
  Shares issued under compensation and incentive stock plans,
    net of forfeitures                                                   -*            1             4
  Shares issued for acquisition                                          1             1             1
-----------------------------------------------------------------------------------------------------------
  Balance at end of year                                               456           455           453
===========================================================================================================
  Common stock (dollars)
  Balance at beginning of year                                     $ 1,138       $ 1,132       $ 1,120
  Shares issued under compensation and incentive stock plans,
    net of forfeitures                                                   1             2             9
  Shares issued for acquisition                                          2             4             3
-----------------------------------------------------------------------------------------------------------
  Balance at end of year                                           $ 1,141       $ 1,138       $ 1,132
===========================================================================================================
  Paid-in capital in excess of par value
  Balance at beginning of year                                     $   298       $   259       $    68
  Shares issued under compensation and incentive stock plans,
    net of forfeitures                                                 (24)           30           109
  Tax benefit                                                           (5)           (2)           38
  Shares issued for acquisition, net                                    24            11            44
-----------------------------------------------------------------------------------------------------------
  Balance at end of year                                           $   293       $   298       $   259
===========================================================================================================
  Deferred compensation
  Balance at beginning of year                                     $   (87)      $   (63)      $   (51)
  Current year awards, net of tax                                       12           (24)          (12)
-----------------------------------------------------------------------------------------------------------
  Balance at end of year                                           $   (75)      $   (87)      $   (63)
===========================================================================================================
  Accumulated other comprehensive income
  Cumulative translation adjustment                                $  (121)      $  (205)      $  (275)
  Pension liability adjustment                                        (157)          (27)          (12)
  Unrealized loss on investments and derivatives                        (3)           (4)           (1)
-----------------------------------------------------------------------------------------------------------
  Balance at end of year                                           $  (281)      $  (236)      $  (288)
===========================================================================================================
  Cumulative translation adjustment
  Balance at beginning of year                                     $  (205)      $  (275)      $  (185)
  Sales of subsidiaries                                                 15           102            11
  Current year changes                                                  69           (32)         (101)
-----------------------------------------------------------------------------------------------------------
  Balance at end of year                                           $  (121)      $  (205)      $  (275)
===========================================================================================================

      *  Actual shares issued in 2002 were 357,000.
      (continued on next page)



                                       52



                               HALLIBURTON COMPANY
                 Consolidated Statements of Shareholders' Equity
                        (Millions of dollars and shares)
                                   (continued)
                                                                            Years ended December 31
                                                                  --------------------------------------------
                                                                       2002          2001          2000
--------------------------------------------------------------------------------------------------------------
                                                                                         
   Pension liability adjustment
   Balance at beginning of year                                       $   (27)      $   (12)      $   (19)
   Sale of subsidiary                                                       -            12             7
   Current year change, net of tax                                       (130)          (27)            -
--------------------------------------------------------------------------------------------------------------
   Balance at end of year                                             $  (157)      $   (27)      $   (12)
==============================================================================================================
   Unrealized gain (loss) on investments
   Balance at beginning of year                                       $    (4)      $    (1)      $     -
   Current year unrealized gain (loss) on investments and
     derivatives                                                            1            (3)           (1)
--------------------------------------------------------------------------------------------------------------
   Balance at end of year                                             $    (3)      $    (4)      $    (1)
==============================================================================================================
   Retained earnings
   Balance at beginning of year                                       $ 4,327       $ 3,733       $ 3,453
   Net income (loss)                                                     (998)          809           501
   Cash dividends paid                                                   (219)         (215)         (221)
--------------------------------------------------------------------------------------------------------------
   Balance at end of year                                             $ 3,110       $ 4,327       $ 3,733
==============================================================================================================
   Treasury stock (number of shares)
   Beginning of year                                                       21            26             6
   Shares issued under benefit, dividend reinvestment plan and
     incentive stock plans, net                                            (2)           (2)            -
   Shares issued for acquisition                                            -            (4)            -
   Shares purchased                                                         1             1            20
--------------------------------------------------------------------------------------------------------------
   Balance at end of year                                                  20            21            26
==============================================================================================================
   Treasury stock (dollars)
   Beginning of year                                                  $   688       $   845       $    99
   Shares issued under benefit, dividend reinvestment plan and
     incentive stock plans, net                                           (62)          (51)          (23)
   Shares issued for acquisition                                            -          (140)            -
   Shares purchased                                                         4            34           769
--------------------------------------------------------------------------------------------------------------
   Balance at end of year                                             $   630       $   688       $   845
==============================================================================================================
   Comprehensive income (loss)
   Net income (loss)                                                  $  (998)      $   809       $   501
--------------------------------------------------------------------------------------------------------------
   Cumulative translation adjustment, net of tax                           69           (32)         (101)
   Less reclassification adjustments for losses included in
     net income                                                            15           102            11
--------------------------------------------------------------------------------------------------------------
   Net cumulative translation adjustment                                   84            70           (90)
--------------------------------------------------------------------------------------------------------------
   Current year adjustment to minimum pension liability, net of          (130)          (15)            7
   tax
   Unrealized gain/(loss) on investments and derivatives                    1            (3)           (1)
--------------------------------------------------------------------------------------------------------------
   Total comprehensive income (loss)                                  $(1,043)      $   861       $   417
==============================================================================================================

      See notes to annual financial statements.




                                       53



                               HALLIBURTON COMPANY
                      Consolidated Statements of Cash Flows
                              (Millions of dollars)
                                                                               Years ended December 31
                                                                       -----------------------------------------
                                                                           2002          2001         2000
----------------------------------------------------------------------------------------------------------------
                                                                                            
   Cash flows from operating activities:
   Net income (loss)                                                      $   (998)    $    809      $    501
   Adjustments to reconcile net income to net cash from operations:
   Loss (income) from discontinued operations                                  652         (257)         (313)
   Depreciation, depletion and amortization                                    505          531           503
   Provision (benefit) for deferred income taxes                              (151)          26            (6)
   Distributions from (advances to) related companies, net of equity
     in (earnings) losses                                                        3            8           (64)
   Change in accounting method, net                                              -           (1)            -
   Gain on sale of assets                                                      (22)           -             -
   Gain on option component of joint venture sale                               (3)           -             -
   Asbestos and silica related liabilities, net                                588           96             4
   Accrued special charges                                                       -           (6)          (63)
   Other non-cash items                                                        101           (3)          (22)
   Other changes, net of non-cash items:
   Receivables and unbilled work on uncompleted contracts                      675         (199)         (896)
   Sale of receivables, net                                                    180            -             -
   Inventories                                                                  62          (91)            8
   Accounts payable                                                             71          118           170
   Other working capital, net                                                  (78)         122           155
   Other operating activities                                                  (23)        (124)          (34)
----------------------------------------------------------------------------------------------------------------
   Total cash flows from operating activities                                1,562        1,029           (57)
----------------------------------------------------------------------------------------------------------------
   Cash flows from investing activities:
   Capital expenditures                                                       (764)        (797)         (578)
   Sales of property, plant and equipment                                      266          120           209
   Acquisitions of businesses, net of cash acquired                              -         (220)          (10)
   Dispositions of businesses, net of cash disposed                            170           61            19
   Proceeds from sale of securities                                             62            -             -
   Investments - restricted cash                                              (187)           4             5
   Other investing activities                                                  (20)         (26)          (56)
----------------------------------------------------------------------------------------------------------------
   Total cash flows from investing activities                                 (473)        (858)         (411)
----------------------------------------------------------------------------------------------------------------
   Cash flows from financing activities:
   Proceeds from long-term borrowings                                           66          425             -
   Payments on long-term borrowings                                            (81)         (13)         (308)
   (Repayments) borrowings of short-term debt, net                              (2)      (1,528)          629
   Payments of dividends to shareholders                                      (219)        (215)         (221)
   Proceeds from exercises of stock options                                      -           27           105
   Payments to reacquire common stock                                           (4)         (34)         (769)
   Other financing activities                                                   (8)         (17)          (20)
----------------------------------------------------------------------------------------------------------------
   Total cash flows from financing activities                                 (248)      (1,355)         (584)
----------------------------------------------------------------------------------------------------------------
   Effect of exchange rate changes on cash                                     (24)         (20)           (9)
   Net cash flows from discontinued operations   (1)                             -        1,263           826
----------------------------------------------------------------------------------------------------------------
   Increase (decrease) in cash and equivalents                                 817           59          (235)
   Cash and equivalents at beginning of year                                   290          231           466
----------------------------------------------------------------------------------------------------------------
   Cash and equivalents at end of year                                    $  1,107     $    290      $    231
================================================================================================================

    (continued on next page)




                                       54



                               HALLIBURTON COMPANY
                      Consolidated Statements of Cash Flows
                              (Millions of dollars)
                                   (continued)
                                                                               Years ended December 31
                                                                      ------------------------------------------
                                                                           2002          2001         2000
----------------------------------------------------------------------------------------------------------------
                                                                                            
  Supplemental disclosure of cash flow information:
  Cash payments during the year for:
  Interest                                                               $    104      $    132      $    144
  Income taxes                                                           $     94      $    382      $    310
  Non-cash investing and financing activities:
  Liabilities assumed in acquisitions of businesses                      $      -      $     92      $     95
  Liabilities disposed of in dispositions of businesses                  $      -      $    500      $    499
================================================================================================================

    (1)Net cash flows from  discontinued  operations in 2001 include proceeds of
       $1.27  billion  from  the sale of the  remaining  businesses  in  Dresser
       Equipment  Group and in 2000  proceeds of $913  million from the sales of
       Dresser-Rand in 2000 and Ingersoll-Dresser Pump in 1999. See Note 3.



    See notes to annual financial statements.



                                       55


                               HALLIBURTON COMPANY
                      Notes to Annual Financial Statements

Note 1. Significant Accounting Policies
         We employ  accounting  policies that are in accordance  with accounting
principles  generally accepted 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.
         Description  of  Company.   Halliburton   Company's   predecessor   was
established in 1919 and incorporated  under the laws of the State of Delaware in
1924. Halliburton Company provides a variety of services, products, maintenance,
engineering and construction to energy,  industrial and governmental  customers.
We operate in two business segments:
              -   Energy Services Group; and
              -   Engineering and Construction Group.
The Energy Services Group segment  provides  discrete  services and products and
integrated solutions ranging from the initial evaluation of producing formations
to drilling,  completion,  production  and well  maintenance.  In addition,  the
segment  is the  leading  supplier  of  integrated  exploration  and  production
software  information  systems  as  well as  professional  and  data  management
services for the upstream oil and gas industry. The Engineering and Construction
Group segment, operating as KBR, provides a wide range of services to energy and
industrial customers and government entities worldwide.
         Principles of  consolidation.  The  consolidated  financial  statements
include the accounts of our company and all of our  subsidiaries in which we own
greater than a 50% interest or control.  All material  intercompany accounts and
transactions  are  eliminated.  Investments in  companies in  which we own a 50%
interest or less and have a  significant  influence  are accounted for using the
equity  method  and if we do not  have  significant  influence  we use the  cost
method. Prior year amounts have been reclassified to conform to the current year
presentation.
         Revenue recognition.  We recognize revenues as services are rendered or
products are shipped.  Generally  the date of shipment  corresponds  to the date
upon which the  customer  takes  title to the  product  and assumes all risk and
rewards of  ownership.  The  distinction  between  services and product sales is
based upon the overall activity of the particular business  operation.  Training
and  consulting  service  revenues are recognized as the services are performed.
Sales of perpetual  software  licenses,  net of deferred  maintenance  fees, are
recorded as revenue  upon  shipment.  Sales of use licenses  are  recognized  as
revenue over the license period.  Post-contract  customer support agreements are
recorded  as  deferred  revenues  and  recognized  as revenue  ratably  over the
contract period of generally one year's duration.
         Engineering and construction  contracts.  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.  When
revenue and costs are recorded from engineering and construction  contracts,  we
comply with paragraph 81 of American  Institute of Certified Public  Accountants
Statement of Position 81-1, also known as SOP 81-1. Under this method,  revenues
are  recognized  as the sum of costs  incurred  during the period plus the gross
profit earned, measured using the percentage of completion method of accounting.
All known or  anticipated  losses on contracts are provided for when they become
evident in accordance  with  paragraph 85 of SOP 81-1.  Claims and change orders
which are in the process of being  negotiated with customers,  for extra work or
changes in the scope of work, are included in revenue when  collection is deemed
probable.  For more details of revenue  recognition,  including other aspects of
engineering and construction accounting,  including billings,  claims and change
orders and liquidated damages, see Note 8 and Note 12.
         Research and development. Research and development expenses are charged
to income as  incurred.  See Note 4 for  research  and  development  expense  by
business segment.

                                       56


         Software  development costs. Costs of developing  software for sale are
charged  to  expense  when  incurred,   as  research  and   development,   until
technological   feasibility  has  been   established   for  the  product.   Once
technological  feasibility  is  established,   software  development  costs  are
capitalized  until the software is ready for general  release to  customers.  We
capitalized  costs  related to software  developed  for resale of $11 million in
2002,  $19  million  in 2001 and $7  million  in 2000.  Amortization  expense of
software  development  costs was $19 million for 2002,  $16 million for 2001 and
$12 million for 2000.  Once the software is ready for release,  amortization  of
the software  development costs begins.  Capitalized  software development costs
are amortized over periods which do not exceed five years.
         Income  per  share.  Basic  income  per share is based on the  weighted
average number of common shares  outstanding during the year. Diluted income per
share  includes  additional  common shares that would have been  outstanding  if
potential common shares with a dilutive effect had been issued.  See Note 13 for
a reconciliation of basic and diluted income per share.
         Cash  equivalents.  We consider all highly liquid  investments  with an
original maturity of three months or less to be cash equivalents.
         Inventories.  Inventories  are  stated at the lower of cost or  market.
Cost represents  invoice or production cost for new items and original cost less
allowance for condition for used  material  returned to stock.  Production  cost
includes  material,   labor  and  manufacturing  overhead.  Some  United  States
manufacturing  and field service  finished  products and parts  inventories  for
drill  bits,  completion products  and bulk  materials  are  recorded  using the
last-in, first-out method. The cost of over 90% of the  remaining  inventory  is
recorded  on the  average  cost  method,  with  the  remainder on the  first-in,
first-out method. See Note 7.
         Property,  plant  and  equipment.  Property,  plant and  equipment  are
reported at cost less accumulated  depreciation,  which is generally provided on
the  straight-line  method over the estimated  useful lives of the assets.  Some
assets are depreciated on accelerated methods.  Accelerated depreciation methods
are also used for tax purposes,  wherever permitted.  Upon sale or retirement of
an asset,  the related costs and accumulated  depreciation  are removed from the
accounts  and any  gain or  loss  is  recognized.  When  events  or  changes  in
circumstances  indicate that assets may be impaired, an evaluation is performed.
The  estimated  future  undiscounted  cash flows  associated  with the asset are
compared to the asset's  carrying  amount to determine  if a write-down  to fair
value is required. We follow the successful efforts method of accounting for oil
and gas properties. See Note 9.
         Maintenance and repairs.  Expenditures  for maintenance and repairs are
expensed;  expenditures for renewals and improvements are generally capitalized.
We use the  accrue-in-advance  method of accounting  for major  maintenance  and
repair costs of marine vessel dry docking  expense and major aircraft  overhauls
and repairs.  Under this method we anticipate the need for major maintenance and
repairs and charge the estimated expense to operations before the actual work is
performed.  At the time the work is  performed,  the  actual  cost  incurred  is
charged against the amounts that were previously  accrued with any deficiency or
excess charged or credited to operating expense.
         Goodwill.  For acquisitions  occurring prior to July 1, 2001,  goodwill
was  amortized  on a  straight-line  basis over  periods not  exceeding 40 years
through  December 31,  2001.  Effective  July 1, 2001,  we adopted SFAS No. 141,
"Business  Combinations"  and SFAS  No.  142,  "Goodwill  and  Other  Intangible
Assets",  which  precludes  amortization  of  goodwill  related to  acquisitions
completed subsequent to June 30, 2001. Additionally,  SFAS No. 142 precludes the
amortization of existing  goodwill  related to  acquisitions  completed prior to
July 1, 2001 for periods  beginning  January 1, 2002. See Note 22 for discussion
of this  accounting  change.  SFAS No. 142 requires an entity to  segregate  its
operations  into  "reporting  units," which we have determined to be the same as
our reportable operating segments,  or the Energy Services Group and Engineering
and Construction Group.  Additionally,  all goodwill has been assigned to one of
these  reporting  units for purposes of determining  impairment of the goodwill.
Because  goodwill  and some  intangible  assets  are no  longer  amortized,  the
reported  amounts of goodwill and intangible  assets are reviewed for impairment
on an  annual  basis  and  more  frequently  when  negative  conditions  such as
significant  current or projected  operating losses exist. The annual impairment
test is a two-step  process and involves  comparing the estimated  fair value of
each reporting unit to the reporting unit's carrying value,  including goodwill.
If the fair value of a reporting unit exceeds its carrying  amount,  goodwill of
the  reporting  unit is not  considered  impaired,  and the  second  step of the
impairment  test is  unnecessary.  If the  carrying  amount of a reporting  unit
exceeds its fair value, the second step of the goodwill impairment test would be
performed to measure the amount of impairment loss to be recorded, if any.

                                       57


         Income taxes.  Deferred tax assets and  liabilities  are recognized for
the expected future tax  consequences of events that have been recognized in the
financial  statements  or tax  returns.  A valuation  allowance  is provided for
deferred  tax assets if it is more  likely than not that these items will either
expire before we are able to realize their benefit, or that future deductibility
is uncertain.
         Derivative instruments. We enter into derivative financial transactions
to hedge existing or projected  exposures to changing foreign currency  exchange
rates,  interest  rates and commodity  prices.  We do not enter into  derivative
transactions for speculative or trading purposes.  Effective January 1, 2001, we
adopted  SFAS  No.  133  "Accounting  for  Derivative  Instruments  and  Hedging
Activities."  SFAS No. 133 requires  that we recognize  all  derivatives  on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value and reflected  immediately through the results of operations.  If the
derivative is designated as a hedge under SFAS No. 133,  depending on the nature
of the  hedge,  changes  in the fair  value of  derivatives  are  either  offset
against:
              -   the change in fair value  of the hedged assets, liabilities or
                  firm commitments through earnings; or
              -   recognized in other comprehensive income until the hedged item
                  is recognized in earnings.
The  ineffective  portion of a derivative's  change in fair value is immediately
recognized in earnings.  Recognized gains or losses on derivatives  entered into
to manage  foreign  exchange  risk are  included in foreign  currency  gains and
losses on the consolidated statements of operations. Gains or losses on interest
rate  derivatives  are  included  in  interest  expense  and  gains or losses on
commodity  derivatives are included in operating income.  During the three years
ended December 31, 2002, we did not enter into any  significant  transactions to
hedge  commodity  prices.  See Note 11 for discussion of interest rate swaps and
Note 19 for further discussion of foreign currency exchange derivatives.
         Foreign  currency   translation.   Foreign  entities  whose  functional
currency is the United States dollar  translate  monetary assets and liabilities
at year-end exchange rates, and non-monetary  items are translated at historical
rates. Income and expense accounts are translated at the average rates in effect
during the year,  except for  depreciation,  cost of product sales and revenues,
and expenses  associated  with  non-monetary  balance sheet  accounts  which are
translated at historical  rates.  Gains or losses from changes in exchange rates
are  recognized  in  consolidated  income  in the  year of  occurrence.  Foreign
entities whose functional currency is the local currency translate net assets at
year-end  rates and income and  expense  accounts  at  average  exchange  rates.
Adjustments  resulting from these translations are reflected in the consolidated
statements of shareholders' equity under "Cumulative translation adjustment".
         Loss  contingencies.  We accrue for loss  contingencies  based upon our
best estimates in accordance with SFAS No. 5,  "Accounting  for  Contingencies".
See Note 12 for discussion of our significant loss contingencies.
         Stock-Based Compensation. At December 31, 2002, we have six stock-based
employee  compensation  plans,  which are  described  more  fully in Note 17. We
account for those plans under the recognition and measurement  principles of APB
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.
         The fair value of options at the date of grant was estimated  using the
Black-Scholes  option  pricing  model.  The  weighted  average  assumptions  and
resulting fair values of options granted are as follows:


                                       Assumptions                                 Weighted Average
           ---------------------------------------------------------------------
              Risk-Free         Expected           Expected         Expected        Fair Value of
            Interest Rate    Dividend Yield    Life (in years)     Volatility      Options Granted
------------------------------------------------------------------------------------------------------
                                                                    
2002             2.9%             2.7%                5                63%              $  6.89
2001             4.5%             2.3%                5                58%              $ 19.11
2000             5.2%             1.3%                5                54%              $ 21.57
======================================================================================================

           The following table illustrates the effect on net income and earnings
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.

