UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K/A
                                 (Amendment No. 1)

(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, 2003

                                       OR

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

Commission File Number 1-3492
                               HALLIBURTON COMPANY
             (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.)
                                5 Houston Center
                            1401 McKinney, Suite 2400
                              Houston, Texas 77020
                    (Address of principal executive offices)
                   Telephone Number - Area code (713)759-2600

           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

        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 30,
2003,  determined  using  the per  share  closing  price on the New  York  Stock
Exchange   Composite   tape  of   $23.00   on  that   date   was   approximately
$10,022,000,000.

As of February 27, 2004,  there were 439,713,236  shares of Halliburton  Company
Common Stock, $2.50 par value per share, outstanding.

Portions of the  Halliburton  Company Proxy Statement dated March 23, 2004 (File
No. 1-3492), are incorporated by reference into Part III of this report.



                                EXPLANATORY NOTE

         We have amended  our Section 302 and 906 certifications  to include the
conformed  signatures  of our Chief  Executive  Officer and our Chief  Financial
Officer.



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.
         Our five  business  segments  are  organized  around  how we manage the
business:  Drilling and Formation Evaluation,  Fluids,  Production Optimization,
Landmark and Other Energy Services and the Engineering and  Construction  Group.
We sometimes  refer to the  combination  of Drilling and  Formation  Evaluation,
Fluids,  Production Optimization and Landmark and Other Energy Services segments
as  our  Energy  Services  Group.  See  Note  5 to  the  consolidated  financial
statements for financial information about our business segments.
         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.
         Proposed  Asbestos and Silica  Settlement and  Pre-packaged  Chapter 11
proceedings.  DII  Industries,  LLC,  Kellogg  Brown & Root,  Inc. and our other
affected  subsidiaries  filed Chapter 11 proceedings on December 16, 2003.  With
the filing of the  Chapter 11  proceedings,  all  asbestos  and silica  personal
injury  claims  and  related  lawsuits  against  Halliburton  and  our  affected
subsidiaries  have  been  stayed.  See Note 11 and  Note 12 to the  consolidated
financial statements for a more detailed discussion.
         The  proposed  plan of  reorganization,  which is  consistent  with the
definitive  settlement  agreements reached with our asbestos and silica personal
injury  claimants in early 2003,  provides that, if and when an order confirming
the  proposed  plan of  reorganization  becomes  final  and  non-appealable,  in
addition to the $311 million paid to claimants in December  2003,  the following
will be contributed to trusts for the benefit of current and future asbestos and
silica personal injury claimants:
              -   up to approximately $2.5 billion in cash;
              -   59.5 million shares of Halliburton common stock;
              -   notes currently valued at approximately $52 million; and
              -   insurance  proceeds, if  any,  between  $2.3 billion  and $3.0
                  billion received by DII Industries and Kellogg Brown & Root.
         Upon  confirmation  of the plan of  reorganization,  current and future
asbestos  and  silica  personal  injury  claims  against   Halliburton  and  its
subsidiaries  will be  channeled  into  trusts  established  for the  benefit of
claimants,  thus releasing  Halliburton and its affiliates from those claims. We
have also recently  entered into a settlement with Equitas,  the largest insurer
of our asbestos and silica claims.  The  settlement  calls for Equitas to pay us
$575 million  (representing  approximately 60% of applicable limits of liability
that DII  Industries  had  substantial  likelihood of  recovering  from Equitas)
provided  that we receive  confirmation  of our plan of  reorganization  and the
current United States Congress does not pass national asbestos litigation reform
legislation.
         Description  of  services  and  products.  We  offer a broad  suite  of
products  and  services  through  our  five  business  segments.  The  following
summarizes our services and products for each business segment.
         ENERGY SERVICES GROUP
         Our Energy  Services Group  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 Energy  Services  Group serves
major, national and independent oil and gas companies throughout the world.
         Drilling and Formation Evaluation
         Our Drilling and Formation  Evaluation segment is primarily involved in
drilling and  evaluating the formations  related to bore-hole  construction  and
initial oil and gas formation  evaluation.  Major products and services  offered
include:

                                       1


              -   drilling systems and services;
              -   drill bits; and
              -   logging and perforating.
         Our Sperry-Sun  business line 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 our Security DBS business line,  include roller
cone rock bits,  fixed  cutter  bits,  coring  equipment  and services and other
downhole tools used to drill wells.
         Logging and  perforating  products  and  services  include our Magnetic
Resonance Imaging Logging  (MRIL(R)) and  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.
         Fluids
         Our Fluids  segment  focuses on fluid  management and  technologies  to
assist in the  drilling  and  construction  of oil and gas wells.  This  segment
offers cementing and drilling fluids systems.
         Cementing  is the process  used to bond the well and well casing  while
isolating  fluid zones and maximizing  wellbore  stability.  Cement and chemical
additives  are pumped to fill the space  between  the casing and the side of the
wellbore.  Our  cementing  service  line  also  provides  casing  equipment  and
services.
         Our  Baroid   business  line  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.
Drilling  fluids also help cool the drill bit, seal porous well  formations  and
assist  in  pressure  control  within a  wellbore.  Drilling  fluids  are  often
customized  by  onsite   engineers  for  optimum   stability  and  enhanced  oil
production.
         Also  included  in this  segment is our  equity  method  investment  in
Enventure  Global  Technology,  LLC (Enventure),  which is an expandable  casing
joint  venture.  In January  2004,  Halliburton  and Shell  Technology  Ventures
(Shell,  an unrelated party) agreed to restructure two joint venture  companies,
Enventure and  WellDynamics  B.V.  (WellDynamics),  in an effort to more closely
align the ventures  with  near-term  priorities  in the core  businesses  of the
venture  owners.  Enventure was owned equally by  Halliburton  and Shell.  Shell
acquired an additional  33.5% of Enventure,  leaving us with 16.5%  ownership in
return for  enhanced  and extended  agreements  and licenses  with Shell for its
Poroflex(TM)  expandable  sand  screens  and a  distribution  agreement  for its
Versaflex(TM) expandable liner hangers, in addition to a one percent increase in
our ownership of WellDynamics.
         Production Optimization
         Our  Production  Optimization  segment  primarily  tests,  measures and
provides means to manage and/or improve well  production  once a well is drilled
and, in some cases, after it has been producing. This segment consists of:
              -   production enhancement;
              -   completion products; and
              -   tools and testing services.

                                       2


         Production  enhancement  optimizes  oil and gas  reservoirs  through  a
variety of pressure pumping services,  including fracturing and acidizing,  sand
control,  coiled tubing,  hydraulic  workover and pipeline and process services.
These  services are used to clean out a formation or to fracture  formations  to
allow increased oil and gas production.
         Completion  products include  subsurface safety valves and flow control
equipment,  surface safety systems,  packers and specialty completion equipment,
production automation, well screens, and slickline equipment and services.
         Tools  and  testing   services  include   underbalanced   applications,
tubing-conveyed  perforating  products and  services,  drill stem and other well
testing tools, data acquisition services and production applications.
         Also  included in this segment are our subsea  operations  conducted in
our 50% owned company, Subsea 7, Inc.
         Landmark and Other Energy Services
         Our  Landmark and  Other Energy  Services segment  provides  integrated
exploration and production software  information  systems,  consulting services,
real-time operations, smartwells and other integrated solutions.
         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  Graphics
software  transforms  vast  quantities of seismic,  well log and other data into
detailed  computer  models of petroleum  reservoirs.  The models are used by our
customers to achieve  optimal  business and technical  decisions in exploration,
development  and  production  activities.  Landmark  Graphics'  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  exploration  and petroleum
data.  The products and services  offered by Landmark  Graphics  integrate  data
workflows and operational  processes across disciplines,  including  geophysics,
geology, drilling,  engineering,  production,  economics,  finance and corporate
planning, and key partners and suppliers.
         This segment also provides  value-added oilfield project management and
integrated  solutions to  independent,  integrated  and national oil  companies.
Integrated  solutions  enhance  field  deliverability  and maximize a customer's
return  on  investment.  These  services  make  use of all of our  products  and
technologies, as well as project management capabilities. Other services provide
installation and servicing of subsea facilities and pipelines.
         Also  included  in this  segment is our  equity  method  investment  in
WellDynamics, an intelligent well completions joint venture. As discussed above,
in January 2004,  Halliburton and Shell agreed to restructure  the  WellDynamics
joint venture. We acquired an additional one percent of WellDynamics from Shell,
giving us 51% ownership. With our resulting control of day-to-day operations, we
believe  we will be able to  achieve  more  natural  opportunities  to  leverage
existing complementary businesses, reduce costs, and ensure global availability.
         ENGINEERING AND CONSTRUCTION GROUP
         Our  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:
              -   onshore  engineering and  construction  activities,  including
                  engineering and construction of liquefied natural gas, ammonia
                  and crude oil refineries and natural gas plants;
              -   offshore  deepwater  engineering, marine  technology,  project
                  management, and related worldwide fabrication capabilities;
              -   government operations, construction, maintenance and logistics
                  activities for government facilities and installations;

                                       3


              -   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
              -   civil engineering, consulting and project management services.
         Dispositions  in  2003.  During  2003,  we  disposed  of the  following
non-core businesses:
              -   in January  2003, we sold our Mono Pumps  business,  which was
                  reported in our Drilling and Formation  Evaluation segment, to
                  National Oilwell, Inc.;
              -   in March 2003, we sold the assets  relating to our  Wellstream
                  business, a global provider of flexible pipe products, systems
                  and  solutions,  which was  reported in our Landmark and Other
                  Energy Services segment, to Candover Partners Ltd.; and
              -   in May 2003, we sold certain assets of Halliburton Measurement
                  Systems,  which provides flow measurement and sampling systems
                  and was reported in our Production  Optimization  segment,  to
                  NuFlo Technologies.
         These  dispositions  will  have  an  immaterial  impact  on our  future
operations.  See Note 4 to the consolidated  financial statements for additional
information related to 2003 dispositions.
         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.
         We conduct business worldwide in over 100 countries.  In 2003, based on
the location of services  provided and products  sold,  27% of our total revenue
was from the United States and 15% of our total revenue was from Iraq, primarily
related to our work for the United States government.  In 2002, 33% of our total
revenue  was from the United  States and 12% of our total  revenue  was from the
United  Kingdom.  No other  country  accounted  for more  than 10% of our  total
revenue  during these  periods.  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

                                       4


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,  civil unrest,  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 one percent
of our 2003 revenues,  the continuing  economic and political  instability  will
continue  to  negatively  impact our  business  activities  in  Venezuela  until
resolved.  The  currency  devaluation  in  Venezuela  in  February  2004 did not
materially  impact our operations,  but further  devaluations  could  negatively
impact our operations in 2004. Due to continuing levels of civil disturbance and
the social,  economic and  political  climate,  a number of our  customers  have
ceased  operations  in the  Nigerian  Delta region and our  operations  could be
negatively  impacted.  Energy Services Group operations in Nigeria accounted for
approximately  2%  of  our  revenues  in  2003,  and  these  developments  could
negatively impact our operations in 2004. 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 18 to the consolidated financial statements.
         Customers  and backlog.  Our revenues  during the past three years were
mainly  derived from the sale of services  and products to the energy  industry,
including  66% in 2003,  86% in 2002 and 85% in 2001.  Revenues  from the United
States  government  (which  resulted  primarily  from the work  performed in the
Middle East by our Engineering and  Construction  Group)  represented 26% of our
2003  consolidated  revenues.  Revenues from the United States government during
2002 and 2001 represented less than 10% of total consolidated revenues. No other
customer  represented  more  than 10% of  consolidated  revenues  in any  period
presented.
         The following  schedule  summarizes  our  project  backlog  at December
31, 2003 and 2002:


 Millions of dollars                                 2003          2002
-----------------------------------------------------------------------------
                                                           
Firm orders                                        $   8,928     $   8,704
Government orders firm but not yet funded;
    letters of intent and contracts awarded
    but not signed                                     1,138         1,330
-----------------------------------------------------------------------------
Total                                              $  10,066     $  10,034
=============================================================================

         Of the total backlog at December 31, 2003,  $9,745  million  relates to
KBR operations with the remainder  arising from our Energy  Services Group.  The
entire  Energy  Services  Group 2003 backlog  relates to subsea  operations.  We
estimate  that 73% of the total  backlog  existing at December  31, 2003 will be
completed  during  2004.  Approximately  72% of total  backlog  relates  to cost
reimbursable contracts with the remaining 28% relating to fixed-price contracts.
In addition,  backlog  relating to engineering,  procurement,  installation  and
commissioning  contracts  for the  offshore  oil and gas  industry  totaled $432
million at December 31, 2003. 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

                                       5


backlog,  which totaled $1.9 billion at December 31, 2003. Our backlog  excludes
contracts for recurring  hardware and software  maintenance and support services
offered by Landmark  Graphics.  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  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.
         Not included in the above backlog numbers for December 31, 2003 are two
new government  contracts awarded in January 2004. KBR was awarded the five year
United States Army Corps of Engineers'  CENTCOM  contract for up to $1.5 billion
and the competitively  bid $1.2 billion Restore Iraqi Oil, or RIO,  continuation
contract,  which will run for up to two years.  As KBR  receives  task orders on
these contracts, the amount of the task order will be included in 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  $221  million  in 2003 and $233
million in both 2002 and 2001.
         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" is the cost  associated  with our  patents,  net of  accumulated
amortization, totaling $49 million as of December 31, 2003 and $58 million as of
December 31, 2002. We do not consider any particular  patent or group of patents
to be material to our business operations.
         Seasonality.  On an overall  basis,  our  operations  are not generally
affected by 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.
         Due to higher spending near the end of the year on capital expenditures
by its customers  for  software,  Landmark  Graphics  results of operations  are
generally  stronger in the fourth  quarter of the year than at the  beginning of
the year.
         Employees.  At December 31,  2003,  we employed  approximately  101,000
people worldwide  compared to 83,000 at December 31, 2002. The large increase is
primarily  due to KBR's  expanded  operations in the Middle East during 2003. At
December 31, 2003,  approximately seven 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, among others:

                                       6


              -   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.
         In  addition  to the  federal  laws and  regulations,  states and other
countries  where we do  business  may have  numerous  environmental,  legal  and
regulatory requirements by 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.  Our Health, Safety and
Environment  group  has  several  programs  in place to  maintain  environmental
leadership and to prevent the occurrence of environmental contamination.
         We do not expect costs  related to these  remediation  requirements  to
have a material  adverse effect on our  consolidated  financial  position or our
results of operations.  We have subsidiaries that have been named as potentially
responsible  parties  along with other third  parties for nine federal and state
superfund  sites for which we have  established a liability.  As of December 31,
2003,  those nine sites accounted for  approximately $7 million of our total $31
million liability. See Note 13 to the consolidated 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 the material with, or furnished it to, the Securities and
Exchange Commission. Also posted on our website is our Code of Business Conduct,
which  applies to all our  employees and also serves as a code of ethics for our
chief executive officer,  chief financial officer,  chief accounting officer and
persons performing similar functions.

                                       7


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
Drilling and Formation
    Evaluation Segment:

Dallas, Texas                           Owned        352,000    Manufacturing facility includes office, laboratory
                                                                and warehouse space that primarily produces roller
                                                                cone drill bits.  In December 2003, we moved the
                                                                production from this facility to our new facility in
                                                                The Woodlands, Texas.  The facility is currently
                                                                for sale.

The Woodlands, Texas                    Leased       256,000    Manufacturing facility including warehouses,
                                                                engineering and sales, testing, training and
                                                                research.  The manufacturing plant produces roller
                                                                cone and rotary type drill bits.

Production Optimization Segment:

Carrollton, Texas                       Owned        649,000    Manufacturing facility including warehouses,
                                                                engineering and sales, testing, training and
                                                                research.  The manufacturing plant produces
                                                                equipment for the Production Optimization segment,
                                                                including surface and subsurface safety valves and
                                                                packer assemblies.

Shared Facilities:

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.  The
                                                                Duncan facilities also include a technology and
                                                                research center, training facility, administrative
                                                                offices and warehousing.  These facilities service
                                                                our Drilling and Formation Evaluation, Fluids and
                                                                Production Optimization segments.

                                       8


                                        Owned/
Location                                Leased    Sq. Footage   Description
----------------------------------------------------------------------------------------------------------------------
Shared Facilities (continued):

Houston, Texas                          Owned        638,000    Two suburban campus locations utilized by our
                                                                Drilling and Formation Evaluation and Fluids
                                                                segments.  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 Drilling and Formation Evaluation
                                                                segment.  The other campus is a manufacturing
                                                                facility with limited office, laboratory and
                                                                warehouse space that primarily produces fixed cutter
                                                                drill bits.

Houston, Texas                          Owned        564,000    A campus facility that is the home office for the
                                                                Energy Services Group.

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 our Drilling and
                                                                Formation Evaluation and Production Optimization
                                                                segments.

Europe/Africa
Shared Facilities:

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

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       740,000    Engineering and project support center which
                                                                occupies 31 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.

                                       9


                                        Owned/
Location                                Leased    Sq. Footage   Description
----------------------------------------------------------------------------------------------------------------------
North America (continued)

Houston, Texas                          Owned        977,000    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.

Europe/Africa
Leatherhead, United Kingdom             Owned        262,000    Engineering and project support center on 55 acres
                                                                in suburban London.

Corporate
Houston, Texas                          Leased        30,000    Corporate executive offices.

         In  addition,  we have 173  international  and 106 United  States field
camps from which the Energy  Services  Group 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.
         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  Fluids  segment.  Based on the  number  of tons of
bentonite  consumed in fiscal  year 2003,  we  estimate  our 19 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 2.7 million tons
of proven  reserves  of barite  in areas of  active  mining  equate to a 17 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.

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 "Forward-Looking Information and Risk Factors" and in
Notes 11, 12 and 13 to the consolidated 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 2003.

                                       10


Executive Officers of the Registrant.

         The  following  table  indicates  the names  and ages of the  executive
officers of the  registrant as of February 1, 2004,  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 59)

*    Albert O. Cornelison, Jr. Executive Vice President and General Counsel of Halliburton Company,
     (Age 54)                    since 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

*    C. Christopher Gaut       Executive Vice President and Chief Financial Officer of Halliburton
     (Age 47)                    Company, since March 2003
                               Senior Vice President, Chief Financial Officer and Member - Office of the
                                 President and Chief Operating Officer of ENSCO International
                                 Incorporated, January 2002 to February 2003
                               Senior Vice President and Chief Financial Officer of ENSCO International
                                  Incorporated, December 1987 to December 2001

*    John W. Gibson, Jr.       President and Chief Executive Officer of Energy Services Group, since
     (Age 46)                     January 2003
                               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

*    Robert R. Harl            Chief Executive Officer of Kellogg Brown & Root, Inc., since March 2001
     (Age 53)                  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

                                       11


Executive Officers of the Registrant (continued)

Name and Age                   Offices Held and Term of Office
------------                   -------------------------------
*    David J. Lesar            Chairman of the Board, President and Chief Executive Officer of
     (Age 50)                    Halliburton 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

     Mark A. McCollum          Senior Vice President and Chief Accounting Officer, since August 2003
     (Age 44)                  Senior Vice President and Chief Financial Officer, Tenneco
                                 Automotive, Inc., November 1999 to August 2003
                               Vice President, Global Finance of Tenneco Automotive, September 1998 to
                                 November 1999

*    Weldon J. Mire            Vice President - Human Resources of Halliburton Company, since
     (Age 56)                    May 2002
                               Division Vice President of Halliburton Energy Services, January 2001 to
                                 May 2002 (Country Vice President Indonesia)
                               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

     David R. Smith            Vice President - Tax of Halliburton Company,  since May 2002
     (Age 57)                  Vice President - Tax of Halliburton Energy Services, Inc.,
                                 September 1998 to May 2002


* 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  payments is included under the
caption "Quarterly Data and Market Price Information" on page 123 of this annual
report. Cash dividends on common stock for 2003 and 2002 in the amount of $0.125
per share 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, 2003, there were approximately  24,143  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 page 122
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 16 through 61
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 pages 47 and 48 of this annual
report.

                                       13


Item 8. Financial Statements and Supplementary Data.



                                                                            Page No.
                                                                            --------
                                                                         
Responsibility for Financial Reporting                                          62
Independent Auditors' Report                                                 63-64
Consolidated Statements of Operations for the years ended
     December 31, 2003, 2002 and 2001                                           65
Consolidated Balance Sheets at December 31, 2003 and 2002                       66
Consolidated Statements of Shareholders' Equity for the years ended
     December 31, 2003, 2002 and 2001                                           67
Consolidated Statements of Cash Flows for the years ended
     December 31, 2003, 2002 and 2001                                           68
Notes to Consolidated Financial Statements                                  69-121
Selected Financial Data (Unaudited)                                            122
Quarterly Data and Market Price Information (Unaudited)                        123

         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.