                                       58



                                                      Years ended December 31
                                               ----------------------------------------
   Millions of dollars except per share data       2002        2001          2000
---------------------------------------------------------------------------------------
                                                                  
   Net income (loss), as reported                 $ (998)     $  809       $   501
   Total stock-based employee compensation
    expense determined under fair value
    based method for all awards, net of
    related tax effects                              (26)        (42)          (41)
---------------------------------------------------------------------------------------
   Net income (loss), pro forma                   $(1,024)    $  767       $   460
=======================================================================================

   Basic earnings (loss) per share:
   As reported                                    $ (2.31)    $  1.89      $   1.13
   Pro forma                                      $ (2.37)    $  1.79      $   1.04
   Diluted earnings (loss) per share:
   As reported                                    $ (2.31)    $  1.88      $   1.12
   Pro forma                                      $ (2.37)    $  1.77      $   1.03
=======================================================================================

Note 2.  Acquisitions and Dispositions
         Magic  Earth  acquisition.   We  acquired  Magic  Earth,  Inc.,  a  3-D
visualization and  interpretation  technology company with broad applications in
the area of data  interpretation in November 2001 for common shares with a value
of $100 million.  At the consummation of the transaction,  we issued 4.2 million
shares, valued at $23.93 per share, to complete the purchase. Magic Earth became
a  wholly-owned  subsidiary  and is reported  within our Energy  Services  Group
segment.  We recorded goodwill of $71 million, all of which is nondeductible for
tax  purposes.  In addition, we recorded intangible assets of $19 million, which
are being amortized based on a five-year life.
         PES acquisition. In February 2000, we acquired the remaining 74% of the
shares of PES (International) Limited that we did not already own for a value of
$126.7 million. This was based on 3.3 million shares of Halliburton common stock
valued at $37.75 per share  which was the  closing  stock  price on January  12,
2000.  PES is based in Aberdeen,  Scotland,  and has developed  technology  that
complements  Halliburton  Energy  Services'  real time reservoir  solutions.  To
acquire the  remaining 74% of PES, we issued 1.2 million  shares of  Halliburton
common stock in February  2002,  and we also issued  rights that resulted in the
issuance of 2.1 million  additional  shares of Halliburton  common stock between
February 2001 and February  2002. We issued 1 million  shares in February  2001;
400,000 shares in June 2001;  and the remaining  700,000 shares in February 2002
under these rights. These shares were included in the cost of the acquisition as
a contingent  liability.  We recorded $115 million of goodwill,  all of which is
non-deductible for tax purposes.
         During the second quarter of 2001, we contributed  the majority of PES'
assets and technologies,  including $130 million of goodwill associated with the
purchase of PES, to a newly formed joint venture with Shell Technology  Ventures
BV,  WellDynamics.  We received  $39  million in cash as an equity  equalization
adjustment,  which we  recorded as a reduction  in our  investment  in the joint
venture.  We own 50% of WellDynamics  and account for this investment  using the
equity  method.  The formation of  WellDynamics  resulted in a difference of $90
million  between the  carrying  amount of our  investment  and our equity in the
underlying net assets of the joint venture,  which has been recorded as goodwill
under "Equity in and advances to related companies".  The  remaining  assets and
goodwill of PES relating to completions and well intervention products have been
combined with our existing completion products product service line.
         PGS Data  Management  acquisition.  In March 2001,  we acquired the PGS
Data Management division of Petroleum Geo-Services ASA (PGS) for $164 million in
cash. The acquisition  agreement also calls for Landmark to provide,  for a fee,
strategic data management and distribution  services to PGS for three years from
the date of  acquisition.  We  recorded  intangible  assets of $14  million  and
goodwill of $149 million in our Energy  Services  Group  segment,  $9 million of
which is  non-deductible  for tax  purposes.  The  intangible  assets  are being
amortized based on a three-year life.

                                       59


         European Marine Contractors Ltd. disposition.  In January 2002, we sold
our 50% interest in European Marine  Contractors Ltd., an  unconsolidated  joint
venture reported within our Energy Services Group, 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 operating income 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
receiving 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.  The total  transaction  resulted in an  after-tax  gain of $68
million, or $0.16 per diluted share.
         Subsea 7 formation.  In May 2002, we contributed  substantially  all of
our  Halliburton  Subsea  assets to a newly  formed  company,  Subsea 7, Inc. We
contributed  assets  with  a  book  value  of  approximately  $82  million.  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 and account for this  investment  using the
equity method. The remaining 50% is owned by DSND Subsea ASA.
         Bredero-Shaw  disposition.  On  September  30,  2002  we  sold  our 50%
interest in the  Bredero-Shaw  joint  venture to our partner  ShawCor  Ltd.  The
purchase price of $149 million is comprised of $53 million in cash, a short-term
note for $25 million and 7.7 million of ShawCor Class A Subordinate  shares.  In
addition  to our second  quarter  impairment  charge of $61  million  ($0.14 per
diluted  share  after-tax)  related  to the  pending  sale of  Bredero-Shaw,  we
recorded  a third  quarter  pretax  loss on sale of $18  million,  or $0.04  per
diluted share.  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 $9.1
million loss on the sale of ShawCor shares, or $0.02 per diluted share.
         Dresser Equipment Group disposition.  In April 2001, we disposed of the
remaining businesses in the Dresser Equipment Group. See Note 3.

Note 3.  Discontinued Operations
         For the twelve  months  ended  December  31,  2002,  we recorded a $806
million  pretax charge in  discontinued  operations.  The $806 million charge is
primarily comprised of the following:
              -   a $567  million  charge  during  the fourth  quarter  due to a
                  revision  of our best  estimate  of our  asbestos  and  silica
                  liability   based  upon   knowledge   gained   throughout  the
                  development  of the  agreement in  principle  for our proposed
                  global  settlement.  The charge  consisted  of $1,047  million
                  related to the  asbestos and silica  claims  gross  liability,
                  which  was  offset  by $480  million  in  anticipated  related
                  insurance recoveries;
              -   a $153 million  charge during the second quarter in connection
                  with our  econometric  study.  The charge  consisted of $1,176
                  million  related to the gross  liability  on our  asbestos and
                  silica   claims,   which  was  offset  by  $1,023  million  in
                  anticipated insurance recoveries;
              -   a $40 million payment associated with the Harbison-Walker
                  bankruptcy filing recorded in the first quarter; and
              -   $46 million in  costs primarily related to  the negotiation of
                  the agreement in principle.
         During the second and third quarters of 2001, we recorded a $95 million
pretax expense to discontinued  operations.  This amount was comprised of a $632
million  charge  related  to the gross  liability  on  Harbison-Walker  asbestos
claims,  which was  offset by $537  million  in  anticipated  related  insurance
recoveries. See Note 12.
         In late 1999 and early 2000 we sold our interest in two joint  ventures
that were a  significant  portion of our Dresser  Equipment  Group.  These sales
prompted a  strategic  review of the  remaining  businesses  within the  Dresser
Equipment Group. As a result of this review,  we determined that these remaining
businesses  did not closely fit with our core  businesses,  long-term  goals and
strategic  objectives.  In April 2000, our Board of Directors  approved plans to
sell all the remaining  businesses  within the Dresser  Equipment Group. We sold
these  businesses  on April 10,  2001 and we  recognized  a pretax  gain of $498
million  ($299  million  after-tax)  during  the  second  quarter  of 2001.  The
financial  results of the Dresser  Equipment  Group  through  March 31, 2001 are
presented as discontinued operations in our financial statements. As part of the
terms of  the transaction, we retained  a 5.1% equity interest of Class A common

                                       60


stock in the Dresser  Equipment Group,  which has been renamed Dresser,  Inc. In
July 2002, Dresser,  Inc. announced a reorganization,  and we have exchanged our
shares for shares of Dresser Ltd. Our equity interest is accounted for under the
cost method.


  Income (loss) from Operations          Years ended December 31
  of Discontinued Businesses     -----------------------------------------
  Millions of dollars                2002        2001          2000
--------------------------------------------------------------------------
                                                    
  Revenues                          $    -      $  359       $ 1,400
==========================================================================
  Operating income                  $    -      $   37       $   158
  Asbestos litigation claims,
    net of insurance recoveries       (806)        (99)            -
  Tax benefit (expense)                154          20           (60)
--------------------------------------------------------------------------
  Net income (loss)                 $ (652)     $  (42)      $    98
==========================================================================

         Gain on disposal of  discontinued  operations  reflects the gain on the
sale of the  remaining  businesses  within the  Dresser  Equipment  Group in the
second  quarter  of 2001 and the gain on the sale of  Dresser-Rand  in  February
2000.


  Gain on Disposal of Discontinued Operations
  Millions of dollars                                  2001         2000
------------------------------------------------------------------------------
                                                              
  Proceeds from sale, less intercompany settlement    $  1,267      $   536
  Net assets disposed                                     (769)        (180)
------------------------------------------------------------------------------
  Gain before taxes                                        498          356
  Income taxes                                            (199)        (141)
------------------------------------------------------------------------------
  Gain on disposal of discontinued operations         $    299      $   215
==============================================================================

Note 4.  Business Segment Information
         We operate in two business segments - the Energy Services Group and the
Engineering and Construction Group. Dresser Equipment Group is presented as part
of  discontinued  operations  through  March 31, 2001 as a result of the sale in
April 2001 of the remaining  businesses within Dresser Equipment Group. See Note
3. Our segments are organized  around the products and services  provided to our
customers.
         During the first quarter of 2002, we announced plans to restructure our
businesses into two operating  subsidiary groups. One group is focused on energy
services and the other is focused on engineering  and  construction.  As part of
this  restructuring,  many support  functions that were  previously  shared were
moved into the two business groups. We also decided that the operations of Major
Projects,  Granherne and  Production  Services  better  aligned with our Kellogg
Brown & Root  subsidiary,  or KBR, in the current  business  environment.  These
businesses  were moved for  management  and  reporting  purposes from the Energy
Services Group segment to the Engineering and Construction  Group segment during
the  second  quarter  of  2002.   Major   Projects,   which   consisted  of  the
Barracuda-Caratinga  project in Brazil,  is now  reported  through the  Offshore
Operations product line,  Granherne is now reported in the Onshore product line,
and Production  Services is now reported  under the  Operations and  Maintenance
product line.
         In  addition,  during  the  fourth  quarter of 2000,  we  combined  all
engineering,  construction,  fabrication and project management  operations into
one  segment,   reporting  as  our  Engineering  and  Construction  Group.  This
restructuring  resulted in some activities moving from the Energy Services Group
to the Engineering and Construction Group, effective January 1, 2001.
         All prior  period segment results  have been restated  to reflect these
changes.
         Energy Services Group.  The Energy Services Group provides a wide range
of discrete services and products and integrated  solutions to customers for the
exploration,  development, and production of oil and gas. The customers for this
segment are major, national and independent oil and gas companies.  This segment
consists of:

                                       61


              -   Halliburton  Energy Services  provides  oilfield  services and
                  products   including   discrete   products  and  services  and
                  integrated  solutions  ranging from the initial  evaluation of
                  producing  formations to drilling, completion,  production and
                  well  maintenance.  Products  and  services  include  pressure
                  pumping  equipment  and  services,  logging  and  perforating,
                  drilling systems and services,  drilling fluids systems, drill
                  bits,  specialized  completion  and  production  equipment and
                  services, well control and integrated solutions;
              -   Landmark   Graphics   provides   integrated   exploration  and
                  production  software  information  systems,   data  management
                  services,  and professional  services for the upstream oil and
                  gas industry; and
              -   Other product service lines provide installation and servicing
                  of subsea  facilities and pipelines.  In January 2002, we sold
                  to Saipem,  our joint  venture  partner,  our 50%  interest in
                  European  Marine   Contractors  Ltd.,  a  joint  venture  that
                  provided  pipeline  services  for offshore  customers.  In May
                  2002,  we  contributed  substantially  all of our  Halliburton
                  Subsea assets to a newly formed company, Subsea 7, Inc. We own
                  50% of Subsea 7, Inc.  and DSND Subsea ASA owns the other 50%.
                  In September 2002, we sold our 50% interest in Bredero-Shaw, a
                  pipecoating  joint  venture,  to our partner  ShawCor Ltd. See
                  Note 2.
         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,  operating as
KBR, offers the following five product lines:
              -   Onshore  operations  consist of engineering  and  construction
                  activities,   including   engineering   and   construction  of
                  liquefied  natural gas,  ammonia and crude oil  refineries and
                  natural gas plants;
              -   Offshore   operations  include  specialty  offshore  deepwater
                  engineering  and marine  technology and worldwide  fabrication
                  capabilities;
              -   Government   operations  provide   operations,   construction,
                  maintenance and logistics activities for government facilities
                  and installations;
              -   Operations and maintenance  services include plant operations,
                  maintenance,  and  start-up  services  for both  upstream  and
                  downstream  oil, gas and  petrochemical  facilities as well as
                  operations,  maintenance and logistics services for the power,
                  commercial and industrial markets; and
              -  Infrastructure  provides  civil  engineering,   consulting  and
                 project management services.
         General corporate.  General corporate represents assets not included in
a business  segment  and is  primarily  composed  of cash and cash  equivalents,
deferred tax assets and insurance for asbestos and silica litigation claims.
         Intersegment revenues included in the revenues of the business segments
and  revenues  between  geographic  areas are  immaterial.  Our equity in pretax
earnings and losses of  unconsolidated  affiliates that are accounted for on the
equity  method is included in revenues and  operating  income of the  applicable
segment.
         The tables  below  present  information  on our  continuing  operations
business segments.


   Operations by Business Segment
                                                         Years ended December 31
                                                 ------------------------------------------
   Millions of dollars                               2002          2001          2000
-------------------------------------------------------------------------------------------
                                                                       
   Revenues:
   Energy Services Group                           $   6,836    $   7,811       $   6,233
   Engineering and Construction Group                  5,736        5,235           5,711
-------------------------------------------------------------------------------------------
   Total                                           $  12,572    $  13,046       $  11,944
===========================================================================================
   Operating income (loss):
   Energy Services Group                           $     638    $   1,036       $     589
   Engineering and Construction Group                   (685)         111             (54)
   General corporate                                     (65)         (63)            (73)
-------------------------------------------------------------------------------------------
   Total                                           $    (112)   $   1,084       $     462
===========================================================================================


                                       62



   Operations by Business Segment (continued)
                                                         Years ended December 31
                                                 ------------------------------------------
   Millions of dollars                               2002          2001          2000
-------------------------------------------------------------------------------------------
                                                                       
   Capital expenditures:
   Energy Services Group                           $     603    $     743       $     533
   Engineering and Construction Group                    161           54              44
   General corporate                                       -            -               1
-------------------------------------------------------------------------------------------
   Total                                           $     764    $     797       $     578
===========================================================================================
   Depreciation, depletion and amortization:
   Energy Services Group                           $     475    $     474       $     435
   Engineering and Construction Group                     29           56              65
   General corporate                                       1            1               3
-------------------------------------------------------------------------------------------
   Total                                           $     505    $     531       $     503
===========================================================================================
    Total assets:
    Energy Services Group                          $   5,944    $   6,564        $  5,964
    Engineering and Construction Group                 3,104        3,187           2,885
    Net assets of discontinued operations                  -            -             690
    General corporate                                  3,796        1,215             653
--------------------------------------------------------------------------------------------
    Total                                          $  12,844    $  10,966        $ 10,192
============================================================================================
    Research and development:
    Energy Services Group                          $     228    $     226        $    224
    Engineering and Construction Group                     5            7               7
--------------------------------------------------------------------------------------------
    Total                                          $     233    $     233        $    231
============================================================================================




   Operations by Geographic Area
                                                          Years ended December 31
                                                  ------------------------------------------
   Millions of dollars                                2002          2001          2000
--------------------------------------------------------------------------------------------
                                                                       
   Revenues:
   United States                                    $   4,139    $   4,911      $   4,073
   United Kingdom                                       1,521        1,800          1,512
   Other areas (numerous countries)                     6,912        6,335          6,359
--------------------------------------------------------------------------------------------
   Total                                            $  12,572    $  13,046      $  11,944
============================================================================================
   Long-lived assets:
   United States                                    $   4,617    $   3,030      $   2,068
   United Kingdom                                         691          617            525
   Other areas (numerous countries)                       711          744            776
--------------------------------------------------------------------------------------------
   Total                                            $   6,019    $   4,391      $   3,369
============================================================================================

Note 5.  Restricted Cash
         At December 31, 2002, we had restricted  cash of $190 million  included
in "Other assets". Restricted cash consists of:
              -   $107 million  deposit that collateralizes  a bond for a patent
                  infringement judgment on appeal;
              -   $57 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 construction
                  projects.
              At December  31,  2001,  we had $3 million in  restricted  cash in
"Other assets".

                                       63


Note 6.  Receivables
         Our receivables are generally not collateralized. Included in notes and
accounts  receivable are notes with varying  interest rates totaling $53 million
at December 31, 2002 and $19 million at December 31, 2001.
         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,  and  the  assets  of  the  funding
subsidiary  are not  available  to pay any  creditors of  Halliburton  or of its
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  sold a $200
million undivided ownership interest to the unaffiliated companies, and may from
time to time  sell  additional  undivided  ownership  interests.  No  additional
amounts were received  from our accounts  receivable  facility  since the second
quarter of 2002.  The total  amount  outstanding  under this  facility  was $180
million as of December 31, 2002. We continue to service,  administer and collect
the  receivables on behalf of the purchaser.  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  and as an  increase  in  cash  flows  from  operating  activities  in our
consolidated statement of cash flows.

Note 7.  Inventories
         Inventories  are  stated at the lower of cost or  market.  Some  United
States  manufacturing  and field service finished products and parts inventories
for drill bits,  completion  products and bulk  materials are recorded using the
last-in,  first-out  method,  totaling  $43 million at December 31, 2002 and $54
million at December  31, 2001.  If the average cost method had been used,  total
inventories  would have been $17 million  higher than  reported at December  31,
2002 and $20 million higher than reported at December 31, 2001.
         Over 90% of remaining inventory is recorded on the average cost method,
with the remainder on the first-in, first-out method.
         Inventories  at December 31, 2002 and December 31, 2001 are composed of
the following:


                                         December 31     December 31
   Millions of dollars                      2002            2001
-----------------------------------------------------------------------
                                                    
   Finished products and parts           $    545         $    520
   Raw materials and supplies                 141              192
   Work in process                             48               75
-----------------------------------------------------------------------
   Total                                 $    734         $    787
=======================================================================

Note 8.  Unapproved Claims and Long-Term Construction Contracts
         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 "Advance
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.