Item 9(a). Controls and Procedures.
         In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out
an evaluation,  under the supervision and with the  participation of management,
including  our Chief  Executive  Officer  and Chief  Financial  Officer,  of the
effectiveness  of our  disclosure  controls and  procedures as of the end of the
period covered by this report.  Based on that  evaluation,  our Chief  Executive
Officer and Chief Financial Officer  concluded that our disclosure  controls and
procedures  were  effective  as of  December  31,  2003  to  provide  reasonable
assurance  that  information  required to be disclosed  in our reports  filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods  specified in the Securities  and Exchange  Commission's
rules and forms.
         During the fourth  quarter of 2003,  it became  apparent to us that the
existing  infrastructure  for our logistics  contracts to support  activities in
Iraq was being strained.  Specifically, these projects are being  performed in a
war zone with operations spread across 60 different site locations in Kuwait and
Iraq,  and we have had to carefully  balance the priority of keeping  our people
safe  against  the demand for  significant  resources  in  forward  areas.  Once
deployed in forward areas,  our people often have had  difficulty  communicating
due to very poor  telephone  or  computer  infrastructure.  Additionally,  these
projects  have had to ramp up very  quickly  to  respond  to  customer  demands.
Revenues on these projects  increased from $320 million in the second quarter of
2003 to over $2 billion  in the fourth  quarter  of 2003.  The  accelerated  and
significant  ramp up in services, concerns for the security of our employees and
subcontractors,  as well as the  complexity  and  scale of these  projects,  has
created  unique  challenges  in  establishing  and  maintaining  a  process  and
procedural environment that controls these projects as well as we would normally
expect.
         During  the  fourth  quarter  several   internal  control  issues  were
identified as a result of work done by our auditors and actions were immediately
taken to  address  the  issues.  We sent a task  force  into  Kuwait  to  assist
personnel  in  the  project  office  in  updating  and  formalizing  procurement
documentation  which had been delayed due to insufficient  resources to do these
activities and respond to customer  requirements.  The project procurement staff
has been  significantly  increased.  We also brought in additional  resources to
assist with identification of and accounting for year-end accruals for goods and
services received but not invoiced.

                                       14


         Further,  as part of  on-going  audits by the  Defense  Contract  Audit
Agency (DCAA),  several contract compliance issues have been raised (see Note 13
to the consolidated financial statements).  Recently, the DCAA has also issued a
deficiency  report  related  to  the  logistics  project's  procurement process,
largely due to the  procurement  documentation  issues  mentioned  above.  It is
likely that this will  result in a formal  audit by the DCAA in this area in the
near future.
         In   order to strengthen our control  environment for these  contracts,
we are implementing several improvements, including:
              -   strengthening the procurement management for government
                  operations within KBR;
              -   adding procurement resources on the project;
              -   mobilizing a task force to assist on procurement processes and
                  documentation until  sufficient resources have  been hired and
                  trained;
              -   reinforcing   requirements and  adding  resources to materials
                  management and property control reconciliations;
              -   reinforcing  requirements  and  adding resources  related   to
                  reconciliation of bank and petty cash accounts; and
              -   revising and reinforcing procedures for  identification of and
                  accounting for accruals  for goods and services  received  but
                  not invoiced.
         There  have  been  no  other  changes  in our  internal  controls  over
financial  reporting  that occurred  during the quarter ended  December 31, 2003
that materially  affected,  or are reasonably likely to materially  affect,  our
internal controls over financial reporting.

                                       15


                               HALLIBURTON COMPANY
          Management's Discussion and Analysis of Financial Condition
                           and Results of Operations


EXECUTIVE OVERVIEW

         During 2003, we made progress toward  resolving our asbestos and silica
liabilities. Our revenues grew nearly 30% to $16 billion, largely as a result of
our  increased  government  services  work in the Middle  East.  We reduced  our
exposure  related to unapproved  claims and  liquidated  damages  related to our
challenging   Barracuda-Caratinga   construction   project.   We  addressed  the
substantial expected future demands on our funds by securing financing, managing
working  capital and strictly  following our reduced  capital  spending plan. We
achieved all of this while continuing to effectively run our day-to-day business
by delivering quality, on-time services to our customers.
         Asbestos and silica. Having reached definitive  settlements with almost
all of our  asbestos  and  silica  personal  injury  claimants,  certain  of our
subsidiaries  filed Chapter 11  proceedings on December 16, 2003. A pre-approved
proposed plan of reorganization was filed as part of the Chapter 11 proceedings.
The  confirmation  hearing is currently  scheduled  in May 2004.  If the plan is
approved  by the  bankruptcy  court,  in addition  to the $311  million  paid to
claimants  in  December  2003,  we  will  contribute  the  following  to  trusts
established for the benefit of the claimants:
              -   up to approximately $2.5 billion in cash;
              -   59.5 million shares of Halliburton common stock;
              -   notes currently  valued at approximately $52 million; and
              -   insurance  proceeds, if  any, between  $2.3  billion  and $3.0
                  billion received by DII Industries and Kellogg Brown & Root.
         Upon confirmation  of the  plan of  reorganization, current  and future
asbestos  and  silica  personal  injury  claims  against   Halliburton  and  its
subsidiaries  will be  channeled  into  trusts  established  for the  benefit of
claimants,  thus releasing  Halliburton and its affiliates from those claims. We
have also recently  entered into a settlement with Equitas,  the largest insurer
of our asbestos and silica claims.  The  settlement  calls for Equitas to pay us
$575 million  (representing  approximately 60% of applicable limits of liability
that DII  Industries  had  substantial  likelihood of  recovering  from Equitas)
provided  that we receive  confirmation  of our plan of  reorganization  and the
current United States Congress does not pass national asbestos litigation reform
legislation.
         Government services in the Middle East. Our government services revenue
related  to Iraq  totaled  $3.6  billion in 2003.  The work we perform  includes
providing construction and services (among other things):
              -   to  support  deployment,  site  preparation,   operations  and
                  maintenance and  transportation for  United States troops; and
              -   to restore the Iraqi petroleum industry, such as extinguishing
                  oil well fires,  environmental assessments and cleanup at  oil
                  sites,  oil  infrastructure condition  assessments,  oilfield,
                  pipeline  and refinery  maintenance and  the  procurement  and
                  importation of fuel products.
The  accelerated  ramp up in  services  in a war zone  brought  with it  several
challenges,   including  keeping  our  people  safe,  recruiting  and  retaining
qualified  personnel,  identifying  and  retaining  appropriate  subcontractors,
establishing the necessary internal control procedures associated with this type
of business and funding the increased working capital demands.  We have received
and expect to continue to receive  heightened  media, legislative and regulatory
attention  regarding  our work in Iraq,  including  the  preliminary  results of
various  audits by the  Defense  Contract  Audit  Agency  (DCAA)  related to our
invoicing  practices  and our  self-reporting  of possible  improper  conduct by
one or two of our former employees.

                                       16


         Barracuda-Caratinga  project.  In recent  years we have faced  numerous
problems related to our  Barracuda-Caratinga  project, a multi-year construction
project to build two  converted  supertankers,  which  will be used as  floating
production,  storage and  offloading units  (FPSOs), 32  hydrocarbon  production
wells,  22 water  injection  wells and all sub-sea  flow lines,  umbilicals  and
risers  necessary to connect the underwater wells to the FPSOs. The project will
be used to develop the  Barracuda  and  Caratinga  crude oil  fields,  which are
located  off the coast of  Brazil.  The  project  is  significantly  behind  its
original schedule and in a financial loss position. In November 2003, we entered
into an agreement  with the project  owner which settled a portion of our claims
and also extended the project completion dates.
         Financing  activities.  The  anticipated  cash  contribution  into  the
asbestos and silica  trusts in 2004,  the  increased  work in Iraq and potential
additional  delays of certain  billings related to work in Iraq have required us
to raise  substantial  funds and could  require us to raise  additional funds in
order to meet our current and potential  future  liabilities and working capital
requirements.  As a result,  between June 2003 and January  2004, we issued $1.2
billion in convertible  notes and $1.6 billion in fixed and floating rate senior
notes. In addition,  in anticipation of the pre-packaged  Chapter 11 filing,  in
the fourth quarter of 2003 we entered into:
              -   a delayed-draw  term facility that would currently provide for
                  draws of up to $500 million to  be available for  cash funding
                  of  the  trusts  for   the  benefit  of  asbestos  and  silica
                  claimants, if required conditions are met;
              -   a master  letter of credit  facility intended  to ensure  that
                  existing letters of credit supporting  our contracts remain in
                  place during the Chapter 11 filing; and
              -   a  $700  million  three-year  revolving  credit  facility  for
                  general  working capital  purposes which  expires  in  October
                  2006.
We have other  significant  sources of funds  available  to us in the  near-term
should we need them,  including,  but not limited to, approximately $200 million
in  availability  under our United  States  accounts  receivable  securitization
facility.  In addition, as early as January 2005, we may receive $500 million of
the funds that would be provided by the Equitas  settlement  described above. In
2003, we  implemented  programs to improve our working  capital and to limit our
spending on capital  projects to those  critical  to serving our  customers.  We
continue to maintain our  investment  grade credit  ratings and have  sufficient
cash  and  financing  capacity  to  fund  our  asbestos  and  silica  settlement
obligations in 2004 and continue to grow our business.
         Business  focus.  In 2003,  we continued to focus on providing  quality
service to our customers and developing new technologies to effectively  compete
in a challenging  market.  Early in the year,  we realigned our Energy  Services
Group into four new segments, allowing us to better align ourselves with how our
customers  procure our services  and to capture new business and achieve  better
integration. Our Energy Services Group business is largely affected by worldwide
drilling activity and oil and gas prices. In 2003 we were negatively impacted by
the decline in the Gulf of Mexico  offshore rig count and the  reduction in deep
water activity by a number of our key customers in that area. We reacted to this
change in the  market  and put into place  various  measures  in order to "right
size" our business  serving that area.  Our  continued  emphasis on research and
development  resulted in growth in new products  and  services in 2003,  such as
rotary steerables and data center technologies. Besides the growth in government
services work at KBR, including the recent awarding of the two-year $1.2 billion
contract  for the RIO  program and the  five-year  up to $1.5  billion  military
support  contract,  we continue to  differentiate  ourselves  as a leader in the
liquefied natural gas industry by being a preferred  engineer and constructor of
liquification  plants and  receiving  terminals  throughout  the world.  We also
recently  completed the  construction  of the 1,420  kilometer  Alice Springs to
Darwin railroad in Australia, one of the largest and most complex infrastructure
projects ever undertaken in that country, five months ahead of schedule.
         Following is a more detailed discussion of each of these subjects.