                                       64


         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.  Profits are
recorded  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 equal to the costs incurred related
to probable  unapproved claims.  Therefore,  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:


                                                  Years ended December 31
                                              --------------------------------
Millions of dollars                                2002             2001
------------------------------------------------------------------------------
                                                              
Probable unapproved claims (included
    in determining contract profit or loss)       $   279          $   137
Unapproved claims in unbilled work on
    uncompleted contracts                         $   210          $   102
==============================================================================

         The claims at December 31, 2002 listed in the above table relate to ten
contracts, most of which are complete or substantially complete. We are actively
engaged in claims negotiation with the customer in all but one case, and in that
case we have initiated the arbitration process. The probable unapproved claim in
arbitration is $2 million. The largest claim relates to the  Barracuda-Caratinga
contract which was  approximately  63% complete at the end of 2002. The probable
unapproved claims included in determining this contract's loss were $182 million
at December 31, 2002 and $43 million at December 31, 2001. As the claim for this
contract  most likely will not be settled  within one year,  amounts in unbilled
work on  uncompleted  contracts  of $115  million at  December  31, 2002 and $10
million at December 31, 2001  included in the table above have been  recorded to
long-term  unbilled  work on  uncompleted  contracts which is included in "Other
assets" 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 years ended  December
31, 2002 and 2001 is as follows:


                                        Total Probable Unapproved        Probable Unapproved Claims
                                                 Claims                        Accrued Revenue
                                     -------------------------------------------------------------------
Millions of dollars                       2002             2001             2002             2001
--------------------------------------------------------------------------------------------------------
                                                                                
Beginning balance                       $    137          $   93          $   102           $   92
    Additions                                158              92              105               58
    Costs incurred during period               -               -               19                -
    Approved claims                           (4)            (15)              (4)             (15)
    Write-offs                                (7)            (33)              (7)             (33)
    Other   *                                 (5)              -               (5)               -
--------------------------------------------------------------------------------------------------------
Ending balance                          $    279          $  137          $   210           $  102
========================================================================================================

        * Other primarily  relates to claims in which the customer has agreed to
          a change order relating to the scope of work.




                                       65


         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.
Amounts for unapproved claims from our related companies are included in "Equity
in and  advances to related  companies" and totaled  $9 million  at December 31,
2002 and $0.3 million at December 31, 2001.

Note 9.  Property, Plant and Equipment
         Property,  plant  and  equipment  at  December  31,  2002  and 2001 are
composed of the following:


   Millions of dollars                       2002          2001
---------------------------------------------------------------------
                                                   
   Land                                    $     86      $     82
   Buildings and property improvements        1,024           942
   Machinery, equipment and other             4,842         4,926
---------------------------------------------------------------------
   Total                                      5,952         5,950
   Less accumulated depreciation              3,323         3,281
---------------------------------------------------------------------
   Net property, plant and equipment       $  2,629      $  2,669
=====================================================================

         Buildings and property  improvements  are depreciated  over 5-40 years;
machinery, equipment and other are depreciated over 3-25 years.
         Machinery,  equipment  and other  includes oil and gas  investments  of
$356 million at December 31, 2002 and $423 million at December 31, 2001.

Note 10.  Related Companies
         We conduct some of our operations  through various joint ventures which
are in  partnership,  corporate and other business  forms,  and are  principally
accounted  for using the equity  method.  Financial  information  pertaining  to
related  companies  for  our  continuing  operations  is  set  out  below.  This
information includes the total related company balances and not our proportional
interest in those balances.
         Our larger unconsolidated  entities include Subsea 7, Inc., a 50% owned
subsidiary,  formed in May of 2002 and the partnerships created to construct the
Alice  Springs to Darwin rail line in  Australia.  During 2002,  we sold our 50%
interest in European Marine Contractors and Bredero-Shaw. See Note 2.
         Combined  summarized  financial   information  for  all  jointly  owned
operations that are not consolidated is as follows:


                                          Years ended December 31
  Combined Operating Results      ---------------------------------------
  Millions of dollars                 2002         2001         2000
-------------------------------------------------------------------------
                                                      
  Revenues                           $  1,948     $  1,987     $  3,098
=========================================================================
  Operating income                   $    200     $    231     $    192
=========================================================================
  Net income                         $    159     $    169     $    169
=========================================================================




                                          December 31
   Combined Financial Position    -----------------------------
   Millions of dollars                 2002          2001
---------------------------------------------------------------
                                             
   Current assets                    $  1,404      $  1,818
   Noncurrent assets                    1,876         1,672
---------------------------------------------------------------
   Total                             $  3,280      $  3,490
===============================================================
   Current liabilities               $  1,155      $  1,522
   Noncurrent liabilities               1,367         1,272
   Minority interests                       -             2
   Shareholders' equity                   758           694
---------------------------------------------------------------
   Total                             $  3,280      $  3,490
===============================================================


                                       66


Note 11.  Lines of Credit, Notes Payable and Long-Term Debt
         At December 31, 2002,  we had committed  lines of credit  totaling $350
million which expire in August 2006. There were no borrowings  outstanding under
these lines of credit.  These lines are not  available  if our senior  unsecured
long-term  debt is rated  lower than BBB- by Standard & Poor's  Ratings  Service
Group or lower  than Baa3 by Moody's  Investors'  Services.  Fees for  committed
lines of credit were immaterial.
         Short-term debt at December 31, 2002 consists  primarily of $37 million
in overdraft  facilities and $12 million of other  facilities with varying rates
of interest.
         Long-term debt at the end of 2002 and 2001 consists of the following:


  Millions of dollars                                       2002          2001
------------------------------------------------------------------------------------
                                                                   
  7.6% debentures due August 2096                          $   300       $   300
  8.75% debentures due February 2021                           200           200
  8% senior notes due April 2003                               139           139
  Variable interest credit facility maturing
     September 2009                                             66             -
  Medium-term notes due 2002 through 2027                      750           825
  Effect of interest rate swaps                                 13             3
  Term loans at LIBOR (GBP) plus 0.75% payable in
    semiannual installments through March 2002                   -             4
  Other notes with varying interest rates                        8            13
------------------------------------------------------------------------------------
  Total long-term debt                                       1,476         1,484
  Less current portion                                         295            81
------------------------------------------------------------------------------------
  Noncurrent portion of long-term debt                     $ 1,181       $ 1,403
====================================================================================

         The 7.6% debentures due 2096,  8.75% debentures due 2021, and 8% senior
notes due 2003 may not be  redeemed  prior to maturity  and do not have  sinking
fund requirements.
         In  the  fourth  quarter  of  2002,  our  51%  owned  and  consolidated
subsidiary, Devonport Management Limited (DML), signed an agreement for a credit
facility of (pound)80 million ($126 million as of December 31, 2002) maturing in
September 2009. This credit facility has a variable interest rate that was equal
to 5.375% on December 31, 2002. There are various financial covenants which must
be maintained by DML. DML has drawn down an initial  amount of $66 million as of
December 31, 2002. Under this agreement,  payments of approximately $4.5 million
are due in quarterly installments. As of December 31, 2002, the available credit
under this facility was approximately $60 million.
         On July 12,  2001,  we issued $425 million of two and  five-year  notes
under our medium-term  note program.  The notes consist of $275 million 6% fixed
rate notes due August 2006 and $150 million  LIBOR + 0.15%  floating  rate notes
due July 2003.  At  December  31,  2002,  we have  outstanding  notes  under our
medium-term note program as follows:


      Amount              Due             Rate      Issue Price
-----------------------------------------------------------------
                                           
  $ 150 million         07/2003        Floating%        Par
  $ 275 million         08/2006          6.00%         99.57%
  $ 150 million         12/2008          5.63%         99.97%
  $  50 million         05/2017          7.53%          Par
  $ 125 million         02/2027          6.75%         99.78%
=================================================================

         Each holder of the 6.75%  medium-term notes has the right to require us
to repay the  holder's  notes in whole or in part on  February  1, 2007.  We may
redeem  the 5.63% and 6.00%  medium-term  notes in whole or in part at any time.
Other notes issued under the medium-term  note program may not be redeemed prior
to maturity. The medium-term notes do not have sinking fund requirements.

                                       67


         In the second  quarter of 2002,  we  terminated  our interest rate swap
agreement on our 8% senior note.  The notional  amount of the swap agreement was
$139 million. This interest rate swap was designated as a fair value hedge under
SFAS No. 133.  Upon  termination,  the fair value of the interest  rate swap was
$0.5 million.  In the fourth  quarter 2002, we terminated the interest rate swap
agreement on our 6% fixed rate medium-term note. The notional amount of the swap
agreement  was $150 million.  This  interest rate swap was  designated as a fair
value hedge under SFAS No. 133. Upon termination, the fair value of the interest
rate swap was $13 million.  These swaps had previously been classified in "Other
assets"  on  the  balance  sheet.  The  fair  value  adjustment  to  these  debt
instruments  that were  hedged will remain and be  amortized  as a reduction  in
interest  expense using the "Effective  Yield Method" over the remaining life of
the notes.
         Our debt  excluding  the effects of our interest  rate swaps matures as
follows:  $295 million in 2003; $21 million in 2004;  $20 million in 2005;  $293
million in 2006; $8 million in 2007; and $826 million thereafter.

Note 12. Commitments and Contingencies
         Leases.  At  year-end  2002,  we  were  obligated  under  noncancelable
operating leases,  principally for the use of land,  offices,  equipment,  field
facilities  and  warehouses.   Total  rentals,  net  of  sublease  rentals,  for
noncancelable leases in 2002, 2001 and 2000 were as follows:


   Millions of dollars       2002          2001          2000
   ------------------------------------------------------------------
                                               
   Rental expense           $   149       $   172       $   149
   ==================================================================

         Future total rentals on noncancelable  operating leases are as follows:
$119 million in 2003;  $83 million in 2004;  $63 million in 2005; $55 million in
2006; $40 million in 2007; and $249 million thereafter.
         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  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.
         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

                                       68


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  December  31,  2002,  there  were  approximately  6,000 open and
unresolved pre-spin-off  refractory claims against DII Industries.  In addition,
there were  approximately  142,000 post spin-off claims that name DII Industries
as a defendant.
         Other DII  Industries  claims.  As of  December  31,  2002,  there were
approximately 147,000 open and unresolved claims alleging injuries from asbestos
used in other products  formerly  manufactured by DII Industries.  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
December 31, 2002, there were  approximately  52,000 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  2,200 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 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.  On  February  14,  2002,  in  accordance  with  the  terms of a letter
agreement,  DII  Industries  also 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 requires 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.
         By  contrast,   the  proposed  global   settlement   being  pursued  by
Halliburton contemplates that DII Industries  and Harbison-Walker,  among others
including  Halliburton,  would receive in a DII Industries and Kellogg,  Brown &
Root bankruptcy the benefits of an injunction channeling to a Section 524(g)/105
trust all present and future  asbestos  claims,  including  with  respect to DII
Industries,  Kellogg, Brown & Root and Halliburton, claims that do not relate to
the Harbison-Walker business or share insurance with Harbison-Walker.
         Harbison-Walker has not yet submitted a proposed plan of reorganization
to the Bankruptcy Court.  Moreover,  although  possible,  at this time we do not
believe it likely that Harbison-Walker will propose or ultimately there would be
confirmed  a  plan  of  reorganization  in its  bankruptcy  proceeding  that  is
acceptable to  DII Industries.  In general, in  order for a Harbison-Walker plan
of reorganization  involving a Section  524(g)/105 trust to be confirmed,  among
other things the creation of the trust would  require the approval of 75% of the
asbestos claimant creditors of  Harbison-Walker.  There can be no assurance that

                                       69


any plan proposed by Harbison-Walker would obtain the necessary approval or that
it would provide for 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 that share insurance with Harbison-Walker.
         In addition, we anticipate that a significant financial contribution to
the  Harbison-Walker  estate  could be required  from DII  Industries  to obtain
confirmation of a  Harbison-Walker  plan of  reorganization if that plan were to
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 that  have  claims  to shared  insurance  with the  Harbison-Walker
business.  This  contribution  to  the  estate  would  be  in  addition  to  DII
Industries'  contribution  of its interest to insurance  coverage for refractory
claims  to the  Section  524(g)/105  trust.  At this  time,  we are not  able to
quantify  the amount of this  contribution  in light of numerous  uncertainties.
These  include the amount of  Harbison-Walker  assets  available  to satisfy its
asbestos  and trade  creditors  and the  results  of  negotiations  that must be
completed among Harbison-Walker, the asbestos claims committee under its Chapter
11 proceeding,  a legal  representative for future asbestos claimants (which has
not yet been appointed by the Bankruptcy Court), DII Industries and the relevant
insurance companies.
         Whether or not  Halliburton  has  completed,  is still  pursuing or has
abandoned its previously  announced global  settlement,  DII Industries would be
under  no  obligation  to  make  a  significant  financial  contribution  to the
Harbison-Walker  estate,  although  Halliburton  intends to consider  all of its
options if in the future it ceased pursuing the global settlement.
         For the  reasons  outlined  above  among  others,  we do not believe it
probable that DII Industries  will be obligated to make either of the additional
$35 million and $85 million payments to RHI Refractories described above. During
February 2003, representatives of RHI A.G., the ultimate corporate parent of RHI
Refractories, met with representatives of DII Industries and indicated that they
believed that DII Industries  would be obligated to pay RHI Refractories the $35
million  and the $85  million in the event  that our  proposed global settlement
were to be consummated. For a number of reasons, DII  Industries  believes  that
the global  settlement would not be the cause of a failure of a  Harbison-Walker
plan to be acceptable to DII Industries and intends vigorously to defend against
this claim if formally asserted.
         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 to  July 21,2003.  Currently,  there  is no assurance  that a stay will
remain in  effect beyond July  21, 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.
         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  142,000 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.

                                       70


         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.  Recently,  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 are scheduled to
take place,  provided the Bankruptcy  Court's mediation order remains 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 independently of the 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.

                                       71


         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  courts 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 second  amended  complaint in that
lawsuit and the parties are now beginning the discovery process.  The parties to
this litigation,  including Federal-Mogul,  have agreed to mediate this dispute.
The  first  mediation  session  is  scheduled  for  April 2,  2003.  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
will proceed 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 noted in our 2001 Form  10-K,  the  amount of the  billed  insurance
receivable   related  to  Highlands   Insurance  Company  included  in  accounts
receivable was $35 million.
         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



                                       72


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. Until this lawsuit is resolved, the scope of the excess insurance
will remain  uncertain.  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
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 have fully  accrued at December 31,  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 have
fully accrued at December 31, 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  578,000  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.
During the fourth quarter of 2002, we received  approximately  32,000 new claims
and we closed  approximately  13,000  claims.  The number of open claims pending
against us is as follows:

                                       73




                                      Total Open
          Period Ending                 Claims
---------------------------------------------------
                                   
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
September 30, 2001                      146,000
June 30, 2001                           145,000
March 31, 2001                          129,000
December 31, 2000                       117,000
===================================================

         The claims  include  approximately  142,000 at  December  31,  2002 and
September  30,  2002,  139,000 at June 30,  2002,  133,000 at March 31, 2002 and
125,000 at December 31, 2001 of 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.
         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 231,000 claims through
settlements and court proceedings at a total cost of approximately $202 million.
We have  received or expect to receive from our  insurers all but  approximately
$93 million of this cost,  resulting  in an average net cost per closed claim of
about $403.
         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-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
                  settlements  and defense costs to develop  average  settlement
                  values and average defense costs for specific asbestos-related
                  diseases  and for the  specific  business  operation or entity
                  allegedly responsible for the asbestos-related diseases;
              -   an analysis  of DII  Industries,  Kellogg,  Brown & Root's and
                  Harbison-Walker  Refractories  Company's  pending inventory of
                  asbestos-related claims by specific  asbestos-related diseases
                  and by the specific  business  operation  or entity  allegedly
                  responsible for the asbestos-related disease;
              -   an analysis of the claims filing history for  asbestos-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 asbestos-related disease and by business operation
                  or  entity  allegedly  responsible  for  the  asbestos-related
                  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

                                       74


              -   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
                  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 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
                  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 are 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 Global Settlement.  In December 2002,  we
announced  that we had reached an agreement in principle  that could result in a
global  settlement of all personal injury asbestos and silica claims against us.
The proposed settlement provides that up to $2.775 billion in cash, 59.5 million
shares of our common stock (with a value of $1.1  billion  using the stock price
at December 31, 2002 of $18.71) and notes with a net present  value  expected to
be less than $100  million  would be paid to a trust for the  benefit of current
and future asbestos personal injury claimants and current silica personal injury
claimants.  Under  the  proposed  agreement,  Kellogg,  Brown  &  Root  and  DII
Industries  will  retain the 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 proposed settlement will be implemented through a pre-packaged
Chapter 11 filing of DII  Industries  and Kellogg,  Brown & Root as well as some
other  DII  Industries  and  Kellogg,   Brown  &  Root  subsidiaries  with  U.S.
operations.  The funding of the  settlement  amounts would occur upon  receiving
final and  non-appealable  court confirmation of a plan of reorganization of DII
Industries and Kellogg,  Brown & Root and their  subsidiaries  in the Chapter 11
proceeding.

                                       75


         Subsequently,  as of March 2003, DII  Industries  and Kellogg,  Brown &
Root have entered into definitive written agreements finalizing the terms of the
agreement in principle.  The proposed  global  settlement  also includes  silica
claims as a result of current or past  exposure.  These  silica  claims are less
than  1%  of  the  personal  injury  claims  included  in  the  proposed  global
settlement. We have approximately 2,500 open silica claims.
         The agreement  contemplated  that we would conduct due diligence on the
asbestos  claims,  and  that  we and  attorneys  for  the  claimants  would  use
reasonable efforts to execute definitive  settlement  agreements.  While all the
required settlement  agreements have not yet been executed, we and attorneys for
some of the asbestos  claimants have now reached  agreement on what they believe
will be a template for such settlement agreements.  These agreements are subject
to a  number  of  conditions,  including  agreement  on a  Chapter  11  plan  of
reorganization  for DII  Industries,  Kellogg,  Brown & Root  and  some of their
subsidiaries,  approval  by 75% of  current  asbestos  claimants  to the plan of
reorganization,  the  negotiation  of financing  acceptable  to us,  approval by
Halliburton's Board of Directors, and confirmation of the plan of reorganization
by a  bankruptcy  court.  The  template  settlement  agreement  also  grants the
claimants' attorneys a right to terminate the definitive settlement agreement on
ten days' notice if Halliburton's DII Industries subsidiary does not file a plan
of reorganization under the bankruptcy code on or before April 1, 2003.
         We are  conducting due diligence on the asbestos  claims,  which is not
expected  to be  completed  by April 1,  2003.  Therefore,  we do not expect DII
Industries,  Kellogg, Brown & Root and some of their subsidiaries to file a plan
of reorganization  prior to April 1. Although there can be no assurances,  we do
not believe the claimants' attorneys will terminate the settlement agreements on
April 1, 2003 as long as  adequate  progress  is being made  toward a Chapter 11
filing. In March 2003, we agreed with Harbison-Walker and the asbestos creditors
committee in the Harbison-Walker bankruptcy to consensually extend the period of
the stay contained in the Bankruptcy  Court's temporary  restraining order until
July 21, 2003. The court's  temporary  restraining  order,  which was originally
entered on February 14, 2002,  stays more than 200,000  pending  asbestos claims
against DII Industries.  The agreement provides that if the pre-packaged Chapter
11 filing by DII Industries, Kellogg, Brown & Root and their subsidiaries is not
made by July 14, 2003, the  Bankruptcy  Court will hear motions to lift the stay
on July 21, 2003.  The asbestos  creditors  committee also reserves the right to
monitor  progress  toward the filing of the  Chapter 11  proceeding  and seek an
earlier hearing to lift the stay if satisfactory  progress toward the Chapter 11
filing is not being made.
         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 SFAS No. 5 at the  current  time.  Among the  prerequisites  to reaching a
conclusion of the settlement are:
              -   agreement on the amounts  to be contributed to  the trust  for
                  the benefit of silica claimants;
              -   our  review  of  the  more  than  347,000  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 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;   and   agreement   with  the  attorneys
                  representing  current asbestos  claimants with respect to, and
                  completion and mailing of, a disclosure  statement  explaining
                  the  pre-packaged  plan of  reorganization  to the  more  than
                  347,000 current claimants;
              -   arrangement of financing on terms acceptable to us to fund the
                  cash amounts to be paid in the settlement;

                                       76


              -   Halliburton board approval;
              -   obtaining affirmative votes to the plan of reorganization from
                  at least the required 75% of known present asbestos  claimants
                  and from a  requisite  number  of silica  claimants  needed 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.
         Because we do not  believe  the  settlement  is  currently  probable as
defined  by  Statement  of  Financial  Standards  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 have determined that the
best  estimate  of  the  probable  loss  is the  $3.5  billion  estimate  in Dr.
Rabinovitz's study, and accordingly,  we have 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;
              -   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 that 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 this 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 that date.  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.