                                       17


Asbestos and Silica Obligations and Insurance Recoveries
         Pre-packaged   Chapter  11  proceedings.   DII  Industries,   LLC  (DII
Industries),  Kellogg Brown & Root,  Inc.  (Kellogg  Brown & Root) and our other
affected  subsidiaries  filed  Chapter 11  proceedings  on December  16, 2003 in
bankruptcy court in Pittsburgh,  Pennsylvania. With the filing of the Chapter 11
proceedings, all asbestos and silica personal injury claims and related lawsuits
against Halliburton and our affected subsidiaries have been stayed.
         Our subsidiaries  sought Chapter 11 protection  because Sections 524(g)
and 105 of the  Bankruptcy  Code may be used to  discharge  current  and  future
asbestos and silica personal injury claims against us and our subsidiaries. Upon
confirmation  of the plan of  reorganization,  current and future  asbestos  and
silica  claims  against us and our  affiliates  will be  channeled  into  trusts
established  for the benefit of claimants  under Sections  524(g) and 105 of the
Bankruptcy  Code,  thus  releasing  Halliburton  and its  affiliates  from those
claims.
         A  pre-packaged  Chapter 11  proceeding  is one in which a debtor seeks
approval of a plan of reorganization  from affected  creditors before filing for
Chapter 11  protection.  Prior to  proceeding  with the  Chapter 11 filing,  our
affected  subsidiaries  solicited  acceptances  from known present  asbestos and
silica  claimants to a proposed plan of  reorganization.  In the fourth  quarter
of 2003, valid votes were received from approximately 364,000 asbestos claimants
and approximately 21,000 silica claimants,  representing substantially all known
claimants.  Of the votes validly cast, over 98% of voting asbestos claimants and
over 99% of  voting  silica  claimants  voted to  accept  the  proposed  plan of
reorganization,  meeting the voting requirements of Chapter 11 of the Bankruptcy
Code for  approval of the  proposed  plan.  The  pre-approved  proposed  plan of
reorganization was filed as part of the Chapter 11 proceedings.
         The  proposed  plan of  reorganization,  which is  consistent  with the
definitive  settlement  agreements reached with our asbestos and silica personal
injury  claimants in early 2003,  provides that, if and when an order confirming
the  proposed  plan of  reorganization  becomes  final  and  non-appealable,  in
addition to the $311 million paid to claimants in December  2003,  the following
will be contributed to trusts for the benefit of current and future asbestos and
silica personal injury claimants:
              -   up to approximately $2.5 billion in cash;
              -   59.5 million  shares of  Halliburton  common stock  (valued at
                  approximately  $1.6 billion for accrual purposes using a stock
                  price of  $26.17  per  share,  which  is based on the  average
                  trading  price  for the  five  days  immediately  prior to and
                  including December 31, 2003);
              -   a one-year  non-interest bearing  note of $31  million for the
                  benefit of asbestos claimants;
              -   a silica note with an initial  payment  into a silica trust of
                  $15  million.  Subsequently  the  note  provides  that we will
                  contribute an amount to the silica trust balance at the end of
                  each  year for the next 30 years  to bring  the  silica  trust
                  balance to $15 million, $10 million or $5 million based upon a
                  formula which uses average yearly disbursements from the trust
                  to  determine  that  amount.  The note  also  provides  for an
                  extension of the note for 20  additional  years under  certain
                  circumstances. We have estimated the amount of this note to be
                  approximately $21 million.  We will periodically  reassess our
                  valuation  of this  note  based  upon our  projections  of the
                  amounts we believe we will be required to fund into the silica
                  trust; and
              -   insurance  proceeds, if  any, between  $2.3 billion  and  $3.0
                  billion received by DII Industries and Kellogg Brown & Root.
         In  connection  with  reaching an  agreement  with  representatives  of
asbestos  and silica  claimants  to limit the cash  required  to settle  pending
claims to $2.775 billion, DII Industries paid $311 million on December 16, 2003.
Halliburton  also agreed to guarantee the payment of an additional  $156 million
of the remaining  approximately $2.5 billion cash amount,  which must be paid on
the earlier to occur of June 17,  2004 or the date on which an order  confirming
the proposed plan of reorganization becomes final and non-appealable.  As a part
of the definitive settlement agreements,  we have been accruing cash payments in

                                       18


lieu of  interest  at a rate of five  percent  per annum for these  amounts.  We
recorded approximately $24 million in pretax charges in 2003 related to the cash
in lieu of  interest.  On December  16,  2003,  we paid $22 million to satisfy a
portion of our cash in lieu of interest payment obligations.
         As a result of the filing of the  Chapter 11  proceedings,  we adjusted
the  asbestos  and silica  liability  to reflect the full amount of the proposed
settlement and certain  related costs,  which resulted in a before tax charge of
approximately  $1.016 billion to  discontinued  operations in the fourth quarter
2003.  The tax effect on this charge was minimal,  as a valuation  allowance was
established for the net operating loss  carryforward  created by the charge.  We
also reclassified a portion of our asbestos and silica related  liabilities from
long-term to short-term,  resulting in an increase of short-term  liabilities by
approximately $2.5 billion, because we believe we will be required to fund these
amounts within one year.
         In accordance  with the  definitive  settlement  agreements  entered in
early 2003, we have been reviewing  plaintiff files to establish a medical basis
for payment of settlement amounts and to establish that the claimed injuries are
based on exposure to our products.  We have reviewed  substantially  all medical
claims  received.  During the fourth  quarter of 2003,  we received  significant
numbers of the product  identification  due diligence files. Based on our review
of these files,  we received the  necessary  information  to allow us to proceed
with  the  pre-packaged  Chapter  11  proceedings.  As  of  December  31,  2003,
approximately  63% of the value of claims  passing  medical due  diligence  have
submitted  satisfactory  product  identification.  We expect the  percentage  to
increase as we receive additional  plaintiff files.  Based on these results,  we
found that  substantially  all of the asbestos and silica  liability  relates to
claims filed against our former  operations that have been divested and included
in  discontinued  operations.  Consequently,  all 2003 changes in our  estimates
related to the asbestos and silica liability were recorded through  discontinued
operations.
         Our proposed  plan of  reorganization  calls for a portion of our total
asbestos and silica liability to be settled by contributing  59.5 million shares
of  Halliburton  common  stock into the trusts.  We will  continue to adjust our
asbestos  and silica  liability  related to the shares if the  average  value of
Halliburton  stock for the five days immediately  prior to and including the end
of each  fiscal  quarter  has  increased  by five  percent or more from the most
recent valuation of the shares. At December 31, 2003, the value of the shares to
be  contributed  is  classified  as a long-term  liability  on our  consolidated
balance sheet, and the shares have not been included in our calculation of basic
or  diluted  earnings  per  share.  If  the  shares  had  been  included  in the
calculation as of the beginning of the fourth quarter,  our diluted earnings per
share from continuing operations for the year ended December 31, 2003 would have
been  reduced  by  $0.03.  When  and  if we  receive  final  and  non-appealable
confirmation of our proposed plan of reorganization, we will:
              -   increase or decrease  our  asbestos  and silica  liability  to
                  value  the 59.5  million  shares of  Halliburton  common stock
                  based on  the value of Halliburton  stock on the date of final
                  and  non-appealable  confirmation  of  our  proposed  plan  of
                  reorganization;
              -   reclassify from a long-term  liability to shareholders' equity
                  the  final value of  the 59.5  million shares  of  Halliburton
                  common stock; and
              -   include  the  59.5  million  shares  in  our  calculations  of
                  earnings per share on a prospective basis.
         We understand that  the United States Congress  may  consider  adopting
legislation  that would  establish a national trust fund as the exclusive  means
for  recovery  for  asbestos-related  disease.  We  are  uncertain  as  to  what
contributions we would be required to make to a national trust, if any, although
it is possible that they could be  substantial  and that they could continue for
several  years.  It is  also  possible  that  our  level  of  participation  and
contribution  to a national trust could be greater than it otherwise  would have
been as a result of having  subsidiaries  that have filed Chapter 11 proceedings
due to asbestos liability.

                                       19


         Recent insurance developments. Concurrent with the remeasurement of our
asbestos and silica  liability  due to the  pre-packaged  Chapter 11 filing,  we
evaluated  the  appropriateness  of the $2.0  billion  recorded for asbestos and
silica insurance  recoveries.  In doing so, we separately evaluated two types of
policies:
              -   policies held by  carriers with which we had either settled or
                  which  were  probable  of  settling and for  which  we   could
                  reasonably estimate the amount of the settlement; and
              -   other policies.
         In December 2003, we retained  Navigant Consulting  (formerly  Peterson
Consulting), a nationally-recognized consultant in asbestos and silica liability
and insurance,  to assist us. In conducting their analysis,  Navigant Consulting
performed the following with respect to both types of policies:
              -   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.
         Navigant Consulting's analysis assumed that there will be no recoveries
from insolvent carriers and that those carriers which are currently solvent will
continue to be solvent throughout the period of the applicable recoveries in the
projections.   Based  on  its  review,   analysis  and   discussions,   Navigant
Consulting's  analysis assisted us in making our 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 included
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 Navigant Consulting is based on
information provided by us.
         In January 2004, we reached a  comprehensive  agreement with Equitas to
settle our insurance  claims against certain  Underwriters at Lloyd's of London,
reinsured by Equitas.  The settlement will resolve all  asbestos-related  claims
made  against  Lloyd's  Underwriters  by us and by  each of our  subsidiary  and
affiliated companies,  including DII Industries,  Kellogg Brown & Root and their
subsidiaries  that have filed  Chapter 11  proceedings  as part of our  proposed
settlement.  Our claims against our other London Market Company Insurers are not
affected by this  settlement.  Provided that there is final  confirmation of the
plan of  reorganization  in the Chapter 11  proceedings  and the current  United
States Congress does not pass national asbestos  litigation reform  legislation,
Equitas  will  pay  us  $575  million,  representing  approximately  60%  of the
applicable limits of liability that DII Industries had substantial likelihood of
recovering from Equitas.  The first payment of $500 million will occur within 15
working  days of the later of  January 5, 2005 or the date on which the order of
the bankruptcy court confirming DII Industries' plan of  reorganization  becomes
final and non-appealable.  A second payment of $75 million will be made eighteen
months after the first payment.
         As   of  December  31,  2003,  we  developed  our best  estimate of the
asbestos and silica insurance receivables as follows:

                                       20


              -   included $575  million of  insurance  recoveries  from Equitas
                  based on the January 2004 comprehensive agreement;
              -   included  insurance recoveries  from  other specific  insurers
                  with whom we had settled;
              -   estimated insurance recoveries from specific  insurers that we
                  are  probable   of  settling  with  and  for  which  we  could
                  reasonably  estimate  the  amount  of  the  settlement.   When
                  appropriate, these estimates considered prior settlements with
                  insurers with similar facts and circumstances; and
              -   estimated insurance recoveries for all other policies with the
                  assistance of the Navigant Consulting study.
         The estimate we developed as a result of  this process  was  consistent
with the  amount of  asbestos  and silica  receivables  already  recorded  as of
December  31,  2003,  causing  us  not  to  significantly  adjust  our  recorded
insurance asset at that time. Our estimate was based on a comprehensive analysis
of the situation  existing at that time which could change  significantly in the
both near- and long-term period as a result of:
              -   additional settlements with insurance companies;
              -   additional insolvencies of carriers; and
              -   legal  interpretation  of  the  type  and  amount  of coverage
                  available to us.
         Currently,  we cannot  estimate the time frame for  collection  of this
insurance  receivable,  except as  described  earlier with regard to the Equitas
settlement.