                                       77


         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, 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 347,000 current
open claims,  are  approximately  one million.  A summary of our accrual for all
claims and corresponding insurance recoveries is as follows:


                                                                          December 31
                                                            ----------------------------------------
Millions of dollars                                                2002                2001
----------------------------------------------------------------------------------------------------
                                                                               
Gross liability                  - beginning balance              $   737            $     80
     Accrued liability                                              2,820                 696
     Payments on claims                                              (132)                (39)
----------------------------------------------------------------------------------------------------
Gross liability                  - ending balance                 $ 3,425            $    737
====================================================================================================

Estimated insurance recoveries:
     Highlands Insurance Company - beginning balance              $   (45)           $    (39)
         Accrued insurance recoveries                                   -                 (18)
         Write-off of recoveries                                       45                   -
         Insurance billings                                             -                  12
----------------------------------------------------------------------------------------------------
     Highlands Insurance Company - ending balance                       -            $    (45)
====================================================================================================

     Other insurance carriers - beginning balance                 $  (567)           $    (12)
         Accrued insurance recoveries                              (1,530)               (563)
         Insurance billings                                            38                   8
----------------------------------------------------------------------------------------------------
     Other insurance carriers - ending balance                    $(2,059)           $   (567)
====================================================================================================
Total estimated insurance recoveries                              $(2,059)           $   (612)
====================================================================================================
Net liability for known asbestos claims                           $ 1,366            $    125
====================================================================================================

         Accounts  receivable  for billings to insurance  companies for payments
made on asbestos  claims were $44 million at December 31, 2002,  and $18 million
at December 31, 200l,  excluding $35 million in accounts  receivable written off
at the conclusion of the Highlands litigation.
         Possible Additional Accruals. When and if the currently proposed global
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 $4.0 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 using $18.71,  which was trading value of the stock at
the end of the  fourth  quarter  of  2002.  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 $322 million  ($288  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 the payment of
the shares into the trust.
         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-related lawsuits to be filed
                  against DII Industries and Kellogg, Brown & Root;

                                       78


              -   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.
         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 representative is 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 FPSO's, 33 hydrocarbon production wells, 18 water injection wells,
and all sub-sea flow lines and risers  necessary to connect the underwater wells
to the FPSO's.
         KBR's performance under the contract is secured by:
              -   two  performance  letters of credit,  which  together  have an
                  available  credit  of  approximately  $261  million  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 $121
                  million as of  December  31,  2002 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.
         The project owner has procured project finance funding obligations from
various banks to finance the payments due to KBR under the contract.
         As of December 31, 2002, the project was approximately 63% complete and
KBR had  recorded a loss of $117 million  related to the  project.  The probable
unapproved  claims  included in  determining  the loss on the project  were $182
million as of December 31, 2002. The claims for the project most likely will not
be settled  within one year.  Accordingly,  probable  unapproved  claims of $115
million at December 31, 2002 have been  recorded to long-term  unbilled  work on
uncompleted  contracts.  Those  amounts are  included  in "Other  assets" 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,  agreed in
principle  to the  scope,  but not yet the  amount,  of issues  valued by KBR of
approximately  $29 million which are not related to the $182 million in probable
unapproved  claims.  Additionally  we are in  discussion  with  Petrobras  about
responsibility  for $78  million of new tax costs that were not  foreseen in the
contract price.
         KBR expects  the project will likely be  completed more than  12 months
later  than  the  original  contract  completion  date.  KBR  believes  that the
project's delay is due primarily to the actions of Petrobras.  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 up to $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  $263 million as of December 31, 2002).
We are in  discussions  with  Petrobras  regarding a settlement of the amount of
unapproved  claims.  There can be no assurance that we will reach any settlement
regarding these claims. We expect any settlement,  if reached,  will result in a
schedule  extension that would eliminate  liability for liquidated damages based
on the  currently  forecasted  schedule.  We have not  accrued  any  amounts for
liquidated damages, since we consider the imposition of liquidated damages to be
unlikely.

                                       79


         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 banks cease to fund the project,  the project owner may not have
the ability to continue to pay KBR for its services. The original bank documents
provide that the banks are not  obligated to continue to fund the project if the
project has been  delayed for more than 6 months.  In November  2002,  the banks
agreed to extend the 6-month period to 12 months.  Other  provisions in the bank
documents may provide for additional time extensions.  However, delays beyond 12

                                       80


months may require bank consent in order to obtain additional funding.  While we
believe the banks have an incentive  to complete  the  financing of the project,
there is no  assurance  that they  would do so. If the banks 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 banks 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 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  drawn,  KBR would be required to fund the amount of the
draw to the  issuing  bank.  In the  event  that  KBR was  determined  after  an
arbitration  proceeding to have been in default  under the contract,  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
that  would  otherwise  have been  credited  back to the  project  owner had the
contract not been terminated.
         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  other than Petrobras.  Because our claims,  together
with change orders that are currently under negotiation,  exceed this amount, we
cannot give assurance that there is adequate  funding to cover current or future
KBR claims.  Unless the project owner provides additional funding or  permits us
to defer repayment of the $300  million advance, and assuming  the project owner
does not allege default on our part, we may be obligated to  fund operating cash
flow  shortages over  the remaining  project life  in  an  amount  we  currently
estimate to be up to approximately $400 million.
         The  possible  Chapter  11  pre-packaged  bankruptcy  filing  by KBR in
connection with the settlement of its asbestos claims would  constitute an event
of default under the loan  documents with the banks unless waivers are obtained.
KBR believes that it is unlikely that the banks will exercise any right to cease
funding  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.
         KBR and  Petrobras  are  currently  attempting  to resolve any disputes
through  ongoing  negotiations  between  the  parties  and each has  appointed a
high-level team for this purpose.
         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 practice. 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.

                                       80


         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 three follow-up  sets of comments,  most
recently in March 2003.
         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
lawsuit,  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 U.S.  District Court for the Northern  District of Texas and consolidated
before the Honorable Judge David Godbey.  The amended  consolidated class action
complaint in that case, styled Richard Moore v. Halliburton, was scheduled to be
filed in February  2003,  but that date has been  extended by  agreement  of the
parties.  It is  unclear  as of this time when the  amended  consolidated  class
action  complaint will be filed.  However,  we believe that we have  meritorious
defenses to the claims and intend to vigorously defend against them.
         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 that degree of
particularity required by the rules of procedure. That motion has now been fully
briefed and is before the court awaiting ruling.
         In addition to the  securities  class  actions,  one  additional  class
action,  alleging  violations of 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.
         Finally,  on October 11, 2002, a shareholder  derivative action against
present and former  directors  and our former CFO was filed  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 have moved
to dismiss  that  action and a hearing on that  motion has taken  place in March
2003. We believe the action is without merit and we intend to vigorously  defend
it.
         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,  which was less than  one-quarter  of BJ's  claim at the
beginning  of the  trial.  A total of $102  million  was  accrued  in the  first
quarter,  which was  comprised  of the $98  million  judgment  and $4 million in
pre-judgment  interest costs.  The jury also found that there was no intentional
infringement  by  Halliburton  Energy  Services.  As  a  result  of  the  jury's
determination of infringement, the court has enjoined us from further use of our
Phoenix  fracturing  fluid.  We have posted a supersedeas  bond in the amount of
approximately  $107  million  to  cover  the  damage  award,   pre-judgment  and
post-judgment interest, and awardable costs. We timely appealed the judgment and
the appeal has now been fully  briefed and we are  awaiting  notice of a date of
hearing before the United States Court of Appeals for the Federal Circuit, which
hears all  appeals of patent  cases.  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.  We  have  alternative  products  to  use in our
fracturing  operations,  and 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.

                                       81


         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.  We have moved for  summary  judgment  and a hearing on that motion was
held on March 12,  2003.  The court's  ruling on this  motion is still  pending.
Trial is set for April 21, 2003.
         Improper payments  reported to the Securities and Exchange  Commission.
We have  reported to the SEC that one of our foreign  subsidiaries  operating in
Nigeria made improper payments of approximately  $2.4 million to an entity 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 an additional $3 million,  which amount was fully accrued as of March
31, 2002. The integrity of our Code of Business Conduct and our internal control
procedures are essential to the way we conduct business.
         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
$48 million as of December 31, 2002 and $49 million as of December 31, 2001. The
liability  covers numerous  properties and no individual  property  accounts for
more than 10% of the current 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 ten federal and state  superfund sites for which we have
established liabilities.  As of December 31, 2002, those ten sites accounted for
$8 million of our total $48 million liability.
         Letters of credit. In the normal course of business, we have agreements
with banks under which  approximately  $1.4 billion of letters of credit or bank
guarantees  were  issued,  including  $204  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  have been  issued.  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  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 global asbestos settlement through December 31, 2003.
         If our  debt  ratings  fall  below  investment  grade,  we  would be in
technical breach of a bank agreement covering another $160 million of letters of
credit at December 31, 2002, which might entitle the bank to set-off rights.  In
addition,  a $151 million  letter of credit line, of which $121 million has been
issued,   includes   provisions   that   allow   the   bank  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.

                                       82


         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 never 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 $364  million at December  31, 2002 and $97 million at December  31, 2001 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 any liability for liquidated damages. Of the
total liquidated  damages,  $263 million at December 31, 2002 and $77 million at
December   31,   2001   relate  to   unasserted   liquidated   damages  for  the
Barracuda-Caratinga  project.  The  estimated  schedule  impact of change orders
requested  by the  customer is expected to cover  approximately  one-half of the
$263 million exposure at December 31, 2002 and claims for schedule extension are
expected to cover the remaining exposure.
         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.  Income (Loss) Per Share


  Millions of dollars and shares except per share data             2002          2001           2000
----------------------------------------------------------------------------------------------------------
                                                                                      
  Income (loss) from continuing operations before
    change in accounting method, net                              $  (346)      $   551        $    188
==========================================================================================================

  Basic weighted average shares                                       432           428             442
  Effect of common stock equivalents                                    -             2               4
----------------------------------------------------------------------------------------------------------
  Diluted weighted average shares                                     432           430             446
==========================================================================================================

  Income (loss) per common share from continuing operations
    before change in accounting method, net:
  Basic                                                           $ (0.80)      $  1.29        $   0.42
==========================================================================================================
  Diluted                                                         $ (0.80)      $  1.28        $   0.42
==========================================================================================================

         Basic income (loss) per share is based on the weighted  average  number
of common shares outstanding during the period.  Diluted income (loss) per share
includes  additional common shares that would have been outstanding if potential
common shares with a dilutive effect had been issued. For 2002, we have used the
basic  weighted  average  shares in the  calculation as the effect of the common
stock equivalents would be antidilutive  based upon the net loss from continuing
operations.  Included in the computation of diluted income per share in 2001 and
2000 are rights we issued in  connection  with the PES  acquisition  for between
850,000 and 2.1 million  shares of Halliburton  common stock.  Excluded from the
computation  of diluted  income per share are  options  to  purchase  10 million
shares of common stock in 2001 and 1 million shares in 2000.  These options were
outstanding  during these years,  but were excluded  because the option exercise
price was greater than the average market price of the common shares.

Note 14.  Reorganization of Business Operations
         On March 18, 2002 we announced plans to restructure our businesses into
two operating  subsidiary  groups, the Energy Services Group and the Engineering
and  Construction  Group.  As part  of this  reorganization,  we  separated  and
consolidated  the entities in our Energy  Services  Group together as direct and
indirect subsidiaries of Halliburton Energy Services, Inc. We also separated and
consolidated the entities in our Engineering and Construction  Group together as

                                       83


direct and indirect  subsidiaries of the former Dresser Industries,  Inc., which
became  a limited liability company  during the second quarter  of 2002 and  was
renamed DII Industries.  The reorganization of business  operations  facilitated
the separation,  organizationally,  financially,  and operationally,  of our two
business  segments,  which  we  believe  will  significantly  improve  operating
efficiencies  in  both,  while  streamlining   management  and  easing  manpower
requirements. In addition, many support functions, which were previously shared,
were moved into the two business  groups.  As a result,  we took actions  during
2002 to reduce our cost  structure  by  reducing  personnel,  moving  previously
shared support  functions into the two business groups and realigning  ownership
of international subsidiaries by group.
         In  2002,   we  incurred   costs  related  to  the   restructuring   of
approximately $107 million which consisted of the following:
              -   $64 million in personnel related expense;
              -   $17 million of asset related write-downs;
              -   $20 million in professional fees related to the restructuring;
                  and
              -   $6 million related to contract terminations.
         Of  this  amount,   $8  million   remains  in  accruals  for  severance
arrangements  and  approximately  $2 million for other  items.  We expect  these
remaining payments will be made during 2003.
         Although we have no specific plans currently,  the reorganization would
facilitate separation of the ownership of the two businesses in the future if we
identify an opportunity that produces  greater value for our  shareholders  than
continuing to own both businesses.
         In the fourth  quarter of 2000 we  approved  a plan to  reorganize  our
engineering   and   construction   businesses   into  one  business  unit.  This
restructuring was undertaken because our engineering and construction businesses
continued  to  experience  delays in customer  commitments  for new upstream and
downstream  projects.  With the  exception  of  deepwater  projects,  short-term
prospects for increased  engineering and  construction  activities in either the
upstream  or  downstream  businesses  were  not  positive.  As a  result  of the
reorganization of the engineering and construction  businesses,  we took actions
to rationalize  our operating  structure  including  write-offs of equipment and
licenses  of  $10  million,   engineering   reference  designs  of  $4  million,
capitalized software of $6 million, and recorded severance costs of $16 million.
Of these charges,  $30 million was reflected under the captions Cost of services
and $6 million as General and administrative in our 2000 consolidated statements
of income.  Severance and related costs of $16 million were for the reduction of
approximately 30 senior management  positions.  In January 2002, the last of the
personnel actions was completed and we have no remaining accruals related to the
2000 restructuring.

Note 15.  Change in Accounting Method
         In July 2001, the Financial  Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets." Effective January 1, 2002, goodwill
is no  longer  amortized  but is  tested  for  impairment  as set  forth  in the
statement. We now perform our goodwill impairment test for each of our reporting
units in accordance  with SFAS No. 142 and those tests indicate that none of the
goodwill we currently  have recorded is impaired.  Amortization  of goodwill for
2001 totaled $42 million pretax and $38 million after-tax.
         In July 2001, the Financial  Accounting Standards Board issued SFAS No.
141,  "Business  Combinations"  which requires the purchase method of accounting
for  business  combination  transactions  initiated  after  June 30,  2001.  The
statement  requires that goodwill  recorded on  acquisitions  completed prior to
July 1, 2001 be amortized  through December 31, 2001.  Goodwill  amortization is
precluded on acquisitions  completed after June 30, 2001. We ceased amortization
of goodwill on December 31, 2001.

                                       84


Note 16.  Income Taxes
         The components of the (provision) benefit for income taxes are:


                                                       Years ended December 31
                                              -------------------------------------------
Millions of dollars                               2002          2001           2000
------------------------------------------------------------------------------------------
                                                                     
Current income taxes:
Federal                                         $     71      $   (146)       $   (16)
Foreign                                             (173)         (157)          (114)
State                                                  4           (20)            (5)
-----------------------------------------------------------------------------------------
Total                                                (98)         (323)          (135)
-----------------------------------------------------------------------------------------
Deferred income taxes:
Federal                                              (11)          (58)           (20)
Foreign and state                                     29            (3)            26
-----------------------------------------------------------------------------------------
Total                                                 18           (61)             6
-----------------------------------------------------------------------------------------
Total continuing operations                     $    (80)     $   (384)       $  (129)
-----------------------------------------------------------------------------------------
Discontinued operations:
     Current income taxes                             21           (15)           (60)
     Deferred income taxes                           133            35              -
Disposal of discontinued operations                    -          (199)          (141)
-----------------------------------------------------------------------------------------
Total                                           $     74      $   (563)       $  (330)
=========================================================================================

         Included  in the  current  (provision)  benefit  for  income  taxes are
foreign  tax  credits  of $89  million  in 2002,  $106  million in 2001 and $113
million in 2000.  The United  States and  foreign  components  of income  before
income  taxes,  minority  interests,  discontinued  operations,  and  change  in
accounting method are as follows:


                               Years ended December 31
                        ---------------------------------------
Millions of dollars         2002         2001         2000
---------------------------------------------------------------
                                            
United States             $   (537)     $    565     $  128
Foreign                        309           389        207
---------------------------------------------------------------
Total                     $   (228)     $    954     $  335
===============================================================

         The primary  components of our deferred tax assets and  liabilities and
the related  valuation  allowances,  including  federal  deferred  tax assets of
discontinued operations are as follows:

                                       85



                                                            December 31
                                                  --------------------------------
Millions of dollars                                    2002            2001
----------------------------------------------------------------------------------
                                                              
Gross deferred tax assets:
    Employee compensation and benefits              $    282        $    214
    Capitalized research and experimentation              75              46
    Accrued liabilities                                  102             121
    Insurance accruals                                    78              82
    Construction contract accounting methods             114             100
    Inventory                                             46              53
    Asbestos and silica related liabilities            1,201             258
    Intercompany profit                                   32              54
    Net operating loss carryforwards                      81              44
    Foreign tax credit carryforward                       49               -
    AMT credit carryforward                                5               -
    Intangibles                                            6              18
    Allowance for bad debt                                40              36
    Other                                                 23              41
----------------------------------------------------------------------------------
      Total                                         $  2,134        $  1,067
----------------------------------------------------------------------------------
Gross deferred tax liabilities:
    Insurance for asbestos and
         silica related liabilities                 $    724        $    214
    Depreciation and amortization                        188             106
    Nonrepatriated foreign earnings                       36              36
    All other                                             13             101
----------------------------------------------------------------------------------
      Total                                         $    961        $    457
----------------------------------------------------------------------------------
Valuation allowances:
    Net operating loss carryforwards                $     77        $     38
    Future tax attributes related to asbestos
         litigation                                      233               -
    Foreign tax credit limitation                         49               -
    All other                                              7               8
----------------------------------------------------------------------------------
      Total                                              366              46
----------------------------------------------------------------------------------
Net deferred income tax asset                       $    807        $    564
==================================================================================

         We have $158 million of net operating  loss  carryforwards  that expire
from 2003 through 2011 and net operating loss  carryforwards of $71 million with
indefinite  expiration  dates. The federal  alternative  minimum tax credits are
available to reduce future U.S. federal income taxes on an indefinite basis.
         We  have  accrued  for  the  potential  repatriation  of  undistributed
earnings of our foreign  subsidiaries and consider earnings above the amounts on
which tax has been provided to be permanently reinvested. While these additional
earnings could become subject to additional tax if repatriated,  repatriation is
not anticipated. Any additional amount of tax is not practicable to estimate.
         We have established a $49 million valuation  allowance against the 2002
foreign tax credit  carryovers,  on the basis that we believe these credits will
not be utilized in the statutory  carryover period. We also have recorded a $233
million valuation allowance on the asbestos liabilities based on the anticipated
impact of the future  asbestos  deductions  on our  ability  to  utilize  future
foreign tax credits.  We  anticipate  that a portion of the asbestos  deductions
will  displace  future  foreign  tax  credits  and  those  credits  will  expire
unutilized.
         Pension liability  adjustment included in Other comprehensive income is
net of a tax benefit of $69 million in 2002, and $15 million in 2001.
         Reconciliations  between the actual provision for income taxes and that
computed by applying the United States  statutory rate to income from continuing
operations before income taxes and minority interest are as follows:

                                       86



                                                                    Years ended December 31
                                                             --------------------------------------
Millions of dollars                                             2002         2001         2000
---------------------------------------------------------------------------------------------------
                                                                                
(Provision) benefit computed at statutory rate                 $    80      $  (334)     $  (117)
Reductions (increases) in taxes resulting from:
    Rate differentials on foreign earnings                          (4)         (32)         (14)
    State income taxes, net of federal income tax benefit            2          (13)          (3)
    Prior years                                                     33            -            -
    Loss on disposals of equity method investee                    (28)           -            -
    Non-deductible goodwill                                          -          (11)         (11)
    Valuation allowance                                           (163)           -            -
    Other items, net                                                 -            6           16
---------------------------------------------------------------------------------------------------
    Total continuing operations                                    (80)        (384)        (129)
Discontinued operations                                            154           20          (60)
Disposal of discontinued operations                                  -         (199)        (141)
---------------------------------------------------------------------------------------------------
    Total                                                      $    74      $  (563)     $  (330)
===================================================================================================

         We have  recognized a $114 million  valuation  allowance in  continuing
operations  and $119  million in  discontinued  operations  associated  with the
asbestos charges net of insurance recoveries. In addition, continuing operations
has recorded a valuation  allowance of $49 million  related to potential  excess
foreign tax credit  carryovers.  Further,  our impairment  loss on  Bredero-Shaw
cannot be fully benefited for tax purposes due to book and tax basis differences
in  that  investment  and  the  limited  benefit  generated  by a  capital  loss
carryback.  Settlement of unrealized  prior period tax exposures had a favorable
impact to the overall tax rate.
         Exclusive   of  the  asbestos  and  silica  charges  net  of  insurance
recoveries and the impairment loss on Bredero-Shaw,  our 2002 effective tax rate
from continuing  operations  would be 38.9% for fiscal 2002 compared to 40.3% in
2001.