United States Government Contract Work
         We provide substantial work under our government  contracts business to
the  United  States  Department  of  Defense  and other  governmental  agencies,
including  under  world-wide  United States Army logistics  contracts,  known as
LogCAP, and under contracts to rebuild Iraq's petroleum industry,  known as RIO.
Our units  operating in Iraq and elsewhere  under  government  contracts such as
LogCAP  and RIO  consistently  review  the  amounts  charged  and  the  services
performed under these  contracts.  Our operations under these contracts are also
regularly  reviewed and audited by the Defense  Contract Audit Agency,  or DCAA,
and other governmental  agencies.  When issues are found during the governmental
agency audit process,  these issues are typically discussed and reviewed with us
in order to reach a resolution.
         The results of a preliminary audit by the DCAA in December 2003 alleged
that we may have  overcharged  the  Department  of  Defense  by $61  million  in
importing fuel into Iraq. After a review, the Army Corps of Engineers,  which is
our client and oversees the project, concluded that we obtained a fair price for
the fuel.  However,  Department of Defense officials have referred the matter to
the agency's  inspector  general with a request for additional  investigation by
the agency's  criminal  division.  We  understand  that the  agency's  inspector
general has commenced an  investigation.  We have also in the past had inquiries
by the DCAA and the civil fraud  division  of the United  States  Department  of
Justice into  possible  overcharges  for work under a contract  performed in the
Balkans, which is still under review with the Department of Justice.
         On January 22, 2004,  we announced the  identification  by our internal
audit function of a potential over billing of approximately $6 million by one of
our  subcontractors  under the LogCAP  contract in Iraq. In accordance  with our
policy and government  regulation,  the potential overcharge was reported to the
Department of Defense Inspector General's office as well as to our customer, the
Army Materiel  Command.  On January 23, 2004, we issued a check in the amount of
$6 million to the Army  Materiel  Command to cover that  potential  over billing
while we conduct our own  investigation  into the matter. We are also continuing
to review  whether third party  subcontractors  paid, or attempted to pay one or
two former employees in connection with the potential $6 million over billing.
         The  DCAA has  raised  issues  relating  to our  invoicing  to the Army
Materiel  Command  for  food  services  for  soldiers  and  supporting  civilian
personnel in Iraq and Kuwait.  We have taken two actions in response.  First, we
have  temporarily  credited  $36  million to the  Department  of  Defense  until

                                       21


Halliburton,  the DCAA and the Army  Materiel  Command  agree on a process to be
used for invoicing for food services. Second, we are not submitting $141 million
of  additional  food  services  invoices  until an internal  review is completed
regarding  the number of meals  ordered  by the Army  Materiel  Command  and the
number of soldiers actually served at dining facilities for United States troops
and supporting civilian personnel in Iraq and Kuwait. The $141 million amount is
our "order of magnitude"  estimate of the remaining  amounts (in addition to the
$36 million we already credited) being questioned by the DCAA. The issues relate
to whether  invoicing should be based on the number of meals ordered by the Army
Materiel Command or whether invoicing should be based on the number of personnel
served. We have been invoicing based on the number of meals ordered. The DCAA is
contending that the invoicing should be based on the number of personnel served.
We believe our position is correct,  but have undertaken a comprehensive  review
of its propriety and the views of the DCAA.  However, we cannot predict when the
issue will be resolved with the DCAA. In the meantime,  we may withhold all or a
portion of the payments to our subcontractors  relating to the withheld invoices
pending resolution of the issues.  Except for the $36 million in credits and the
$141  million of withheld  invoices,  all our  invoicing  in Iraq and Kuwait for
other food services and other  matters are being  processed and sent to the Army
Materiel Command for payment in the ordinary course.
         All  of  these  matters  are  still  under  review  by  the  applicable
government  agencies.  Additional  review and allegations are possible,  and the
dollar amounts at issue could change significantly.  We could also be subject to
future DCAA  inquiries  for other  services we provide in Iraq under the current
LogCAP contract or the RIO contract.  For example, as a result of an increase in
the level of work  performed in Iraq or the DCAA's review of additional  aspects
of our  services  performed  in  Iraq,  it is  possible  that we may,  or may be
required to, withhold additional invoicing or make refunds to our customer, some
of which could be  substantial,  until these  matters are  resolved.  This could
materially and adversely affect our liquidity.

Barracuda-Caratinga Project
         In June 2000,  KBR entered into a contract  with  Barracuda & Caratinga
Leasing  Company B.V., the project owner, to develop the Barracuda and Caratinga
crude oil fields,  which are located off the coast of Brazil.  The  construction
manager and owner's  representative  is Petroleo  Brasilero SA (Petrobras),  the
Brazilian national oil company. When completed,  the project will consist of two
converted supertankers,  Barracuda and Caratinga, which will be used as floating
production,  storage and offloading  units,  commonly  referred to as FPSOs,  32
hydrocarbon  production  wells,  22 water  injection  wells and all sub-sea flow
lines,  umbilicals and risers  necessary to connect the underwater  wells to the
FPSOs.  The project is significantly  behind the original  schedule due in large
part to  change  orders  from  the  project  owner  and is in a  financial  loss
position.  As a result,  we have asserted  numerous  claims  against the project
owner and are  subject to  potential liquidated  damages.  We continue to engage
in discussions with the project owner in an attempt to settle issues relating to
additional claims, completion dates and liquidated damages.
         Our performance under the contract is secured by:
              -   performance   letters  of  credit,   which  together  have  an
                  available credit of approximately  $266 million as of December
                  31, 2003 and which will  continue to be adjusted to  represent
                  approximately  10% of the contract amount,  as amended to date
                  by change orders;
              -   retainage  letters of credit,  which  together have  available
                  credit of  approximately  $160 million as of December 31, 2003
                  and which will  increase in order to continue to represent 10%
                  of the cumulative cash amounts paid to us; and
              -   a guarantee of  Kellogg Brown  & Root's performance  under the
                  agreement  by Halliburton  Company  in favor  of  the  project
                  owner.
         In November 2003, we entered into  agreements with the project owner in
which the project owner agreed to:

                                       22


              -   pay  $69 million  to settle a  portion of our  claims, thereby
                  reducing  the  amount  of  probable unapproved  claims to $114
                  million; and
              -   extend  the  original   project  completion  dates  and  other
                  milestone dates, reducing our exposure to liquidated damages.
         Accordingly, as of December 31, 2003:
              -   the project was approximately 83% complete;
              -   we  have recorded  an inception  to date  pretax loss  of $355
                  million related  to the  project, of  which  $238 million  was
                  recorded in 2003 and $117 million was recorded in 2002;
              -   the probable unapproved claims included in determining the
                  loss were $114 million; and
              -   we have an exposure to liquidated damages of up to ten percent
                  of  the  contract  value.  Based  upon  the  current  schedule
                  forecast,  we would incur $96 million in liquidated damages if
                  our claim for additional time is not successful.
         Unapproved   Claims.   We  have   asserted   claims  for   compensation
substantially  in excess  of the $114  million  of  probable  unapproved  claims
recorded as  noncurrent  assets as of December 31,  2003,  as well as claims for
additional  time to  complete  the  project  before  liquidated  damages  become
applicable. The project owner and Petrobras have asserted claims against us that
are in addition to the project owner's potential claims for liquidated  damages.
In the November  2003  agreements,  the parties  have agreed to arbitrate  these
remaining  disputed  claims.  In addition,  we have agreed to cap our  financial
recovery to a maximum of $375 million,  and the project owner and Petrobras have
agreed to cap  their  recovery  to a maximum  of $380  million  plus  liquidated
damages.
         Liquidated  Damages.  The original  completion  date for the  Barracuda
vessel was December  2003,  and the original  completion  date for the Caratinga
vessel was April  2004.  We expect  that the  Barracuda  vessel  will  likely be
completed  at least 16 months  later than its  original  contract  determination
date, and the Caratinga vessel will likely be completed at least 14 months later
than  its  original  contract  determination  date.  However,  there  can  be no
assurance that further  delays will not occur.  In the event that any portion of
the delay is determined to be attributable to us and any phase of the project is
completed  after the  milestone  dates  specified in the  contract,  we could be
required to pay liquidated damages.  These damages were initially  calculated on
an escalating  basis rising  ultimately to  approximately  $1 million per day of
delay caused by us,  subject to a total cap on liquidated  damages of 10% of the
final  contract  amount  (yielding  a cap of  approximately  $272  million as of
December 31, 2003).
         Under the  November  2003  agreements,  the  project  owner  granted an
extension of time to the original  completion  dates and other  milestone  dates
that average  approximately 12 months. In addition,  the project owner agreed to
delay any  attempt  to assess the  original  liquidated  damages  against us for
project  delays  beyond 12 months and up to 18 months  and delay any  drawing of
letters of credit with respect to such liquidated  damages until the earliest of
December  7,  2004,  the  completion  of  any  arbitration  proceedings  or  the
resolution of all claims between the project owner and us. Although the November
2003  agreements  do not delay the  drawing of letters of credit for  liquidated
damages for delays beyond 18 months,  our master letter of credit  facility (See
Note 13 to the consolidated  financial  statements) will provide funding for any
such draw while it is in effect. The November 2003 agreements also provide for a
separate  liquidated  damages  calculation  of $450,000  per day for each of the
Barracuda  and the  Caratinga  vessels  if  delayed  beyond 18  months  from the
original schedule. That amount is subject to the total cap on liquidated damages
of 10% of the final contract amount. Based upon the November 2003 agreements and
our most recent estimates of project  completion dates, which are April 2005 for
the Barracuda vessel and May 2005 for the Caratinga  vessel, we estimate that if
we were to be  completely  unsuccessful  in our claims for  additional  time, we
would be obligated to pay $96 million in liquidated damages. We have not accrued
for this exposure because we consider the imposition of such liquidated  damages
to be unlikely.
         Value added taxes.  On December  16, 2003,  the State of Rio de Janeiro
issued a decree recognizing that Petrobras is entitled to a credit for the value
added taxes paid on the project. The decree also provided that value added taxes
that may have become due on the  project,  but which had not yet been paid could

                                       23


be paid in January 2004 without penalty or interest.  In response to the decree,
we have entered into an agreement with Petrobras whereby Petrobras agreed to:
              -   directly pay the value added  taxes due on all  imports on the
                  project   (including   Petrobras'  January   2004  payment  of
                  approximately $150 million); and
              -   reimburse us for value added taxes paid on local purchases, of
                  which approximately $100 million will become due during 2004.
Since the credit to Petrobras for these value added taxes is on a delayed basis,
the issue of whether we must bear the cost of money for the period from  payment
by Petrobras until receipt of the credit has not been determined.
         The validity of the  December  2003 decree has now been  challenged  in
court in Brazil.  Our legal  advisers in Brazil  believe that the decree will be
upheld. If it is overturned or rescinded,  or the Petrobras credits are lost for
any other reason not due to Petrobras, the issue of who must ultimately bear the
cost of the  value added  taxes will have to be  determined  based upon  the law
prior to the  December  2003  decree.  We believe that the value added taxes are
reimbursable  under the contract  and prior law,  but,  until the December  2003
decree was issued,  Petrobras  and the  project  owner had been  contesting  the
reimbursability  of up to $227  million of value  added  taxes.  There can be no
assurance  that we will not be  required  to pay all or a portion of these value
added taxes. In addition,  penalties and interest of $40 million to $100 million
could be due if the December 2003 decree is invalidated. We have not accrued any
amounts for these taxes, penalties or interest.
         Default provisions.  Prior to the filing of the pre-packaged Chapter 11
proceedings  in  connection  with the  proposed  settlement  of our asbestos and
silica claims, we obtained a waiver from the project owner (with the approval of
the lenders  financing  the  project) so that the filing did not  constitute  an
event of  default  under the  contract.  In  addition,  the  project  owner also
obtained  a waiver  from the  lenders  so that the  Chapter  11  filing  did not
constitute an event of default under the project  owner's loan  agreements  with
the  lenders.  The waiver   received  by the  project  owner from the lenders is
subject to certain  conditions that have thus far been fulfilled.  Included as a
condition is that the pre-packaged  plan of  reorganization  be confirmed by the
bankruptcy  court  within 120 days of the filing of the Chapter 11  proceedings.
The  currently   scheduled   hearing  date  for  confirmation  of  the  plan  of
reorganization  is not within the 120-day period. We understand that the project
owner is seeking,  and expects to receive,  an extension of the 120-day  period,
but can  give no  assurance  that it will be  granted.  In the  event  that  the
conditions  do not continue to be fulfilled, the  lenders,  among other  things,
could exercise a right to suspend the project  owner's use of advances made, and
currently  escrowed,  to fund the  project.  We believe it is unlikely  that the
lenders will exercise any right to suspend funding the project given the current
status of the  project  and the fact that a failure to pay may allow us to cease
work on the project  without  Petrobras  having a readily  available  substitute
contractor. However, there can be no assurance that the lenders will continue to
fund the project.
         In the  event  that we  were  determined  to be in  default  under  the
contract, and if the project was not completed by us as a result of such default
(i.e.,  our services are  terminated as a result of such  default),  the project
owner may seek direct damages.  Those damages could include  completion costs in
excess of the contract price and interest on borrowed  funds,  but would exclude
consequential  damages.  The total  damages could be up to $500 million plus the
return of up to $300 million in advance  payments  previously  received by us to
the extent  they have not been  repaid.  The  original  contract  terms  require
repayment  of the $300 million in advance  payments by  crediting  the last $350
million of our invoices related to the contract by that amount, but the November
2003  agreements  delay the  repayment  of any of the $300  million  in  advance
payments  until at least  December 7, 2004. A termination of the contract by the
project owner could have a material  adverse  effect on our financial  condition
and results of operations.
         Cash  flow  considerations.  The  project  owner has  procured  project
finance funding  obligations from various lenders to finance the payments due to
us under the contract. The project owner currently has no other committed source
of funding on which we can necessarily rely. In addition,  the project financing

                                       24


includes borrowing capacity in excess of the original contract amount.  However,
only  $250  million  of this  additional  borrowing  capacity  is  reserved  for
increases in the contract amount payable to us and our subcontractors.
         Under the loan documents,  the availability date for loan draws expired
December  1, 2003 and  therefore,  the  project  owner  drew down all  remaining
available  funds on that date.  As a condition to the draw down of the remaining
funds,  the project owner was required to escrow the funds for the exclusive use
of paying project costs. The availability of the escrowed funds can be suspended
by the lenders if applicable  conditions  are not met. With limited  exceptions,
these funds may not be paid to Petrobras or its subsidiary (which is funding the
drilling  costs of the project) until all amounts due to us,  including  amounts
due for the claims, are liquidated and paid. While this potentially  reduces the
risk that the funds would not be  available  for payment to us, we are not party
to the  arrangement  between the  lenders and the project  owner and can give no
assurance that there will be adequate  funding to cover current or future claims
and change orders.
         We have now begun to fund operating cash  shortfalls on the project and
would be obligated to fund such shortages over the remaining  project life in an
amount we currently  estimate to be  approximately  $480  million.  That funding
level assumes  generally that neither we nor the project owner are successful in
recovering claims against the other and that no liquidated  damages are imposed.
Under the same assumptions, except assuming that we recover unapproved claims in
the amounts currently  recorded,  the cash shortfall would be approximately $360
million. We have already funded  approximately $85 million of such shortfall and
expect that our funded  shortfall  amount will  increase to  approximately  $416
million by December 2004, of which  approximately  $225 million would be paid to
the project  owner in December 2004 as part of the return of the $300 million in
advance payments. The remainder of the advance payments would be returned to the
project owner over the remaining life of the project after December 2004.  There
can be no assurance that we will recover the amount of unapproved claims we have
recognized, or any amounts in excess of that amount.

LIQUIDITY AND CAPITAL RESOURCES

         We ended 2003 with cash and cash  equivalents of $1.8 billion  compared
to $1.1  billion  at the end of 2002.
         Significant  uses of  cash.  Our liquidity and cash balance during 2003
have been  significantly  affected by our government  services work in Iraq, our
asbestos and silica liabilities,  $296 million in scheduled debt maturities  and
a $180 million  reduction of  receivables  in our  securitization  program.  Our
working  capital  position   (excluding  cash  and  equivalents)   increased  by
approximately  $880 million due to the start-up of our government  services work
in Iraq. The activities in Iraq will continue to require this significant amount
of working capital,  and therefore the timing of the realization of this working
capital is  uncertain.  We  currently  expect the working  capital  requirements
related to Iraq will increase through the first half of 2004. An increase in the
amount of services we are engaged to perform could place  additional  demands on
our working capital. It is possible that we may, or may be required to, withhold
additional  invoicing  or make  refunds  to our  customer  related to the DCAA's
review  of  additional  aspects  of  our  services,   some  of  which  could  be
substantial,  until  these  matters  are  resolved.  This could  materially  and
adversely affect our liquidity.
         On  December  16, 2003, a  partial  payment  of $311  million  was made
immediately  prior to the  Chapter  11 filing  of our  subsidiaries  related  to
asbestos and silica personal injury claims. We have also agreed to guarantee the
payment of an  additional  $156  million  of the  remaining  approximately  $2.5
billion cash amount, which must be paid on the earlier to occur of June 17, 2004
or the date on which an order  confirming  the proposed  plan of  reorganization
becomes   final  and   non-appealable.   When  and  if  we  receive   final  and
non-appealable  confirmation of our plan of reorganization,  we will be required
to fund the remainder of the cash amount to be  contributed  to the asbestos and
silica trusts.

                                       25


          As a result of capital discipline throughout the year, we have reduced
capital  expenditures  from $764  million in 2002 to $515  million  in 2003.  We
expect to continue this level of  expenditures  with capital  outlays  currently
being estimated at approximately $540 million in 2004. We have not finalized our
capital  expenditures  budget for 2005 or later periods.  We currently have been
paying annual dividends to our shareholders of approximately $219 million.
         The following table summarizes our long-term contractual obligations as
of December 31, 2003:


                                                 Payments due
                                ------------------------------------------------
Millions of dollars                2004      2005    2006      2007      2008    Thereafter     Total
--------------------------------------------------------------------------------------------------------
                                                                          
Long-term debt (1)               $    22     $ 324   $  296   $   10    $  151     $ 2,625     $ 3,428
Operating leases                     143        96       80       58        45         267         689
Capital leases                         1         1        -        -         -           -           2
Pension funding
   obligations (2)                    67         -        -        -         -           -          67
Purchase obligations (3)             241         4        4        3         3           1         256
--------------------------------------------------------------------------------------------------------
Total long-term
   contractual obligations       $   474     $ 425   $  380   $   71    $  199     $ 2,893     $ 4,442
========================================================================================================

       (1)  Long-term  debt  excludes  the  effect of an  interest  rate swap of
       approximately  $9  million.  See  Note 10 to the  consolidated  financial
       statements for further  discussion.
       (2) Congress is expected to consider pension  funding relief  legislation
       when they  reconvene in 2004.  The actual  contributions  we make  during
       2004 may be impacted by the final legislative outcome.
       (3) The  purchase  obligations  disclosed  above do not include  purchase
       obligations that KBR enters into with its vendors in the normal course of
       business  that  support  existing   contracting   arrangements  with  its
       customers.  The purchase  obligations with their vendors can span several
       years  depending on the duration of the projects.  In general,  the costs
       associated  with the purchase  obligations are expensed as the revenue is
       earned on the related projects.


         In  addition,  we have  received  adverse  judgments  on two cases:  BJ
Services Company patent litigation and Anglo-Dutch (Tenge).  (See Note 13 to the
consolidated financial statements for more information.) We could be required to
pay  approximately  $107 million during 2004 to BJ Services  Company,  which has
been escrowed and is included in the  restricted  cash balance in "Other current
assets".  We are currently  appealing the Anglo-Dutch (Tenge) judgment but could
be required to pay as  much as $106 million  (although we have only  accrued $77
million) to Anglo-Dutch Petroleum International, Inc. We have posted security in
the amount of $25 million in order to postpone  execution of the judgment  until
all appeals have been exhausted.
         Significant  sources of cash.  After  consideration  of the increase in
working  capital  needs  related to work in Iraq,  asbestos  and  silica  claims
payments,  and the  reduction  of $180  million  under our  accounts  receivable
securitization  facility,  our operations provided approximately $600 million in
cash flow in 2003. In addition,  our cash flow was supplemented by cash from the
sale of non-core businesses  totaling $224 million,  which included $136 million
collected  from the sale of Wellstream,  $33 million  collected from the sale of
Halliburton Measurement Systems, $25 million collected on a note receivable that
was  received  as a portion  of the  payment  for  Bredero-Shaw  and $23 million
collected from the sale of Mono Pumps.
         In contemplation of the anticipated cash contribution into the asbestos
and silica trusts in 2004 and to help fund our working capital needs in Iraq, we
increased our long-term  borrowings by  approximately  $2.2 billion  during 2003
through the issuance of  convertible  bonds and fixed and  floating  rate senior
notes.  Also,  in January of 2004, we issued senior notes due 2007 totaling $500
million, which will primarily be used to fund the asbestos and silica settlement
liability.  Our combined  short-term notes payable and long-term debt was 58% of
total  capitalization at the end of 2003, compared to 30% at the end of 2002 and
24% at the end of 2001.