Note 17.  Common Stock
         Our 1993 Stock and Long-Term  Incentive  Plan provides for the grant of
any or all of the following types of awards:
              -   stock  options,   including   incentive   stock   options  and
                  non-qualified stock options;
              -   stock  appreciation rights,  in tandem  with  stock options or
                  freestanding;
              -   restricted stock;
              -   performance share awards; and
              -   stock value equivalent awards.
Under the terms of the 1993 Stock and Long-Term  Incentive  Plan as amended,  49
million shares of common stock have been reserved for issuance to key employees.
The plan  specifies  that no more  than 16  million  shares  can be  awarded  as
restricted  stock.  At December 31, 2002, 19 million  shares were  available for
future  grants  under the 1993 Stock and  Long-Term  Incentive  Plan of which 10
million shares remain available for restricted stock awards.
         In connection with the acquisition of Dresser Industries, Inc. in 1998,
we assumed the outstanding stock options under the stock option plans maintained
by Dresser Industries,  Inc. Stock option transactions  summarized below include
amounts  for the 1993  Stock and  Long-Term  Incentive  Plan and stock  plans of
Dresser  Industries,  Inc. and other acquired  companies.  No further awards are
being made under the stock plans of acquired companies.
         The following table represents our stock options granted, exercised and
forfeited during the past three years:

                                       87



                                         Number of        Exercise        Weighted Average
                                           Shares         Price per        Exercise Price
  Stock Options                        (in millions)        Share            per Share
---------------------------------------------------------------------------------------------
                                                                 
  Outstanding at December 31, 1999           17.1      $  3.10 - 61.50       $  32.03
---------------------------------------------------------------------------------------------
    Granted                                   1.7        34.75 - 54.00          41.61
    Exercised                                (3.6)        3.10 - 45.63          25.89
    Forfeited                                (0.5)       12.20 - 54.50          37.13
---------------------------------------------------------------------------------------------
  Outstanding at December 31, 2000           14.7      $  8.28 - 61.50       $  34.54
---------------------------------------------------------------------------------------------
    Granted                                   3.6        12.93 - 45.35          35.56
    Exercised                                (0.7)        8.93 - 40.81          25.34
    Forfeited                                (0.5)       12.32 - 54.50          36.83
---------------------------------------------------------------------------------------------
  Outstanding at December 31, 2001           17.1      $  8.28 - 61.50       $  35.10
---------------------------------------------------------------------------------------------
    Granted                                   2.6         9.10 - 19.75          12.57
    Exercised                                 -    *      8.93 - 17.21          11.39
    Forfeited                                (1.2)        8.28 - 54.50          31.94
---------------------------------------------------------------------------------------------
  Outstanding at December 31, 2002           18.5      $  9.10 - 61.50       $  32.10
=============================================================================================

              * Actual  exercises  for 2002 were  approximately  30,000  shares.


         Options outstanding at December 31, 2002 are composed of the following:


                                          Outstanding                                 Exercisable
                         ----------------------------------------------     --------------------------------
                                             Weighted
                                             Average        Weighted                            Weighted
                            Number of       Remaining       Average           Number of          Average
       Range of              Shares        Contractual      Exercise           Shares           Exercise
    Exercise Prices       (in millions)        Life          Price          (in millions)         Price
------------------------------------------------------------------------------------------------------------
                                                                                 
  $  9.10 - 19.27               3.2             7.4         $  13.41               0.7          $  16.96
  $ 19.28 - 30.14               5.1             4.8            27.50               4.8             27.79
  $ 30.15 - 39.54               6.3             6.5            37.30               4.8             38.55
  $ 39.55 - 61.50               3.9             6.7            45.28               2.2             48.34
------------------------------------------------------------------------------------------------------------
  $  9.10 - 61.50              18.5             6.2         $  32.10              12.5          $  34.98
============================================================================================================

         There were 10.7 million  options  exercisable  with a weighted  average
exercise  price  of  $34.08  at  December  31,  2001,  and 8.8  million  options
exercisable  with a weighted  average  exercise  price of $32.81 at December 31,
2000.
         All stock options under the 1993 Stock and  Long-Term  Incentive  Plan,
including  options  granted to employees of Dresser  Industries,  Inc. since its
acquisition,  are  granted at the fair market  value of the common  stock at the
grant date.
         Stock  options  generally  expire 10 years from the grant  date.  Stock
options  under the 1993 Stock and Long-Term  Incentive  Plan vest ratably over a
three or four year period.  Other plans have vesting  periods ranging from three
to 10 years.  Options  under the  Non-Employee  Directors'  Plan vest  after six
months.  Restricted shares awarded under the 1993 Stock and Long-Term  Incentive
Plan were 1,706,643 in 2002,  1,484,034 in 2001, and 695,692 in 2000. The shares
awarded are net of forfeitures of 46,894 in 2002, 170,050 in 2001, and 69,402 in
2000.  The weighted  average fair market value per share at the date of grant of
shares granted was $14.95 in 2002, $30.90 in 2001, and $42.25 in 2000.
         Our Restricted  Stock Plan for  Non-Employee  Directors allows for each
non-employee  director to receive an annual  award of 400  restricted  shares of
common stock as a part of  compensation.  We reserved  100,000  shares of common
stock for issuance to  non-employee  directors.  Under this plan we issued 4,400

                                       88


restricted shares in 2002, 4,800 restricted shares in 2001, and 3,600 restricted
shares in 2000.  At  December  31,  2002,  38,000  shares  have  been  issued to
non-employee  directors under this plan. The weighted  average fair market value
per share at the date of grant of shares  granted was $12.56 in 2002,  $34.35 in
2001, and $46.81 in 2000.
         Our Employees'  Restricted Stock Plan was established for employees who
are not officers,  for which 200,000  shares of common stock have been reserved.
At December 31, 2002,  152,650 shares (net of 42,750 shares forfeited) have been
issued. Forfeitures were 400 in 2002, 800 in 2001, and 6,450 in 2000. No further
grants are being made under this plan.
         Under  the terms of our  Career  Executive  Incentive  Stock  Plan,  15
million  shares of our common  stock were  reserved for issuance to officers and
key employees at a purchase price not to exceed par value of $2.50 per share. At
December 31, 2002,  11.7 million  shares (net of 2.2 million  shares  forfeited)
have been issued under the plan. No further grants will be made under the Career
Executive Incentive Stock Plan.
         Restricted  shares issued under the 1993 Stock and Long-Term  Incentive
Plan,  Restricted Stock Plan for Non-Employee  Directors,  Employees' Restricted
Stock Plan and the Career Executive  Incentive Stock Plan are limited as to sale
or disposition. These restrictions lapse periodically over an extended period of
time not exceeding 10 years.  Restrictions  may also lapse for early  retirement
and  other  conditions  in  accordance  with  our  established  policies.   Upon
termination of employment,  shares in which restrictions have not lapsed must be
returned to us, resulting in restricted stock forfeitures. The fair market value
of the stock, on the date of issuance,  is being amortized and charged to income
(with similar credits to paid-in capital in excess of par value)  generally over
the average period during which the  restrictions  lapse.  At December 31, 2002,
the unamortized amount is $75 million.  We recognized  compensation costs of $38
million in 2002, $23 million in 2001, and $18 million in 2000.
         During 2002,  our Board of Directors  approved the 2002 Employee  Stock
Purchase  Plan (ESPP) and  reserved 12 million  shares for  issuance.  Under the
ESPP, eligible employees may have up to 10% of their earnings withheld,  subject
to some limitations,  to be used to purchase shares of our common stock.  Unless
the Board of Directors shall determine  otherwise,  each 6-month offering period
commences on January 1 and July 1 of each year.  The price at which common stock
may be purchased  under the ESPP is equal to 85% of the lower of the fair market
value of the common stock on the  commencement  date or last trading day of each
offering period.  There were approximately  541,000 shares sold through the ESPP
in 2002.
         On April 25, 2000, our Board of Directors approved plans to implement a
share repurchase program for up to 44 million shares. No shares were repurchased
in 2002. We repurchased  1.2 million shares at a cost of $25 million in 2001 and
20.4 million shares at a cost of $759 million in 2000.

Note 18.  Series A Junior Participating Preferred Stock
         We previously declared a dividend of one preferred stock purchase right
on each  outstanding  share of common stock.  The dividend is also applicable to
each share of our common  stock that was issued  subsequent  to  adoption of the
Rights Agreement  entered into with Mellon Investor Services LLC. Each preferred
stock purchase right entitles its holder to buy one  two-hundredth of a share of
our Series A Junior  Participating  Preferred  Stock,  without par value,  at an
exercise price of $75.  These  preferred  stock  purchase  rights are subject to
anti-dilution  adjustments,  which are described in the Rights Agreement entered
into with Mellon.  The preferred  stock  purchase  rights do not have any voting
rights and are not entitled to dividends.
         The  preferred  stock  purchase  rights become  exercisable  in limited
circumstances  involving a potential business  combination.  After the preferred
stock purchase  rights become  exercisable,  each preferred stock purchase right
will  entitle  its  holder  to an  amount  of  our  common  stock,  or  in  some
circumstances,  securities of the acquirer, having a total market value equal to
two  times  the  exercise  price of the  preferred  stock  purchase  right.  The
preferred  stock purchase rights are redeemable at our option at any time before
they become exercisable.  The preferred stock purchase rights expire on December
15,  2005.  No event  during  2002  made the  preferred  stock  purchase  rights
exercisable.

Note 19.  Financial Instruments and Risk Management
         In June 1998, the  Financial Accounting Standards Board issued SFAS No.
133  "Accounting  for  Derivative   Instruments  and  for  Hedging  Activities",
subsequently  amended by SFAS No. 137 and SFAS No. 138. This  standard  requires
entities  to  recognize  all  derivatives  on the  balance  sheet as  assets  or

                                       89


liabilities and to measure the  instruments at fair value.  Accounting for gains
and losses  from  changes  in those fair  values is  specified  in the  standard
depending on the intended use of the derivative and other  criteria.  We adopted
SFAS No. 133  effective January 2001  and recorded a $1 million after-tax credit
for the cumulative effect of adopting the change in accounting method. We do not
expect future measurements at fair value under the new accounting method to have
a material effect on our financial condition or results of operations.
         Foreign  exchange risk.  Techniques in managing  foreign  exchange risk
include,  but are not limited to, foreign  currency  borrowing and investing and
the use of currency  derivative  instruments.  We selectively manage significant
exposures  to potential  foreign  exchange  losses  considering  current  market
conditions,  future operating  activities and the associated cost in relation to
the perceived risk of loss. The purpose of our foreign  currency risk management
activities  is to protect us from the risk that the  eventual  dollar cash flows
resulting  from the sale and  purchase  of  products  and  services  in  foreign
currencies  will be adversely  affected by changes in exchange  rates. We do not
hold or issue  derivative  financial  instruments  for  trading  or  speculative
purposes.
         We manage our currency exposure through the use of currency  derivative
instruments  as it  relates to the major  currencies,  which are  generally  the
currencies of the  countries  for which we do the majority of our  international
business.  These  contracts  generally  have an expiration  date of two years or
less.  Forward  exchange  contracts,  which  are  commitments  to buy or  sell a
specified  amount of a  foreign  currency  at a  specified  price and time,  are
generally used to manage  identifiable  foreign  currency  commitments.  Forward
exchange  contracts  and foreign  exchange  option  contracts,  which convey the
right,  but not the  obligation,  to sell or buy a  specified  amount of foreign
currency at a specified price, are generally used to manage exposures related to
assets and liabilities denominated in a foreign currency. None of the forward or
option contracts are exchange traded.  While derivative  instruments are subject
to fluctuations in value,  the fluctuations are generally offset by the value of
the underlying  exposures being managed. The use of some contracts may limit our
ability to benefit from favorable fluctuations in foreign exchange rates.
         Foreign currency contracts are not utilized to manage exposures in some
currencies due primarily to the lack of available markets or cost considerations
(non-traded  currencies).  We attempt to manage our working capital  position to
minimize  foreign  currency  commitments in non-traded  currencies and recognize
that pricing for the services and  products  offered in these  countries  should
cover the cost of exchange  rate  devaluations.  We have  historically  incurred
transaction losses in non-traded currencies.
         Assets,  liabilities and forecasted  cash flows  denominated in foreign
currencies.  We utilize the derivative instruments described above to manage the
foreign currency exposures related to specific assets and liabilities, which are
denominated in foreign  currencies;  however, we have not elected to account for
these instruments as hedges for accounting  purposes.  Additionally,  we utilize
the  derivative  instruments  described  above to manage  forecasted  cash flows
denominated in foreign currencies generally related to long-term engineering and
construction  projects.  While we enter  into  these  instruments  to manage the
foreign  currency  risk on these  projects,  we have  chosen  not to seek  hedge
accounting treatment for these contracts.  The fair value of these contracts was
immaterial as of the end of 2002 and 2001.
         Notional  amounts and fair market values.  The notional amounts of open
forward  contracts and options for  continuing  operations  were $609 million at
December 31, 2002 and $505 million at December 31, 2001. The notional amounts of
our foreign exchange  contracts do not generally  represent amounts exchanged by
the  parties,  and  thus,  are not a  measure  of our  exposure  or of the  cash
requirements  relating to these contracts.  The amounts exchanged are calculated
by reference to the notional amounts and by other terms of the derivatives, such
as exchange rates.
         Credit risk.  Financial  instruments  that  potentially  subject  us to
concentrations  of credit risk are primarily cash  equivalents,  investments and
trade  receivables.  It is our  practice  to  place  our  cash  equivalents  and
investments in high-quality securities with various investment institutions.  We
derive  the  majority  of  our  revenues  from  sales  and  services,  including
engineering  and  construction,  to  the  energy  industry.  Within  the  energy
industry,  trade  receivables  are  generated  from a broad and diverse group of
customers.  There are concentrations of receivables in the United States and the
United  Kingdom.  We maintain an  allowance  for losses  based upon the expected
collectibility of all trade accounts receivable.
         There  are no  significant  concentrations  of  credit  risk  with  any
individual   counterparty  related  to  our  derivative  contracts.   We  select
counterparties  based on their  profitability,  balance sheet and a capacity for
timely  payment of  financial  commitments  which is  unlikely  to be  adversely
affected by foreseeable events.

                                       90


         Interest rate risk. We have several debt instruments  outstanding which
have both fixed and  variable  interest  rates.  We manage our ratio of fixed to
variable-rate  debt through the use of different  types of debt  instruments and
derivative instruments.
         Fair market value of financial  instruments.  The estimated fair market
value of  long-term  debt at year-end for both 2002 and 2001 was $1.3 billion as
compared to the  carrying  amount of $1.5  billion at year-end for both 2002 and
2001.  The fair  market  value of fixed rate  long-term  debt is based on quoted
market prices for those or similar instruments.  The carrying amount of variable
rate long-term  debt  approximates  fair market value because these  instruments
reflect market changes to interest  rates.  See Note 11. The carrying  amount of
short-term financial instruments, cash and equivalents,  receivables, short-term
notes payable and accounts  payable,  as reflected in the  consolidated  balance
sheets  approximates  fair  market  value due to the short  maturities  of these
instruments.  The  currency  derivative  instruments  are carried on the balance
sheet at fair  value and are based  upon  third-party  quotes.  The fair  market
values of  derivative  instruments  used for fair  value  hedging  and cash flow
hedging were immaterial.

Note 20.  Retirement Plans
         Our  Company  and  subsidiaries   have  various  plans  which  cover  a
significant number of their employees.  These plans include defined contribution
plans, which provide  retirement  contributions in return for services rendered,
provide an individual  account for each  participant and have terms that specify
how contributions to the participant's  account are to be determined rather than
the amount of pension  benefits the participant is to receive.  Contributions to
these plans are based on pretax income and/or  discretionary  amounts determined
on an annual  basis.  Our expense for the  defined  contribution  plans for both
continuing and discontinued  operations  totaled $80 million in 2002 compared to
$129 million in 2001 and $140 million in 2000.  Other  retirement  plans include
defined benefit plans, which define an amount of pension benefit to be provided,
usually as a function of age, years of service or compensation.  These plans are
funded to operate on an  actuarially  sound  basis.  Plan  assets are  primarily
invested in cash, short-term  investments,  real estate, equity and fixed income
securities of entities  domiciled in the country of the plan's  operation.  Plan
assets,  expenses and obligations for retirement  plans in the following  tables
include both continuing and discontinued operations.


                                                                  2002                               2001
                                                   ----------------------------------------------------------------------
Millions of dollars                                 United States     International     United States    International
-------------------------------------------------------------------------------------------------------------------------
                                                                                             
Change in benefit obligation
Benefit obligation at beginning of year                 $  140         $  1,968             $  288          $  1,670
Service cost                                                 1               72                  2                60
Interest cost                                                9              102                 13                89
Plan participants' contributions                             -               14                  -                14
Effect of business combinations and new plans                -               70                  -                 -
Amendments                                                   1               (4)                 -                 -
Divestitures                                                 -               (5)              (111)              (90)
Settlements/curtailments                                    (1)              (1)               (46)                -
Currency fluctuations                                        -              102                  -                15
Actuarial gain/(loss)                                        5              (27)                 8               270
Benefits paid                                              (11)             (52)               (14)              (60)
-------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year                       $  144         $  2,239             $  140          $  1,968
=========================================================================================================================


                                       91



                                                                  2002                               2001
                                                    ---------------------------------------------------------------------
Millions of dollars                                  United States    International     United States    International
-------------------------------------------------------------------------------------------------------------------------
                                                                                             
Change in plan assets
Fair value of plan assets at beginning of year           $  130        $  1,827             $  313          $  2,165
Actual return on plan assets                                 (6)            (69)               (22)             (294)
Employer contribution                                         1              36                  7                30
Settlements                                                  (1)              -                (46)                -
Plan participants' contributions                              -              14                  1                14
Effect of business combinations and new plans                 -              45                  -                 -
Divestitures                                                  -              (5)              (109)              (45)
Currency fluctuations                                         -              89                  -                15
Benefits paid                                               (11)            (51)               (14)              (58)
-------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year                 $  113        $  1,886             $  130          $  1,827
=========================================================================================================================

Funded status                                            $  (31)       $   (353)            $  (10)         $   (141)
Unrecognized transition obligation/(asset)                    -              (2)                (1)               (3)
Unrecognized actuarial (gain)/loss                           56             477                 34               308
Unrecognized prior service cost/(benefit)                     1             (70)                (2)              (96)
-------------------------------------------------------------------------------------------------------------------------
Net amount recognized                                    $   26        $     52             $   21          $     68
=========================================================================================================================

         We  recognized  an  additional   minimum  pension   liability  for  the
underfunded  defined benefit plans. The additional minimum liability is equal to
the excess of the  accumulated  benefit  obligation over plan assets and accrued
liabilities.  A corresponding amount is recognized as either an intangible asset
or a reduction of shareholders'  equity. For the year ended December 31, 2002 we
recognized $212 million in additional  minimum  pension  liability of which $130
million was recorded as Other comprehensive income, net of tax.


                                                               2002                               2001
                                                 ---------------------------------------------------------------------
Millions of dollars                               United States    International     United States    International
----------------------------------------------------------------------------------------------------------------------
                                                                                          
Amounts recognized in the consolidated
    balance sheets
Prepaid benefit cost                                   $  30           $   102            $   7           $    85
Accrued benefit liability including
    additional minimum liability                         (59)             (250)             (10)              (36)
Intangible asset                                           2                12                1                 1
Accumulated other comprehensive income,
    net of tax                                            35               122               15                12
Deferred tax asset                                        18                66                8                 6
----------------------------------------------------------------------------------------------------------------------
Net amount recognized                                  $  26           $    52            $  21           $    68
======================================================================================================================

         Assumed  long-term  rates of return on plan assets,  discount rates for
estimating benefit obligations and rates of compensation  increases vary for the
different plans according to the local economic  conditions.  The rates used are
as follows:

                                       92



   Weighted-average assumptions         2002             2001            2000
-------------------------------------------------------------------------------------
                                                            
   Expected return on plan assets:
      United States plans               9.0%             9.0%            9.0%
      International plans           5.5% to 8.16%    5.5% to 9.0%    3.5% to 9.0%
   Discount rate:
      United States plans               7.0%            7.25%            7.5%
      International plans          5.25% to 20.0%    5.0% to 8.0%    4.0% to 8.0%
   Rate of compensation increase:
      United States plans               4.5%             4.5%            4.5%
      International plans           3.0% to 21.0%    3.0% to 7.0%    3.0% to 7.6%
=====================================================================================




                                                   2002                       2001                       2000
                                         --------------------------------------------------------------------------------
                                          United                     United                     United
   Millions of dollars                    States    International    States    International    States    International
   ----------------------------------------------------------------------------------------------------------------------
                                                                                        
   Components of net periodic
       benefit cost
   Service cost                             $   1       $    72       $   2        $    60        $  4        $    57
   Interest cost                                9           102          13             89          20             87
   Expected return on plan assets             (13)         (106)        (18)           (95)        (26)           (99)
   Transition amount                            -            (2)          -             (2)          -              -
   Amortization of prior service cost          (2)           (6)         (2)            (6)         (1)            (6)
   Settlements/curtailments                     -            (2)         16              -          10              -
   Recognized actuarial (gain)/loss             1             3          (1)            (9)          -            (10)
   ----------------------------------------------------------------------------------------------------------------------
   Net periodic benefit (income) cost       $  (4)      $    61       $  10        $    37        $  7        $    29
  =======================================================================================================================

         The projected benefit obligation,  accumulated benefit obligation,  and
fair  value of plan  assets  for the  pension  plans  with  accumulated  benefit
obligations  in excess of plan  assets as of  December  31, 2002 and 2001 are as
follows:


  Millions of dollars                   2002          2001
----------------------------------------------------------------
                                              
  Projected benefit obligation        $  2,319      $   235
  Accumulated benefit obligation      $  2,121      $   215
  Fair value of plan assets           $  1,942      $   175
================================================================

          Postretirement  medical plan. We offer postretirement medical plans to
specific eligible employees. For some plans, our liability is limited to a fixed
contribution  amount for each  participant or dependent.  The plan  participants
share the total cost for all benefits provided above our fixed  contribution and
participants'  contributions are adjusted as required to cover benefit payments.
We have made no commitment to adjust the amount of our contributions; therefore,
the  computed  accumulated  postretirement  benefit  obligation  amount  is  not
affected by the expected future health care cost inflation rate.
         Other  postretirement  medical plans are  contributory but we generally
absorb  the  majority  of the  costs.  We may elect to adjust  the amount of our
contributions for these plans. As a result, the expected future health care cost
inflation rate affects the accumulated postretirement benefit obligation amount.
These plans have assumed health care trend rates  (weighted based on the current
year benefit  obligation) for 2002 of 13% which are expected to decline to 5% by
2007.
         Obligations  and  expenses  for  postretirement  medical  plans  in the
following tables include both continuing and discontinued operations.

                                       93



  Millions of dollars                                 2002             2001
------------------------------------------------------------------------------------
                                                               
  Change in benefit obligation
  Benefit obligation at beginning of year            $   157         $   296
  Service cost                                             1               2
  Interest cost                                           11              15
  Plan participants' contributions                        11              12
  Settlements/curtailments                                 -            (144)
  Actuarial gain                                          33               5
  Benefits paid                                          (27)            (29)
------------------------------------------------------------------------------------
  Benefit obligation at end of year                  $   186         $   157
====================================================================================
  Change in plan assets
  Fair value of plan assets at beginning of year     $     -         $     -
  Employer contribution                                   16              17
  Plan participants' contributions                        11              12
  Benefits paid                                          (27)            (29)
------------------------------------------------------------------------------------
  Fair value of plan assets at end of year           $     -         $     -
====================================================================================

  Funded status                                      $  (186)        $  (157)
  Employer contribution                                    2               2
  Unrecognized actuarial gain                             20             (14)
  Unrecognized prior service cost                          2               3
------------------------------------------------------------------------------------
  Net amount recognized                              $  (162)        $  (166)
====================================================================================

  Millions of dollars                                  2002             2001
------------------------------------------------------------------------------------
  Amounts recognized in the consolidated
   balance sheets
  Accrued benefit liability                          $  (162)        $  (166)
------------------------------------------------------------------------------------
  Net amount recognized                              $  (162)        $  (166)
====================================================================================

  Weighted-average assumptions                    2002        2001        2000
------------------------------------------------------------------------------------
  Discount rate                                   7.0%       7.25%        7.50%
------------------------------------------------------------------------------------

  Millions of dollars                             2002         2001        2000
------------------------------------------------------------------------------------
  Components of net periodic benefit cost
  Service cost                                   $    1       $    2       $  3
  Interest cost                                      11           15         20
  Amortization of prior service cost                  -           (3)        (7)
  Settlements/curtailments                            -         (221)         -
  Recognized actuarial gain                          (1)          (1)        (1)
------------------------------------------------------------------------------------
  Net periodic benefit cost                      $   11       $ (208)      $ 15
====================================================================================

         Assumed  health care cost trend rates have a significant  effect on the
amounts reported for the total of the health care plans. A  one-percentage-point
change in assumed health care cost trend rates would have the following effects:

                                       94



                                                             One-Percentage-Point
                                                          ----------------------------
  Millions of dollars                                       Increase    (Decrease)
--------------------------------------------------------------------------------------
                                                                  
  Effect on total of service and interest cost components     $   1         $ (1)
  Effect on the postretirement benefit obligation             $  10         $ (9)
--------------------------------------------------------------------------------------

Note 21. Dresser Industries, Inc. Financial Information
         Since becoming a wholly owned subsidiary of Halliburton, DII Industries
(formerly Dresser  Industries, Inc.) has ceased filing periodic reports with the
United States Securities and Exchange  Commission.  DII Industries 8% guaranteed
senior  notes,  which  were  initially  issued  by  Baroid  Corporation,  remain
outstanding and are fully and unconditionally  guaranteed by Halliburton.  Under
the terms of a Fourth  Supplemental  Indenture,  Halliburton Company in December
2002 assumed as  co-obligor  the payment of principle and interest on the notes,
and the  performance  of all of the  covenants  and  conditions  of the  related
indenture.

Note 22.  Goodwill and Other Intangible Assets
         We adopted the SFAS No. 142 "Goodwill and Other Intangible Assets", and
in  accordance   with  the   statement,   amortization   of  goodwill  has  been
discontinued.  Our reporting units as defined under SFAS No. 142 are the same as
our reportable  operating  segments:  Energy  Services Group and Engineering and
Construction Group. Goodwill for the Energy Services Group was $402 million (net
of $118 million  accumulated  amortization)  in 2002,  $386 million (net of $118
million accumulated  amortization) in 2001, and $310 million (net of $97 million
accumulated amortization) in 2000. Goodwill for the Engineering and Construction
Group was $321 million (net of $152 million  accumulated  amortization) in 2002,
$334 million (net of $151 million  accumulated  amortization)  in 2001, and $287
million (net of $134 million accumulated amortization) in 2000.
         Had we been  accounting  for our  goodwill  under  SFAS No. 142 for all
periods  presented,  our net income  (loss) and earnings  (loss) per share would
have been as follows:


                                                                   Years ended December 31
                                                           --------------------------------------
              Millions of dollars except per share data        2002         2001         2000
              ------------------------------------------------------------------------------------
                                                                               
              Reported net income (loss)                      $  (998)     $   809      $   501
              Goodwill amortization, net of tax                     -           38           36
              ------------------------------------------------------------------------------------
              Adjusted net income (loss)                      $  (998)     $   847      $   537
              ====================================================================================

              Basic earnings (loss) per share:
                  Reported net income (loss)                  $ (2.31)     $  1.89      $  1.13
                  Goodwill amortization, net of tax                 -         0.09         0.08
              ------------------------------------------------------------------------------------
                  Adjusted net income (loss)                  $ (2.31)     $  1.98      $  1.21
              ====================================================================================

              Diluted earnings (loss) per share:
                  Reported net income (loss)                  $ (2.31)     $  1.88      $  1.12
                  Goodwill amortization, net of tax                 -         0.09         0.08
              ------------------------------------------------------------------------------------
                  Adjusted net income (loss)                  $ (2.31)     $  1.97      $  1.20
              ====================================================================================


                                       95



                               HALLIBURTON COMPANY
                             Selected Financial Data
                                   (Unaudited)


                                                                       Years ended December 31
  Millions of dollars and shares                 ----------------------------------------------------------------------
  except per share and employee data                 2002          2001          2000          1999           1998
  ---------------------------------------------------------------------------------------------------------------------
                                                                                            
  Operating results
  Net revenues
      Energy Services Group                        $  6,836      $  7,811      $  6,233     $    5,402     $  7,258
      Engineering and Construction Group              5,736         5,235         5,711          6,911        7,246
  ---------------------------------------------------------------------------------------------------------------------
         Total revenues                            $ 12,572      $ 13,046      $ 11,944     $   12,313     $ 14,504
  =====================================================================================================================
  Operating income (loss)
      Energy Services Group                        $    638      $  1,036      $    589     $      241     $    934
      Engineering and Construction Group               (685)          111           (54)           184          274
      Special charges and credits (1)                     -             -             -             47         (959)
      General corporate                                 (65)          (63)          (73)           (71)         (79)
  ---------------------------------------------------------------------------------------------------------------------
         Total operating income (1)                    (112)        1,084           462            401          170
  Nonoperating income (expense), net (2)               (116)         (130)         (127)           (94)        (115)
  ---------------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations
      before income taxes and minority interest        (228)          954           335            307           55
  Provision for income taxes (3)                        (80)         (384)         (129)          (116)        (155)
  Minority interest in net income of
  consolidated
      subsidiaries                                      (38)          (19)          (18)           (17)         (20)
  ---------------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations         $   (346)     $    551      $    188     $      174     $   (120)
  =====================================================================================================================
  Income (loss) from discontinued operations       $   (652)     $    257      $    313     $      283     $    105
  =====================================================================================================================
  Net income (loss)                                $   (998)     $    809      $    501     $      438     $    (15)
  =====================================================================================================================
  Basic income (loss) per common share
      Continuing operations                        $  (0.80)     $   1.29      $   0.42     $     0.40     $   (0.27)
      Net income (loss)                               (2.31)         1.89          1.13           1.00         (0.03)
  Diluted income (loss) per common share
      Continuing operations                           (0.80)         1.28          0.42           0.39         (0.27)
      Net income (loss)                               (2.31)         1.88          1.12           0.99         (0.03)
  Cash dividends per share                             0.50          0.50          0.50           0.50          0.50
  Return on average shareholders' equity             (24.02)%       18.64%        12.20%         10.49%        (0.35)%
  ----------------------------------------------------------------------------------------------------------------------
  Financial position
  Net working capital                              $  2,288      $  2,665      $  1,742     $    2,329     $  2,129
  Total assets                                       12,844        10,966        10,192          9,639       10,072
  Property, plant and equipment, net                  2,629         2,669         2,410          2,390        2,442
  Long-term debt (including current maturities)       1,476         1,484         1,057          1,364        1,426
  Shareholders' equity                                3,558         4,752         3,928          4,287        4,061
  Total capitalization                                5,083         6,280         6,555          6,590        5,990
  Shareholders' equity per share                       8.16         10.95          9.20           9.69         9.23
  Average common shares outstanding (basic)             432           428           442            440          439
  Average common shares outstanding (diluted)           432           430           446            443          439
  ---------------------------------------------------------------------------------------------------------------------
  Other financial data
  Capital expenditures                             $   (764)     $   (797)     $   (578)    $     (520)    $   (841)
  Long-term borrowings (repayments), net                (15)          412          (308)           (59)         122
  Depreciation, depletion and amortization
      expense                                           505           531           503            511          500
  Goodwill amortization included in depreciation,
      depletion and amortization expense:
         Energy Services Group                            -            24            19             12           22
         Engineering and Construction Group               -            18            25             21           14
  Payroll and employee benefits (4)                  (4,875)       (4,818)       (5,260)        (5,647)      (5,880)
  Number of employees (4), (5)                       83,000        85,000        93,000        103,000      107,800
  =====================================================================================================================
  (continued on next page)



                                       96



                               HALLIBURTON COMPANY
                             Selected Financial Data
                                   (Unaudited)
                                   (continued)


                                                                          Years ended December 31
  Millions of dollars and shares                 -------------------------------------------------------------------------
  except per share and employee data                 1997          1996          1995            1994           1993
  ------------------------------------------------------------------------------------------------------------------------
                                                                                              
  Operating results
  Net revenues
      Energy Services Group                       $    7,152     $   5,696     $  4,838      $    4,548      $    5,065
      Engineering and Construction Group               6,346         5,540        4,207           3,992           4,080
  ------------------------------------------------------------------------------------------------------------------------
         Total revenues                           $   13,498     $  11,236     $  9,045      $    8,540      $    9,145
  ========================================================================================================================
  Operating income
      Energy Services Group                       $      959     $     644     $    552      $      411      $      395
      Engineering and Construction Group                 279           188           89              66              95
      Special charges and credits (1)                     11           (86)          (8)            (19)           (419)
      General corporate                                  (71)          (72)         (71)            (56)            (63)
  ------------------------------------------------------------------------------------------------------------------------
         Total operating income (1)                    1,178           674          562             402               8
  Nonoperating income (expense), net (2)                 (82)          (70)         (34)            333             (61)
  ------------------------------------------------------------------------------------------------------------------------
  Income from continuing operations
      before income taxes and minority interest        1,096           604          528             735             (53)
  Provision for income taxes (3)                        (406)         (158)        (167)           (275)            (18)
  Minority interest in net income of
  consolidated
      subsidiaries                                       (30)            -           (1)            (14)            (24)
  ------------------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations        $      660     $     446     $    360      $      446      $      (95)
  ========================================================================================================================
  Income from discontinued operations             $      112     $     112     $     36      $       97      $       81
  ========================================================================================================================
  Net income (loss)                               $      772     $     558     $    381      $      543      $      (14)
  ========================================================================================================================
  Basic income (loss) per common share
      Continuing operations                       $     1.53     $    1.04     $   0.83      $     1.04      $    (0.23)
      Net income (loss)                                 1.79          1.30         0.88            1.26           (0.04)
  Diluted income (loss) per common share
      Continuing operations                             1.51          1.03         0.83            1.03           (0.23)
      Net income (loss)                                 1.77          1.29         0.88            1.26           (0.04)
  Cash dividends per share                              0.50          0.50         0.50            0.50            0.50
  Return on average shareholders' equity               19.16%        15.25%       10.44%          15.47%          (0.43)%
  ------------------------------------------------------------------------------------------------------------------------
  Financial position
  Net working capital                             $    1,985     $   1,501     $  1,477      $    2,197      $    1,563
  Total assets                                         9,657         8,689        7,723           7,774           8,087
  Property, plant and equipment, net                   2,282         2,047        1,865           1,631           1,747
  Long-term debt (including current maturities)        1,303           957          667           1,119           1,129
  Shareholders' equity                                 4,317         3,741        3,577           3,723           3,296
  Total capitalization                                 5,647         4,828        4,378           4,905           4,746
  Shareholders' equity per share                        9.86          8.78         8.29            8.63            7.70
  Average common shares outstanding (basic)              431           429          431             431             422
  Average common shares outstanding (diluted)            436           432          432             432             422
  ------------------------------------------------------------------------------------------------------------------------
  Other financial data
  Capital expenditures                            $     (804)    $    (612)    $   (474)     $     (358)     $     (373)
  Long-term borrowings (repayments), net                 285           286         (481)           (120)            192
  Depreciation, depletion and amortization
      expense                                            465           405          380             387             574
  Goodwill amortization included in
      depreciation, depletion and amortization
      expense:
         Energy Services Group                            20            19           17              14              11
         Engineering and Construction Group               12             7            7               7               7
  Payroll and employee benefits (4)                   (5,479)       (4,674)      (4,188)         (4,222)         (4,429)
  Number of employees (4), (5)                       102,000        93,000       89,800          86,500          90,500
  ========================================================================================================================
  (continued on next page)

                                       97


                               HALLIBURTON COMPANY
                             Selected Financial Data
                                   (Unaudited)
                                   (continued)



 (1) Operating income includes the following special charges and credits:

     1999 - $47 million: reversal of a portion of the 1998 special charges.

     1998 - $959  million:  asset  related  charges  ($491  million),  personnel
     reductions ($234 million),  facility consolidations ($124 million),  merger
     transaction costs ($64 million), and other related costs ($46 million).

     1997 - $11 million:  merger  costs ($9  million),  write-downs  on impaired
     assets and early retirement incentives ($10 million),  losses from the sale
     of assets  ($12  million),  and gain on  extension  of joint  venture  ($42
     million).

     1996 - $86 million: merger costs ($13 million),  restructuring,  merger and
     severance  costs  ($62  million),  and  write-off  of  acquired  in-process
     research and development costs ($11 million).

     1995 - $8  million:  restructuring  costs ($5  million)  and  write-off  of
     acquired in-process research and development costs ($3 million).

     1994 - $19 million:  merger costs ($27 million),  litigation ($10 million),
     and litigation and insurance recoveries ($18 million).

     1993 - $419 million: loss on sale of business ($322 million),  merger costs
     ($31 million),  restructuring ($5 million),  litigation ($65 million),  and
     gain on curtailment of medical plan ($4 million).

(2)  Nonoperating  income in 1994  includes a gain of $276 million from the sale
     of an  interest in Western  Atlas  International,  Inc.  and a gain of $102
     million from the sale of our natural gas compression business.

(3)  Provision for income taxes in 1996 includes tax benefits of $44 million due
     to the recognition of net operating loss  carryforwards  and the settlement
     of various issues with the Internal Revenue Service.

(4)  Includes  employees of Dresser  Equipment  Group which is accounted  for as
     discontinued operations for the years 1993 through 2000.

(5)  Does not include employees of less than 50%-owned affiliated companies.