                                       26


         Future sources of cash. We have available to us significant  sources of
cash in the near-term should we need it.
              Asbestos and silica liability  financing. In the fourth quarter of
2003, we entered into a delayed-draw term facility for up to $1.0 billion.  This
facility  was reduced in January 2004 to  approximately  $500 million by the net
proceeds  of our recent  issuance  of senior  notes due 2007.  This  facility is
subject to further  reduction  and could be  available  for cash  funding of the
trusts for the benefit of asbestos and silica  claimants.  There are a number of
conditions  that must be met before the  delayed-draw  term facility will become
available for our use, including final and  non-appealable  confirmation  of our
plan of reorganization and confirmation of the rating of Halliburton's long-term
senior  unsecured  debt at BBB or higher by Standard & Poor's and Baa2 or higher
by Moody's  Investors  Service.  In  addition,  we entered  into a $700  million
three-year revolving credit facility for general working capital purposes, which
replaced  our  $350  million  revolving  credit  facility.  At the  time  of its
replacement,  no amounts had been drawn against the $350 million  revolver.  The
$700 million revolving credit facility is now effective and undrawn.
              Asbestos and silica settlements with insurers. In January 2004, we
reached a  comprehensive  agreement with Equitas to settle our insurance  claims
against  certain  Underwriters at Lloyd's of London,  reinsured by Equitas.  The
settlement  will  resolve  all  asbestos-related  claims  made  against  Lloyd's
Underwriters  by us and by  each of our  subsidiary  and  affiliated  companies,
including DII Industries,  Kellogg Brown & Root and their subsidiaries that have
filed  Chapter 11  proceedings  as part of our proposed  settlement.  Our claims
against  our other  London  Market  Company  Insurers  are not  affected by this
settlement.   Provided  that  there  is  final   confirmation  of  the  plan  of
reorganization  in the  Chapter 11  proceedings and the  current  United  States
Congress does not pass national asbestos litigation reform legislation,  Equitas
will  pay us $575  million,  representing  approximately  60% of the  applicable
limits of liability that DII Industries had substantial likelihood of recovering
from  Equitas.  The first  payment of $500  million will occur within 15 working
days of the  later of  January  5,  2005 or the date on which  the  order of the
bankruptcy  court  confirming DII  Industries'  plan of  reorganization  becomes
final and non-appealable.  A second payment of $75 million will be made eighteen
months after the first payment.
              Other  Sources  of  cash.  We  also  have  available  our accounts
receivable  securitization  facility. See "Off Balance Sheet Risk" for a further
discussion.
         Other factors affecting liquidity
         Credit  ratings.  Late in 2001 and  early in  2002,  Moody's  Investors
Service 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  and silica  exposure.  In
December 2003,  Moody's  Investors Service confirmed our ratings with a positive
outlook  and  Standard & Poor's  revised  its credit  watch  listing for us from
"negative" to "developing" in  response to our announcement  that DII Industries
and  Kellogg  Brown & Root  and  other  of our  subsidiaries  filed  Chapter  11
proceedings to implement the proposed asbestos and silica settlement.
         Although our long-term  unsecured  debt ratings  continue at investment
grade levels,  the cost of new borrowing is relatively  higher and our access to
the debt markets is more volatile at these new rating levels.  Investment  grade
ratings are BBB- or higher for  Standard & Poor's and Baa3 or higher for Moody's
Investors  Service.  Our current long-term  unsecured debt ratings are one level
above BBB- on  Standard & Poor's and one level  above Baa3 on Moody's  Investors
Service.  Several  of our credit  facilities  or other  contractual  obligations
require us to maintain a certain credit rating as follows:
              -   our $700 million revolving credit facility would require us to
                  provide additional  collateral if our long-term unsecured debt
                  rating falls below investment grade;
              -   our  Halliburton  Elective  Deferral Plan contains a provision
                  which  states that,  if the  Standard & Poor's  rating for our
                  long-term unsecured debt falls below BBB, the amounts credited

                                       27


                  to the participants' accounts will be paid to the participants
                  in a lump-sum  within 45 days.  At December  31, 2003 this was
                  approximately $51 million; and
              -   certain of our letters of credit have  ratings  triggers  that
                  could require cash collateralization or give the banks set-off
                  rights.  These  contingencies would be funded under the senior
                  secured master letter of credit  facility (see below) while it
                  remains available.
         Letters of credit. In the normal course of business, we have agreements
with banks under which  approximately  $1.2 billion of letters of credit or bank
guarantees  were  outstanding  as of December 31, 2003,  including  $252 million
which  relate to our joint  ventures'  operations.  Certain of these  letters of
credits have triggering  events (such as the filing of Chapter 11 proceedings by
some of our  subsidiaries  or reductions in our credit ratings) that would allow
the banks to require cash collateralization or allow the holder to draw upon the
letter of credit.
         In the fourth quarter of 2003, we entered into a senior secured  master
letter of credit  facility  (Master LC Facility) with a syndicate of banks which
covers at least 90% of the face amount of our existing letters of credit.  Under
the Master LC Facility, each participating bank has permanently waived any right
that it had to demand  cash  collateral  as a result of the filing of Chapter 11
proceedings.  In addition,  the Master LC Facility  provides for the issuance of
new letters of credit,  so long as the total  facility does not exceed an amount
equal  to  the  amount  of  the  facility  at  closing  plus  $250  million,  or
approximately $1.5 billion.
         The  purpose of the  Master LC  Facility  is to provide an advance  for
letter  of  credit  draws,  if any,  as well as to  provide  collateral  for the
reimbursement  obligations for the letters of credits. Advances under the Master
LC Facility will remain  available until the earlier of June 30, 2004 or when an
order  confirming  the  proposed  plan  of  reorganization   becomes  final  and
non-appealable.  At that  time,  all  advances  outstanding  under the Master LC
Facility,  if any,  will become term loans  payable in full on November 1, 2004,
and all other  letters of credit  shall  cease to be subject to the terms of the
Master LC Facility.  As of December 31, 2003, there were no outstanding advances
under the Master LC Facility.

BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

         We  currently  operate  in over 100  countries  throughout  the  world,
providing a comprehensive range of discrete and integrated products and services
to the energy industry and to other industrial and governmental  customers.  The
majority of our consolidated  revenues are derived from the sale of services and
products,  including engineering and construction  activities.  We sell services
and products primarily to major,  national and independent oil and gas companies
and  the  United  States  government.  These  products  and  services  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. Our five business segments are organized around how we manage the
business:  Drilling and Formation Evaluation,  Fluids,  Production Optimization,
Landmark and Other Energy Services and the Engineering and  Construction  Group.
We sometimes  refer to the combination of  Drilling  and  Formation  Evaluation,
Fluids,  Production Optimization and Landmark and Other Energy Services segments
as the Energy Services Group.
         The industries we serve are highly  competitive  with many  substantial
competitors for each segment.  In 2003,  based upon the location of the services
provided and products  sold, 27% of our total revenue was from the United States
and 15% was from Iraq.  In 2002,  33% of our total  revenue  was from the United
States  and 12% of our  total  revenue  was from the  United  Kingdom.  No other
country  accounted  for more  than 10% of our  revenues  during  these  periods.
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
international   country  would  be  material  to  our  consolidated  results  of
operations.

                                       28


         Halliburton Company
         Activity levels within our 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.
         Energy Services Group
         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  expenditures by international and national oil companies,  the world
economy and global stability,  which together drive worldwide drilling activity.
Our Energy Services Group financial performance is significantly affected by oil
and gas prices and worldwide rig activity  which are summarized in the following
tables.
         This  table  shows  the  average  oil and gas  prices  for  West  Texas
Intermediate crude oil and Henry Hub natural gas prices:


Average Oil and Gas Prices                  2003            2002            2001
--------------------------------------------------------------------------------------
                                                                  
West Texas Intermediate (WTI)
     oil prices (dollars per barrel)        $ 31.14       $  25.92         $ 26.02
Henry Hub Gas Prices (dollars per
     million cubic feet)                    $  5.63       $   3.33         $  4.07
======================================================================================

         Our customers' cash flow, in many  instances,  depends upon the revenue
they generate from sale of oil and gas. With higher  prices,  they may have more
cash flow,  which usually  translates  into higher  exploration  and  production
budgets.  Higher prices may also mean that oil and gas  exploration  in marginal
areas can become  attractive,  so our customers  may consider  investing in such
properties when prices are high. When this occurs,  it means more potential work
for us. The opposite is true for lower oil and gas prices.
         The  expectation  in 2003 was that  world  oil  prices  would  begin to
somewhat soften, but prices have continued to increase. United States oil prices
continued to increase due to low inventory levels as a result of Iraqi crude oil
production still being below pre-war levels and higher natural gas prices adding
pressure to switch to competing heating fuel oils.
         Natural gas demand  showed a decline in 2003 largely due to high prices
discouraging  demand in the  industrial  and electric  power  sectors.  However,
expected  growth in the economy,  along with  somewhat  lower  projected  annual
average prices,  are expected to increase demand by two percent in 2004. Natural
gas production slightly increased in 2003, but is expected to fall back somewhat
in 2004 as  drilling  intensity  declines.  In 2004,  the  projected  supply gap
between  demand  and  production  is  offset  by the  expectation  that  storage
injection  requirements  will be less than those in 2003,  when stocks after the
winter of 2002-2003 were at record lows.
         The yearly  average rig counts based on the Baker  Hughes  Incorporated
rig count information are as follows:

                                       29



Average Rig Counts                          2003            2002            2001
--------------------------------------------------------------------------------------
Land vs. Offshore
--------------------------------------------------------------------------------------
                                                                  
United States:
     Land                                     924            718           1,002
     Offshore                                 108            113             153
--------------------------------------------------------------------------------------
     Total                                  1,032            831           1,155
--------------------------------------------------------------------------------------
Canada:
     Land                                     368            260             337
     Offshore                                   4              6               5
--------------------------------------------------------------------------------------
     Total                                    372            266             342
--------------------------------------------------------------------------------------
International (excluding Canada):
     Land                                     544            507             525
     Offshore                                 226            225             220
--------------------------------------------------------------------------------------
     Total                                    770            732             745
--------------------------------------------------------------------------------------
Worldwide total                             2,174          1,829           2,242
--------------------------------------------------------------------------------------
Land total                                  1,836          1,485           1,864
--------------------------------------------------------------------------------------
Offshore total                                338            344             378
======================================================================================




Average Rig Counts                          2003            2002            2001
--------------------------------------------------------------------------------------
Oil vs. Gas
--------------------------------------------------------------------------------------
                                                                  
United States:
     Oil                                      157            137             217
     Gas                                      875            694             938
--------------------------------------------------------------------------------------
     Total                                  1,032            831           1,155
--------------------------------------------------------------------------------------
*  Canada:                                   372             266             342
--------------------------------------------------------------------------------------
International (excluding Canada):
     Oil                                      576            561             571
     Gas                                      194            171             174
--------------------------------------------------------------------------------------
     Total                                    770            732             745
--------------------------------------------------------------------------------------
Worldwide total                             2,174          1,829           2,242
======================================================================================

*  Canadian rig counts by oil and gas were not available.