                                       98



                               HALLIBURTON COMPANY
                   Quarterly Data and Market Price Information
                                   (Unaudited)


                                                                            Quarter
                                                    ---------------------------------------------------------
Millions of dollars except per share data               First         Second         Third         Fourth         Year
----------------------------------------------------------------------------------------------------------------------------
                                                                                                  
2002
Revenues                                             $   3,007        $ 3,235        $ 2,982       $ 3,348       $12,572
Operating income (loss)                                    123           (405)           191           (21)         (112)
Income (loss) from continuing operations                    50           (358)            94          (132)         (346)
Loss from discontinued operations                          (28)          (140)             -          (484)         (652)
Net income (loss)                                           22           (498)            94          (616)         (998)
Earnings per share:
    Basic income (loss) per common share:
       Income (loss) from continuing operations           0.12          (0.83)          0.22         (0.30)        (0.80)
       Loss from discontinued operations                 (0.07)         (0.32)             -         (1.12)        (1.51)
       Net income (loss)                                  0.05          (1.15)          0.22         (1.42)        (2.31)
    Diluted income (loss) per common share:
       Income (loss) from continuing operations           0.12          (0.83)          0.22         (0.30)        (0.80)
       Loss from discontinued operations                 (0.07)         (0.32)             -         (1.12)        (1.51)
       Net income (loss)                                  0.05          (1.15)          0.22         (1.42)        (2.31)
Cash dividends paid per share                            0.125          0.125          0.125         0.125          0.50
Common stock prices (1)
    High                                                 18.00          19.63          16.00          21.65        21.65
    Low                                                   8.60          14.60           8.97          12.45         8.60
============================================================================================================================
2001
Revenues                                             $   3,144        $ 3,339        $ 3,391       $ 3,172       $13,046
Operating income                                           198            272            342           272         1,084
Income from continuing operations before
    change in accounting method, net                        86            143            181           141           551
Income (loss) from discontinued operations                  22            (60)            (2)           (2)          (42)
Gain on disposal of discontinued operations                  -            299              -             -           299
Change in accounting method, net                             1              -              -             -             1
Net income                                                 109            382            179           139           809
============================================================================================================================
(continued on next page)

                                       99


                               HALLIBURTON COMPANY
                   Quarterly Data and Market Price Information
                                   (Unaudited)
                                   (continued)


                                                                              Quarter
                                                       ------------------------------------------------------
Millions of dollars except per share data                First        Second         Third         Fourth          Year
-----------------------------------------------------------------------------------------------------------------------------
2001
Earnings per share:
    Basic income (loss) per common share:
       Income from continuing operations                     0.20        0.34           0.42          0.33          1.29
       Income (loss) from discontinued operations            0.05       (0.14)             -         (0.01)        (0.10)
       Gain on disposal of discontinued operations              -        0.70              -            -           0.70
       Net income                                            0.25        0.90           0.42          0.32          1.89
    Diluted income (loss) per common share:
       Income from continuing operations                     0.20        0.33           0.42          0.33          1.28
       Income (loss) from discontinued operations            0.05       (0.14)             -         (0.01)        (0.10)
       Gain on disposal of discontinued operations              -        0.70              -            -           0.70
       Net income                                            0.25        0.89           0.42          0.32          1.88
Cash dividends paid per share                               0.125       0.125          0.125         0.125          0.50
Common stock prices (1)
    High                                                    45.91       49.25          36.79         28.90         49.25
    Low                                                     34.81       32.20          19.35         10.94         10.94
=============================================================================================================================

(1) New York  Stock  Exchange -  composite  transactions  high and low  intraday
price.



                                      100


PART III

Item 10. Directors and Executive Officers of Registrant.
         The information  required  for  the  directors  of  the  Registrant  is
incorporated by reference to the Halliburton Company Proxy Statement dated March
25, 2003 (File No.  1-3492),  under the caption  "Election  of  Directors."  The
information  required for the executive  officers of the  Registrant is included
under Part I on pages 10 through 12 of this annual report.

Item 11. Executive Compensation.
         This  information  is  incorporated  by  reference  to the  Halliburton
Company  Proxy  Statement  dated  March 25,  2003 (File No.  1-3492),  under the
captions "Compensation Committee Report on Executive Compensation,"  "Comparison
of Cumulative Total Return,"  "Summary  Compensation  Table," "Option Grants For
Fiscal 2002,"  "Aggregated Option Exercises in Fiscal 2002 and December 31, 2002
Option Values," "Employment  Contracts and  Change-in-Control  Arrangements" and
"Directors' Compensation."

Item 12(a). Security Ownership of Certain Beneficial Owners and Management.
         This  information  is  incorporated  by  reference  to the  Halliburton
Company  Proxy  Statement  dated  March 25,  2003 (File No.  1-3492),  under the
caption "Stock Ownership of Certain Beneficial Owners and Management."

Item 12(b). Security Ownership of Management.
         This  information  is  incorporated  by  reference  to the  Halliburton
Company  Proxy  Statement  dated  March 25,  2003 (File No.  1-3492),  under the
caption "Stock Ownership of Certain Beneficial Owners and Management."

Item 12(c). Changes in Control.
         Not applicable.

Item 12(d). Securities Authorized for Issuance Under Equity Compensation Plans.
         This  information  is  incorporated  by  reference  to the  Halliburton
Company  Proxy  Statement  dated  March 25,  2003 (File No.  1-3492),  under the
caption "Equity Compensation Plan Information."

Item 13. Certain Relationships and Related Transactions.
         This  information  is  incorporated  by  reference  to the  Halliburton
Company  Proxy  Statement  dated  March 25,  2003 (File No.  1-3492),  under the
caption "Certain Relationships and Related Transactions."

Item 14.  Controls and Procedures.
         Under the  supervision  and with the  participation  of our management,
including our principal  executive officer and principal  financial officer,  we
have evaluated the  effectiveness  of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this annual report,
and, based on their  evaluation,  our principal  executive officer and principal
financial  officer  have  concluded  that  these  controls  and  procedures  are
effective.  There were no  significant  changes in our  internal  controls or in
other factors that could  significantly  affect these controls subsequent to the
date of their evaluation.
         Disclosure   controls  and   procedures  are  our  controls  and  other
procedures that are designed to ensure that information required to be disclosed
by us in the reports  that we file or submit 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.  Disclosure  controls and
procedures  include,  without  limitation,  controls and procedures  designed to
ensure that  information  required to be  disclosed by us in the reports that we
file under the Exchange Act is accumulated  and  communicated to our management,
including our principal  executive officer and principal  financial officer,  as
appropriate to allow timely decisions regarding required disclosure.

                                      101


PART IV

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

(a) 1. Financial Statements:
       The  reports  of   Independent  Public  Accountants   and  the  financial
       statements of  the Company as  required by Part II, Item 8, are  included
       on  pages 47 through 95 and  pages 99 and 100 of this annual report.  See
       index on page 14.

    2. Financial Statement Schedules: Page No.

       Report on supplemental schedule of KPMG LLP                        112

       Schedule II - Valuation and qualifying accounts for the
       three years ended
            December 31, 2002                                             113

       Note:  All   schedules  not   filed  with   this   report   required   by
       Regulation  S-X have  been  omitted  as  not  applicable  or not required
       or   the  information  required  has  been  included  in  the   notes  to
       financial statements.

    3. Exhibits:

    Exhibit
    Number          Exhibits

    3.1             Restated   Certificate  of   Incorporation  of   Halliburton
                    Company filed  with  the  Secretary of  State of Delaware on
                    July  23, 1998  (incorporated  by reference  to Exhibit 3(a)
                    to  Halliburton's  Form 10-Q  for the quarter ended June 30,
                    1998, File No. 1-3492).

*   3.2             By-laws  of   Halliburton  revised   effective  February 12,
                    2003.

    4.1             Form  of debt security of 8.75% Debentures due  February 12,
                    2021  (incorporated  by  reference  to  Exhibit  4(a) to the
                    Predecessor's  Form 8-K dated  as of February 20, 1991, File
                    No. 1-3492).

    4.2             Senior  Indenture  dated  as of  January 2, 1991 between the
                    Predecessor and  Texas Commerce  Bank National  Association,
                    as trustee  (incorporated  by  reference to  Exhibit 4(b) to
                    the   Predecessor's  Registration  Statement   on  Form  S-3
                    (Registration   No.  33-38394)  originally  filed  with  the
                    Securities and  Exchange  Commission on  December 21, 1990),
                    as  supplemented  and  amended  by  the  First  Supplemental
                    Indenture   dated  as   of  December  12,  1996  among   the
                    Predecessor,  Halliburton  and  the Trustee (incorporated by
                    reference  to  Exhibit  4.1  of  Halliburton's  Registration
                    Statement on  Form 8-B  dated  December  12, 1996,  File No.
                    1-3492).

    4.3             Resolutions  of   the  Predecessor's   Board   of  Directors
                    adopted  at a meeting  held  on February 11, 1991 and of the
                    special pricing  committee of the  Board of Directors of the
                    predecessor adopted  at a meeting held  on February 11, 1991
                    and  the  special  pricing  committee's  consent in  lieu of
                    meeting  dated February 12, 1991 (incorporated  by reference
                    to Exhibit 4(c) to the Predecessor's  Form  8-K dated as  of
                    February 20, 1991, File No. 1-3492).

                                      102


    4.4             Form of debt security of 6.75%  Notes due  February  1, 2027
                    (incorporated  by reference to Exhibit  4.1 to Halliburton's
                    Form 8-K dated as of February 11, 1997, File No. 1-3492).

    4.5             Second  Senior  Indenture  dated  as  of  December  1,  1996
                    between the  Predecessor  and Texas  Commerce  Bank National
                    Association,  as  Trustee,  as supplemented  and  amended by
                    the  First  Supplemental  Indenture  dated as of December 5,
                    1996  between  the  Predecessor  and  the  Trustee  and  the
                    Second  Supplemental  Indenture  dated  as  of December  12,
                    1996  among the  Predecessor,  Halliburton  and  the Trustee
                    (incorporated  by reference to Exhibit  4.2 of Halliburton's
                    Registration  Statement  on  Form  8-B  dated  December  12,
                    1996, File No. 1-3492).

    4.6             Third  Supplemental  Indenture  dated  as  of August 1, 1997
                    between   Halliburton  and   Texas  Commerce  Bank  National
                    Association,  as Trustee,  to  the  Second Senior  Indenture
                    dated as  of December 1, 1996 (incorporated by  reference to
                    Exhibit 4.7  to Halliburton's  Form 10-K  for the year ended
                    December 31, 1998, File No. 1-3492).

    4.7             Fourth  Supplemental  Indenture   dated as  of September 29,
                    1998 between  Halliburton and Chase  Bank of Texas, National
                    Association   (formerly    Texas   Commerce   Bank  National
                    Association),  as  Trustee,  to the  Second Senior Indenture
                    dated as of December 1, 1996  (incorporated by reference  to
                    Exhibit 4.8 to  Halliburton's  Form 10-K  for the year ended
                    December 31, 1998, File No. 1-3492).

    4.8             Resolutions of  Halliburton's Board of  Directors adopted by
                    unanimous consent  dated December 5, 1996  (incorporated  by
                    reference to  Exhibit 4(g) of  Halliburton's  Form  10-K for
                    the year ended December 31, 1996, File No. 1-3492).

    4.9             Resolutions of  Halliburton's Board of Directors  adopted at
                    a special  meeting held on September 28, 1998  (incorporated
                    by  reference to Exhibit  4.10 to  Halliburton's  Form  10-K
                    for the year ended December 31, 1998, File No. 1-3492).

    4.10            Restated  Rights  Agreement  dated  as  of  December 1, 1996
                    between   Halliburton  and  Mellon  Investor   Services  LLC
                    (formerly   ChaseMellon   Shareholder    Services,   L.L.C.)
                    (incorporated by reference to Exhibit 4.4  of  Halliburton's
                    Registration  Statement  on  Form  8-B  dated  December  12,
                    1996, File No. 1-3492).

    4.11            Copies of  instruments that define  the rights of holders of
                    miscellaneous   long-term   notes of   Halliburton  and  its
                    subsidiaries,  totaling  $8  million  in  the  aggregate  at
                    December 31, 2002, have  not been filed with the Commission.
                    Halliburton agrees to furnish  copies of  these  instruments
                    upon request.

    4.12            Form  of debt  security  of 7.53%  Notes  due  May 12,  2017
                    (incorporated  by reference to Exhibit 4.4 to  Halliburton's
                    Form 10-Q for the  quarter  ended  March 31, 1997,  File No.
                    1-3492).

    4.13            Form of debt  security  of  6.30%  Notes  due August 5, 2002
                    (incorporated by  reference to Exhibit 4.1 to  Halliburton's
                    Form 8-K dated as of August 5, 1997, File No. 1-3492).

    4.14            Form of debt  security  of 5.63% Notes due  December 1, 2008
                    (incorporated  by reference to Exhibit  4.1 to Halliburton's
                    Form 8-K dated as of November 24, 1998, File No. 1-3492).

                                      103


    4.15            Form of  Indenture,  between  Baroid  Corporation  and Texas
                    Commerce  Bank  National  Association,  as  Trustee,  for 8%
                    Senior  Notes   due  2003  (incorporated  by  reference   to
                    Exhibit  4.01  to  the  Registration  Statement  on Form S-3
                    filed  by Baroid  Corporation,  Registration  No. 33-60174),
                    as  supplemented  and   amended  by  Form  of   Supplemental
                    Indenture,  between  Dresser,  Baroid Corporation  and Texas
                    Commerce Bank N.A. as  Trustee,  for  8%  Guaranteed  Senior
                    Notes  due 2003  (incorporated  by  reference to Exhibit 4.3
                    to  Registration  Statement  on  Form S-4  filed  by  Baroid
                    Corporation  and Dresser Industries, Inc., Registration  No.
                    33-53077).

    4.16            Second Supplemental Indenture dated October 30, 1997 between
                    Dresser  and Texas  Commerce Bank  National  Association, as
                    Trustee,  for 8%  Senior  Notes  due 2003  (incorporated  by
                    reference to Exhibit 4.19 to Halliburton's Form 10-K for the
                    year ended December 31, 1998, File No. 1-3492).

    4.17            Third   Supplemental  Indenture  dated   September  29, 1998
                    between  Dresser, Halliburton, as  Guarantor, and Chase Bank
                    of Texas, National Association,  as  Trustee, for 8%  Senior
                    Notes due 2003  (incorporated  by reference to  Exhibit 4.20
                    to Halliburton's Form 10-K for the  year ended  December 31,
                    1998, File No. 1-3492).

    4.18            Form of  Indenture, between Dresser and  Texas Commerce Bank
                    National Association,  as Trustee, for 7.60% Debentures  due
                    2096  (incorporated  by   reference  to  Exhibit  4  to  the
                    Registration  Statement  on  Form S-3 filed  by  Dresser  as
                    amended,  Registration  No. 333-01303), as supplemented  and
                    amended by Form of  Supplemental Indenture, between  Dresser
                    and Texas  Commerce Bank National  Association, Trustee, for
                    7.60%  Debentures  due 2096  (incorporated  by  reference to
                    Exhibit 4.1 to Dresser's  Form 8-K filed on  August 9, 1996,
                    File No. 1-4003).

    4.19            Form  of debt  security of floating  rate Notes due July 16,
                    2003   (incorporated   by   reference  to  Exhibit  4.1   to
                    Halliburton's  Form  8-K dated  January 8,  2002,  File  No.
                    1-3492).

    4.20            Form  of debt  security  of 6%  Notes  due  August  1,  2006
                    (incorporated  by reference to Exhibit  4.2 to Halliburton's
                    Form 8-K dated January 8, 2002, File No. 1-3492).

*   4.21            Fourth  Supplemental  Indenture  dated   December  20,  2002
                    between  DII Industries,  LLC (formerly  Dresser Industries,
                    Inc.), Halliburton  and  JPMorgan  Chase  Bank, a  New  York
                    banking corporation  (formerly Chase Bank of Texas, National
                    Association  and before  that Texas  Commerce  Bank National
                    Association), as Trustee, for 8% Senior Notes due 2003.

*   4.22            Credit Facility  in  the  amount of(pound)80  million  dated
                    November 29, 2002  between Devonport  Royal Dockyard Limited
                    and  Devonport  Management  Limited  and  The  Governor  and
                    Company of the Bank of Scotland, HSBC Bank plc and The Royal
                    Bank of Scotland Plc.

    10.1            Halliburton Company Career Executive Incentive Stock Plan as
                    amended  November 15, 1990  (incorporated  by  reference  to
                    Exhibit  10(a) to the  Predecessor's Form 10-K for  the year
                    ended December 31, 1992, File No. 1-3492).

    10.2            Retirement Plan for the Directors of Halliburton Company, as
                    amended and restated effective May 16, 2000 (incorporated by
                    reference to Exhibit 10.2 to Halliburton's Form 10-Q for the
                    quarter ended September 30, 2000, File No. 1-3492).

                                      104


    10.3            Halliburton Company Directors' Deferred Compensation Plan as
                    amended   and   restated   effective    February   1,   2001
                    (incorporated by reference to Exhibit 10.3  to Halliburton's
                    Form 10-K for the year ended December 31, 2000, File No.
                    1-3492).

    10.4            Halliburton Company 1993 Stock and Long-Term Incentive Plan,
                    as amended and restated effective May 16, 2000 (incorporated
                    by  reference to Exhibit 10.3 to Halliburton's Form 10-Q for
                    the quarter ended June 30, 2000, File No. 1-3492).

    10.5            Halliburton Company  Restricted Stock Plan  for Non-Employee
                    Directors  (incorporated by  reference to Appendix  B of the
                    Predecessor's proxy statement dated March 23, 1993, File No.
                    1-3492).

    10.6            Employment  agreement  (David  J.  Lesar)  (incorporated  by
                    reference  to Exhibit  10(n) to the  Predecessor's Form 10-K
                    for the year ended December 31, 1995, File No. 1-3492).

    10.7            Employment  agreement  (Lester  L. Coleman) (incorporated by
                    reference to Exhibit 10.16 to Halliburton's  Form  10-K  for
                    the year ended December 31, 1998, File No. 1-3492).

    10.8            Employment  agreement  (Gary  V.  Morris)  (incorporated  by
                    reference  to Exhibit  10.19 to Halliburton's  Form 10-K for
                    the year ended December 31, 1998, File No. 1-3492).

    10.9            Dresser  Industries,  Inc.  Deferred  Compensation  Plan, as
                    amended and restated effective January 1, 2000 (incorporated
                    by reference to Exhibit 10.16 to Halliburton's Form 10-K for
                    the year ended December 31, 2000, File No. 1-3492).

    10.10           Dresser   Industries,   Inc.   1982   Stock    Option   Plan
                    (incorporated by reference to  Exhibit A to Dresser's  Proxy
                    Statement dated February 12, 1982, File No. 1-4003).

    10.11           ERISA Excess Benefit  Plan for Dresser  Industries, Inc., as
                    amended and restated effective June 1, 1995 (incorporated by
                    reference to  Exhibit 10.7 to  Dresser's  Form 10-K  for the
                    year ended October 31, 1995, File No. 1-4003).

    10.12           ERISA   Compensation   Limit   Benefit   Plan   for  Dresser
                    Industries, Inc., as amended and restated  effective June 1,
                    1995 (incorporated by reference to Exhibit 10.8 to Dresser's
                    Form 10-K  for the year  ended October  31,  1995,  File No.
                    1-4003).

    10.13           Supplemental   Executive   Retirement   Plan    of   Dresser
                    Industries, Inc., as amended and  restated effective January
                    1,  1998  (incorporated  by  reference  to  Exhibit  10.9 to
                    Dresser's  Form 10-K  for  the  year ended October 31, 1997,
                    File No. 1-4003).

    10.14           Stock   Based   Compensation   Arrangement  of  Non-Employee
                    Directors  (incorporated  by  reference  to  Exhibit  4.4 to
                    Dresser's  Registration  Statement on Form S-8, Registration
                    No. 333-40829).

    10.15           Dresser  Industries, Inc.  Deferred  Compensation  Plan  for
                    Non-employee Directors,  as restated  and  amended effective
                    November 1, 1997 (incorporated  by reference  to Exhibit 4.5
                    to   Dresser's   Registration   Statement   on   Form   S-8,
                    Registration No. 333-40829).

    10.16           Long-Term Performance Plan  for Selected Employees of The M.
                    W.  Kellogg  Company,  as  amended  and  restated  effective
                    September  1, 1999  (incorporated  by  reference  to Exhibit
                    10.23 to Halliburton's Form 10-K for the year ended December
                    31, 2000, File No. 1-3492).

                                      105


    10.17           Dresser  Industries,  Inc.  1992   Stock  Compensation  Plan
                    (incorporated  by reference to Exhibit  A to Dresser's Proxy
                    Statement dated February 7, 1992, File No. 1-4003).

    10.18           Amendments  No.  1  and  2  to Dresser Industries, Inc. 1992
                    Stock  Compensation   Plan  (incorporated  by  reference  to
                    Exhibit  A to Dresser's  Proxy Statement  dated  February 6,
                    1995, File No. 1-4003).

    10.19           Amendment  No. 3 to the Dresser  Industries, Inc. 1992 Stock
                    Compensation  Plan  (incorporated  by  reference to  Exhibit
                    10.25 to Dresser's Form 10-K for the  year ended October 31,
                    1997, File No. 1-4003).

    10.20           Amendment  No.  1  to  the Supplemental Executive Retirement
                    Plan of Dresser Industries,  Inc. (incorporated by reference
                    to Exhibit 10.1 to Dresser's Form 10-Q for the quarter ended
                    April 30, 1998, File No. 1-4003).

    10.21           Employment  agreement (Robert F.  Heineman) (incorporated by
                    reference to Exhibit 10.2 to Halliburton's Form 10-Q for the
                    quarter ended June 30, 2000, File No. 1-3492).

    10.22           Employment  agreement (Arthur  D. Huffman)  (incorporated by
                    reference to Exhibit 10.1 to Halliburton's Form 10-Q for the
                    quarter ended September 30, 2000, File No. 1-3492).

    10.23           Form of Nonstatutory Stock Option Agreement for Non-Employee
                    Directors  (incorporated  by  reference  to  Exhibit 10.3 to
                    Halliburton's Form 10-Q for the quarter ended  September 30,
                    2000, File No. 1-3492).

    10.24           Employment agreement (Margaret E. Carriere) (incorporated by
                    reference to  Exhibit 10.39 to  Halliburton's Form  10-K for
                    the year ended December 31, 2000, File No. 1-3492).

    10.25           Agreement  and  Plan  of  Recapitalization,  as  amended and
                    restated effective April 10, 2001 (incorporated by reference
                    to Halliburton's Form 8-K/A dated as  of May 10,  2001, File
                    No. 1-3492).

    10.26           Halliburton  Company Supplemental Executive  Retirement Plan
                    (formerly part  of  Halliburton Company  Senior  Executives'
                    Deferred   Compensation  Plan),  as   amended  and  restated
                    effective  January 1, 2001  (incorporated  by  reference  to
                    Exhibit  10.1  to  Halliburton's Form 10-Q for  the  quarter
                    ended June 30, 2001, File No. 1-3492).

    10.27           Halliburton  Company  Benefit  Restoration   Plan  (formerly
                    part of  Halliburton  Company  Senior  Executives'  Deferred
                    Compensation  Plan),  as  amended  and   restated  effective
                    January  1, 2001 (incorporated  by reference to Exhibit 10.2
                    to Halliburton's  Form 10-Q  for the  quarter ended June 30,
                    2001, File No. 1-3492).

    10.28           Employment agreement  (Douglas L.  Foshee) (incorporated  by
                    reference to Exhibit 10.3 to Halliburton's Form 10-Q for the
                    quarter ended June 30, 2001, File No. 1-3492).

    10.29           Halliburton  Annual  Performance  Pay  Plan,  as amended and
                    restated   effective   January  1,   2001  (incorporated  by
                    reference to Exhibit 10.1 to Halliburton's Form 10-Q for the
                    quarter ended September 30, 2001, File No. 1-3492).

    10.30           Halliburton Company  Performance Unit  Program (incorporated
                    by reference to Exhibit 10.2 to Halliburton's  Form 10-Q for
                    the quarter ended September 30, 2001, File No. 1-3492).

                                      106


    10.31           Employment  agreement  (R.  Randall  Harl)  (incorporated by
                    reference  to Exhibit  10.32 to Halliburton's  Form 10-K for
                    the year ended December 31, 2002, File No. 1-3492).

    10.32           Employment   agreement  (Edgar   Ortiz)   (incorporated   by
                    reference  to Exhibit  10.33 to  Halliburton's Form 10-K for
                    the year ended December 31, 2002, File No. 1-3492).

    10.33           Halliburton   Elective    Deferral  Plan,   as  amended  and
                    restated   effective  January  1,   2002  (incorporated   by
                    reference  to Exhibit  4.1  to  Halliburton's   Registration
                    Statement on Form S-8, Registration No. 333-73046).

    10.34           Halliburton Elective  Deferral Plan  as amended and restated
                    effective May 1, 2002 (incorporated by  reference to Exhibit
                    10.1 to  Halliburton's Form  10-Q for the quarter ended June
                    30, 2002, File No. 1-3492).

    10.35           Halliburton  Company  2002  Employee   Stock  Purchase  Plan
                    (incorporated    by    reference   to    Exhibit   10.2   to
                    Halliburton's  Form  10-Q for  the  quarter  ended  June 30,
                    2002, File No. 1-3492).

    10.36           Halliburton Company Directors' Deferred Compensation Plan as
                    amended  and  restated  effective  as  of  October  22, 2002
                    (incorporated by reference to Exhibit 10.1 to  Halliburton's
                    Form 10-Q for the quarter ended September 30, 2002, File No.
                    1-3492).

    10.37           Employment Agreement (Albert O. Cornelison) (incorporated by
                    reference to Exhibit 10.3 to Halliburton's Form 10-Q for the
                    quarter ended June 30, 2002, File No. 1-3492).

    10.38           Employment  Agreement  (Weldon  J.  Mire)  (incorporated  by
                    reference to Exhibit 10.4 to Halliburton's Form 10-Q for the
                    quarter ended June 30, 2002, File No. 1-3492).

*   10.39           Employment Agreement of David R. Smith.

*   10.40           Employment Agreement of John W. Gibson.

*   21              Subsidiaries of the Registrant.

*   23.1            Consent of KPMG LLP.

*   23.2            Notice Regarding Consent of Arthur Andersen LLP.

    24.1            Powers  of attorney  for the following  directors signed  in
                    February, 1997  (incorporated by  reference to Exhibit 24 to
                    Halliburton's  Form 10-K  for the year  ended  December  31,
                    1996, File No. 1-3492):

                    Robert L. Crandall
                    W. R. Howell
                    C. J. Silas

    24.2            Power  of attorney  signed in  December, 1997 for Charles J.
                    DiBona  (incorporated  by  reference  to  Exhibit  24(b)  to
                    Halliburton's  Form 10-K  for  the  year  ended December 31,
                    1997, File No. 1-3492).

                                      107


    24.3            Powers  of attorney  for the  following directors  signed in
                    October, 1998 (incorporated by reference to Exhibit  24.3 to
                    Halliburton's  Form 10-K  for  the  year  ended December 31,
                    1998, File No. 1-3492):

                    Lawrence S. Eagleburger
                    Ray L. Hunt
                    J. Landis Martin
                    Jay A. Precourt

    24.4            Powers of attorney  for the  following  directors  signed in
                    May,  2001  (incorporated  by reference  to  Exhibit 24.1 to
                    Halliburton's Form 10-Q for the quarter ended June 30, 2001,
                    File No. 1-3492):

                    Kenneth T. Derr
                    Aylwin B. Lewis
                    Debra L. Reed


  *                 Filed with this Form 10-K.

(b) Reports on Form 8-K:



                         Date of
Date Filed               Earliest Event         Description of Event
-------------------------------------------------------------------------------------------------------------------
                                          
During the fourth quarter of 2002:

October 2, 2002          October 1, 2002        Item 5. Other Events for a press release announcing a conference
                                                call to discuss third quarter financial results.

November 5, 2002         November 4, 2002       Item 9. Regulation FD Disclosure for a press release announcing
                                                the revision of credit rating agreements.

November 13, 2002        November 7, 2002       Item 9. Regulation FD Disclosure for a press release announcing
                                                2002 third quarter results.

November 13, 2002        November 7, 2002       Item 9. Regulation FD Disclosure for a press release announcing
                                                asbestos plaintiffs agree to extend current stay on asbestos
                                                claims until December 11, 2002

November 14, 2002        November 12, 2002      Item 9. Regulation FD Disclosure 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 Douglas L. Foshee.

November 15, 2002        November 14, 2002      Item 9. Regulation FD Disclosure for a press release announcing
                                                the 2002 fourth quarter dividend.

December 12, 2002        December 11, 2002      Item 9. Regulation FD Disclosure for a press release announcing
                                                the Harbison-Walker bankruptcy court has agreed to extend the
                                                current stay on asbestos claims until December 13, 2002.

                                      108


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

During the fourth quarter of 2002 (continued):

December 12, 2002        December 11, 2002      Item 9. Regulation FD Disclosure for a press release announcing
                                                the Company is close to an agreement in principle with asbestos
                                                plaintiffs' attorneys representing more than 300,000 claimants.

December 13, 2002        December 13, 2002      Item 9. Regulation FD Disclosure for a press release announcing
                                                the Harbison-Walker bankruptcy court has agreed to extend the
                                                current stay on asbestos claims until December 18, 2002.

December 18, 2002        December 17, 2002      Item 9. Regulation FD Disclosure for a press release announcing
                                                completion of the sale of ShawCor shares.

December 19, 2002        December 18, 2002      Item 9. Regulation FD Disclosure for a press release announcing a
                                                conference call to discuss the global asbestos settlement.

December 19, 2002        December 18, 2002      Item 9. Regulation FD Disclosure for a press release announcing
                                                asbestos plaintiffs agree to extend current stay on asbestos
                                                claims until January 17, 2003

December 20, 2002        December 18, 2002      Item 9. Regulation FD Disclosure for a press release announcing
                                                agreement in principle to achieve global settlement of asbestos
                                                claims.

December 20, 2002        December 19, 2002      Item 9. Regulation FD Disclosure for a press release announcing
                                                the SEC has formalized its investigation of the Company's
                                                disclosure and accounting for cost overruns on certain
                                                engineering and construction jobs.

During the first quarter of 2003:

January 3, 2003          January 2, 2003        Item 9. Regulation FD Disclosure for a press release announcing
                                                an analyst and investor meeting on January 13, 2003.

January 7, 2003          January 7, 2003        Item 9. Regulation FD Disclosure for a press release announcing a
                                                conference call on February 20, 2003 to discuss 2002 fourth
                                                quarter financial results.

January 13, 2003         January 13, 2003       Item 9. Regulation FD Disclosure for submission of presentation
                                                content at analyst and investor meeting on January 13, 2003.

January 21, 2003         January 17, 2003       Item 9. Regulation FD Disclosure for a press release announcing
                                                asbestos plaintiffs agree to extend current stay on asbestos
                                                claims until February 18, 2003.

February 14, 2003        February 12, 2003      Item 9. Regulation FD Disclosure for a press release announcing
                                                2003 first quarter dividend.

                                      109


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

During the first quarter of 2003 (continued):

February 14, 2003        February 12, 2003      Item 9. Regulation FD Disclosure for a press release announcing
                                                C. Christopher Gaut named executive vice president and chief
                                                financial officer and Doug Foshee promoted to chief operating
                                                officer.

February 21, 2003        February 18, 2003      Item 9. Regulation FD Disclosure for a press release announcing
                                                the Harbison-Walker bankruptcy court extended the current stay on
                                                asbestos claims until March 21, 2003.  The court also ruled that
                                                the Company must file an affidavit by March 14, 2003 stating
                                                settlement agreements have been signed by attorneys representing
                                                75% of DII Industries' current asbestos claimants.

February 21, 2003        February 20, 2003      Item 9. Regulation FD Disclosure for a press release announcing
                                                2002 fourth quarter results.

March 12, 2003           March 11, 2003         Item 9. Regulation FD Disclosure for a press release announcing
                                                the selling of Wellstream.

March 17, 2003           March 14, 2003         Item 9. Regulation FD Disclosure for a press release announcing
                                                DII Industries' filing of an affidavit on the global asbestos
                                                settlement, stating that it believes it has complied with the
                                                March 14, 2003 court-imposed deadline requiring signed agreements
                                                by an estimated 75% of DII Industries' asbestos plaintiffs.

March 24, 2003           March 21, 2003         Item 9. Regulation FD Disclosure for a press release announcing
                                                an agreement  with Harbison-Walker Refractories Company and the
                                                Official Committee of Asbestos Creditors in the Harbison-Walker
                                                bankruptcy to consensually extend the period of the stay contained
                                                in the Bankruptcy Court's temporary restraining order until July
                                                21, 2003.

March 26, 2003           March 21, 2003         Item 9. Regulation FD Disclosure for a press release announcing
                                                2003 first quarter results.


                                      110


This report is a copy of a previously issued report, the predecessor auditor has
not reissued this report,  and the previously  issued report refers to financial
statements not physically included in this document.


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE



To the Shareholders and
Board of Directors of Halliburton Company:


We have audited in accordance with auditing standards  generally accepted in the
United States of America, the consolidated financial statements included in this
Form 10-K, and have issued our report thereon dated January 23, 2002. Our audits
were made for the purpose of forming an opinion on those  statements  taken as a
whole.  The  supplemental  schedule  (Schedule  II)  is  the  responsibility  of
Halliburton Company's management and is presented for purposes of complying with
the  Securities  and  Exchange  Commission's  rules and is not part of the basic
financial  statements.   This  schedule  has  been  subjected  to  the  auditing
procedures  applied in the audits of the basic financial  statements and, in our
opinion,  is fairly  stated in all  material  respects  in relation to the basic
financial statements taken as a whole.



Arthur Andersen LLP
Dallas, Texas

January 23, 2002 (Except with respect to certain matters discussed in Note 9, as
to which the date is February 21, 2002.)

                                      111


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE




The Board of Directors and Stockholders
Halliburton Company:

Under date of March 13, 2003, we reported on the consolidated  balance sheets of
Halliburton  Company and  subsidiaries  as of December 31, 2002, and the related
consolidated statements of operations,  shareholders' equity, and cash flows for
the year ended  December  31,  2002,  which are  included  in the Form 10-K.  In
connection  with   our  audit  of  the  aforementioned   consolidated  financial
statements,  we  also  audited  the  related  consolidated  financial  statement
schedules  included in Form 10-K.  These financial  statement  schedules are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated  financial statement schedules based on our audit.
The accompanying 2001 and 2000  consolidated  financial  statement  schedules of
Halliburton  Company and  subsidiaries  were audited by other  auditors who have
ceased  operations.  Those auditors  expressed an  unqualified  opinion on those
consolidated   financial  statements  and  schedules,   before  the  restatement
described  in Note 4 to the  consolidated  financial  statements  and before the
revision described in Note 22 to the consolidated financial statements, in their
report dated January 23, 2002 (except with respect to certain matters  discussed
in Note 9 to those financial  statements,  as to which the date was February 21,
2002).

In our opinion, such financial statement schedules,  when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.




/s/ KPMG LLP
---------------
    KPMG LLP
    Houston, Texas
    March 13, 2003

                                      112




                               HALLIBURTON COMPANY
                 Schedule II - Valuation and Qualifying Accounts
                              (Millions of Dollars)

     The table below presents  valuation and qualifying  accounts for continuing
operations.
                                                                            Additions
                                                                  ------------------------------
                                                     Balance at     Charged to      Charged to                     Balance at
                                                     Beginning      Costs and        Other                           End of
                   Descriptions                       of Period      Expenses       Accounts       Deductions        Period
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                    
  Year ended December 31, 2000:
  Deducted from accounts and notes receivable:
      Allowance for bad debts                         $  94        $    39             $ -         $    (8) (a)      $  125
-------------------------------------------------------------------------------------------------------------------------------
   Liability for major repairs and maintenance        $  15        $     4             $ -         $    (5)          $   14
-------------------------------------------------------------------------------------------------------------------------------
   Accrued special charges                            $  69        $     -             $ -         $   (63) (b)      $    6
---------------------------------------------------- ------------ -------------------------------------------------------------
   Accrued reorganization charges                     $   -        $    36             $ -         $   (20)          $   16
===============================================================================================================================

  Year ended December 31, 2001:
  Deducted from accounts and notes receivable:
      Allowance for bad debts                         $ 125        $    70             $ -         $   (64) (a)      $  131
-------------------------------------------------------------------------------------------------------------------------------
   Liability for major repairs and maintenance        $  14        $     4             $ -         $    (5)          $   13
----------------------------------------------------------------- -------------------------------------------------------------
   Accrued special charges                            $   6        $     -             $ -         $    (6)          $    -
-------------------------------------------------------------------------------------------------------------------------------
   Accrued reorganization charges                     $  16        $     -             $ -         $   (15) (c)      $    1
===============================================================================================================================

  Year ended December 31, 2002:
  Deducted from accounts and notes receivable:
      Allowance for bad debts                         $131         $    82             $           $   (56)  (a)     $  157
-------------------------------------------------------------------------------------------------------------------------------
   Liability for major repairs and maintenance        $13          $     4             $           $   (10)          $    7
-------------------------------------------------------------------------------------------------------------------------------
   Accrued reorganization charges                     $1           $    29             $           $   (20)          $   10
===============================================================================================================================

(a) Receivable write-offs and reclassifications, net of recoveries.
(b) Includes $9 million for items of a long-term  nature  reclassified  to other
    liabilities in 2000.
(c) Includes $4 million estimate to actual adjustment.



                                      113


SIGNATURES


As required by Section 13 or 15(d) of the  Securities  Exchange Act of 1934, the
registrant  has  authorized  this  report  to be  signed  on its  behalf  by the
undersigned authorized individuals, on this 28th day of March, 2003.

                                        HALLIBURTON COMPANY




                              By      /s/  David J. Lesar
                                --------------------------------------
                                           David J. Lesar
                                       Chairman of the Board,
                                 President and Chief Executive Officer

As required by the Securities  Exchange Act of 1934, this report has been signed
below by the  following persons  in the capacities  indicated  on  this 28th day
of March, 2003.

Signature                                   Title
---------                                   -----



  /s/  David J. Lesar                       Chairman of the Board, President and
---------------------------------           Chief Executive Officer
       David J. Lesar




  /s/  Douglas L. Foshee                    Executive Vice President and
---------------------------------           Chief Financial Officer
       Douglas L. Foshee




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

                                      114


Signature                                                     Title
---------                                                     -----
*ROBERT L. CRANDALL                                           Director
---------------------------------
Robert L. Crandall

* KENNETH T. DERR                                             Director
---------------------------------
Kenneth T. Derr

* CHARLES J. DIBONA                                           Director
---------------------------------
Charles J. DiBona

* LAWRENCE S. EAGLEBURGER                                     Director
---------------------------------
Lawrence S. Eagleburger

* W. R. HOWELL                                                Director
---------------------------------
W. R. Howell

* RAY L. HUNT                                                 Director
---------------------------------
Ray L. Hunt

* AYLWIN B. LEWIS                                             Director
---------------------------------
Aylwin B. Lewis

* J. LANDIS MARTIN                                            Director
---------------------------------
J. Landis Martin

* JAY A. PRECOURT                                             Director
---------------------------------
Jay A. Precourt

* DEBRA L. REED                                               Director
---------------------------------
Debra L. Reed

* C. J. SILAS                                                 Director
---------------------------------
C. J. Silas




* /s/  MARGARET E. CARRIERE
---------------------------------
        Margaret E. Carriere, Attorney-in-fact

                                      115


CERTIFICATIONS


I, David J. Lesar, certify that:

1. I have reviewed this annual report on Form 10-K of Halliburton Company;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed  such  disclosure  controls and  procedures  to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this annual report is being prepared;

b) evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions  about the  effectiveness  of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):

a) all significant  deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

b) any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 25, 2003


                               /s/ David J. Lesar
                               --------------------
                                   David J. Lesar


                             Chief Executive Officer

                                      116


I, Douglas L. Foshee, certify that:

1. I have reviewed this annual report on Form 10-K of Halliburton Company;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed  such  disclosure  controls and  procedures  to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this annual report is being prepared;

b) evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions  about the  effectiveness  of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant  deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

b) any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 25, 2003




                              /s/ Douglas L. Foshee
                              -----------------------
                                Douglas L. Foshee
              Executive Vice President and Chief Financial Officer

                                      117