         Most of our work in Energy  Services Group closely tracks the number of
active rigs. As rig count  increases or decreases,  so does the total  available
market for our services  and  products.  Further,  our margins  associated  with
services  and  products  for  offshore  rigs are  generally  higher  than  those
associated with land rigs.
         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.
         The  United  States rig count  increase  in 2003 was  primarily  in gas
drilling  as gas  prices  remained  high and  operators  continued  to build gas
storage levels before the 2003/2004 winter heating season. The overall increased
North American rig count is being driven by higher oil and gas prices and demand
for natural  gas to replace  working  gas in storage  for the  2003/2004  winter
heating season.

                                       30


         Overall  outlook.  For 2003, high commodity prices resulted in improved
activity  levels with  average  global rig counts up 19%.  Nonetheless,  reduced
reinvestment  rates by our  customers  meant that  overall  activity  growth and
offshore  activity in  particular  failed to meet  broader  expectations  of the
market.
         The Energy Services Group experienced strong performance in Canada, the
Middle East and  Latin America in 2003.  Mexico's  performance was  particularly
strong as operating income there more than doubled.
         The  Gulf  of  Mexico  was  an  overall  disappointment.  The  industry
experienced a five percent year-over-year decline in the offshore Gulf of Mexico
rig  count  and a  reduction  in deep  water  activity  with a number of our key
customers.  As a result,  we have  started  the  process  of  reducing  our cost
structure in the Gulf of Mexico region and are  refocusing  our efforts  towards
more successful  new products.  Equally important,  we have redeployed  a number
of people and assets to higher growth regions  internationally,  including Latin
America and Asia.
         Our Drilling and Formation Evaluation segment saw excellent performance
in logging,  but our drilling services performance was adversely affected in the
second half of the year by  downturns  of activity in the Gulf of Mexico and the
United Kingdom sector of the North Sea. As a result, we are currently  executing
a plan to remove  approximately  $50  million  of annual  operating  costs  from
drilling services. We expect to see a recovery of margins during 2004.
         The Energy Services Group also achieved  significant  growth in our new
products  and  services  in  2003.   Overall,   revenues   associated  with  new
technologies were higher than those of 2002 across a wide range of customers and
geographies.  We were particularly successful in our rotary steerables products,
where we  increased  our  revenues  by 80% with an increase in our tool fleet of
25%.
         The signing of contracts for national data centers with the governments
of Nigeria and Indonesia  reinforces the successes we have had with national oil
companies  and their  governments  over the last few years,  and is something we
wish to  build upon in 2004.  Together  with the data  centers in  Pakistan, the
United  Kingdom, Brazil, Norway,  Australia,  Canada and Houston, as well as the
recent selection of  Landmark as an  operator of the  Kazakhstan  National  Data
Bank,  we believe  Halliburton is emerging  as the clear leader  for data center
technology.
         We have also reexamined  various joint ventures and recently  announced
an  agreement  to  restructure  two  significant   joint  ventures  with  Shell,
WellDynamics B.V. (an intelligent well completion joint venture),  and Enventure
Global Technologies LLC (an expandable casing joint venture). For Enventure,  we
elected to reduce our interests and transfer part of our interests to Shell.  In
return, we received significantly enhanced marketing and distribution rights for
sand screens and liner hangers, which we believe are central to our business and
offer major opportunities for profitable growth. In a similar strategic vein, we
believe the majority stake we will secure in WellDynamics is better aligned with
the core "Real Time Knowledge" strategy of our company.
         As we look  forward,  we see modest  growth in the global market during
2004. Spears and Associates expects the United States rig count to average 1,050
rigs. For Canada,  they are predicting an average of 362 rigs in 2004. Growth in
international  drilling  activity is expected to remain positive over the coming
year. The  international  rig count is expected by Spears to average 795 rigs in
2004 with 9,874 new wells  forecasted to be drilled.  We will be focused in 2004
on our operational  efficiency and capital discipline,  without compromising our
ability to serve new growth markets in the future.
         Engineering and Construction Group
         Our Engineering and Construction  Group,  operating as KBR,  provides a
wide  range of  services  to energy  and  industrial  customers  and  government
entities worldwide.  Engineering and construction  projects are generally longer
term in nature  than our Energy  Services  Group work and are  impacted  by more
diverse drivers than short term fluctuations in oil and gas prices.
         Our government  services  opportunities  are strong in the Middle East,
United States,  United Kingdom, and Australia.  Spending on defense and security
programs has been increasing in each of the major markets. These include support
to military forces, security assessments and upgrades at military and government

                                       31


facilities and disaster and  contingency  relief at home and abroad.  We believe
governments  will  continue  to look  to the  private  sector  to  perform  work
traditionally done by those government agencies.
         The drive to monetize  gas  reserves in the Middle  East,  West Africa,
Asia Pacific, Eurasia and Latin America, combined with strong demand for gas and
liquefied  natural gas (LNG) in the  United States, Japan, Korea,  Taiwan, China
and  India,  has  led to  numerous  gas to  liquid,  LNG  liquefaction  and  gas
development projects in the exporting regions as well as onshore or floating LNG
terminals, and gas processing plants in the importing countries.
         Outsourcing  of operations  and  maintenance  work has been  increasing
worldwide,  and we  expect  this  trend to  continue.  An  increasing  number of
independent  oil companies are acquiring  mature  oilfield assets from major oil
companies and are looking to outsource operations and maintenance  capabilities.
KBR is investing in technologies to optimize asset  performance in both upstream
and downstream oil and gas markets.
         We are also seeing  significant  business  opportunities  in the United
Kingdom for major public infrastructure  projects, which have been dominated for
almost a decade by privately financed  projects,  and now account for 10% of the
country's  infrastructure  capital  spending.  We  have  been  involved  with  a
significant  number of these  projects,  and we expect to build on that business
using  our  experience  with  pulling   together   complex   project   financing
arrangements and managing partnerships.
         Engineering and  construction  contracts can be broadly  categorized as
either  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, from among other things:
              -   uncertainty in  estimating the  technical aspects  and  effort
                  involved to accomplish the work within the contract schedule;
              -   labor availability and productivity; and
              -   supplier and subcontractor pricing and performance.
         Fixed-price  engineering,  procurement and construction and fixed-price
engineering,  procurement, installation and commissioning contracts involve even
greater risks including:
              -   bidding  a fixed-price  and completion  date  before  detailed
                  engineering work has been performed;
              -   bidding a fixed-price  and  completion  date before locking in
                  price  and  delivery  of  significant  procurement  components
                  (often items which are  specifically  designed and  fabricated
                  for the project);
              -   bidding a  fixed-price and  completion  date before finalizing
                  subcontractors' terms and conditions;
              -   subcontractor's    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.

                                       32


         The approximate percentages of revenues attributable to fixed-price and
cost reimbursable engineering and construction segment contracts are as follows:


               Fixed-Price         Cost
                               Reimbursable
----------------------------------------------
                         
    2003           24%             76%
    2002           47%             53%
    2001           41%             59%
==============================================

         An important aspect of our 2002  reorganization  was to look closely at
each of our products and services to ensure that risks can be properly evaluated
and that they are self-sufficient, including their use of capital and liquidity.
In that process,  we found that the engineering,  procurement,  installation and
commissioning,  or EPIC, of offshore projects involved a  disproportionate  risk
and were  using a large  share of our  bonding  and  letter of  credit  capacity
relative to profit contribution.  Accordingly, we determined to not pursue those
types of projects in the future.  We have six fixed-price EPIC offshore projects
underway, and we are fully committed to successful completion of these projects,
several of which are substantially complete.
         The  reshaping  of  our  offshore  business  away  from  lump-sum  EPIC
contracts to cost reimbursement services has been marked by some significant new
work.  During  the  first  quarter  of  2004  we  signed  a  major  reimbursable
engineering, procurement,  and construction  management, or EPCM, contract for a
West  African  oilfield  development.  This is a major  award under our new EPCM
strategy.  We are also pursuing program  management  opportunities in deep-water
locations around the world.  These efforts,  implemented under our new strategy,
are  allowing us to utilize our global  resources  to continue to be a leader in
the offshore business.

                                       33



RESULTS OF OPERATIONS IN 2003 COMPARED TO 2002


REVENUES:                                                             Increase/     Percentage
Millions of dollars                         2003          2002       (Decrease)       Change
-------------------------------------------------------------------------------------------------
                                                                        
Drilling and Formation Evaluation         $   1,643     $   1,633     $      10         0.6%
Fluids                                        2,039         1,815           224        12.3
Production Optimization                       2,766         2,554           212         8.3
Landmark and Other Energy Services              547           834          (287)      (34.4)
-------------------------------------------------------------------------------------------------
    Total Energy Services Group               6,995         6,836           159         2.3
Engineering and Construction Group            9,276         5,736         3,540        61.7
-------------------------------------------------------------------------------------------------
Total revenues                            $  16,271     $  12,572     $   3,699        29.4%
=================================================================================================

Geographic - Energy Services Group segments only:
-------------------------------------------------------------------------------------------------
Drilling and Formation Evaluation:
    North America                         $     558     $     549     $       9         1.6%
    Latin America                               261           251            10         4.0
    Europe/Africa                               312           344           (32)       (9.3)
    Middle East/Asia                            512           489            23         4.7
-------------------------------------------------------------------------------------------------
         Subtotal                             1,643         1,633            10         0.6
-------------------------------------------------------------------------------------------------
Fluids:
    North America                               990           934            56         6.0
    Latin America                               258           216            42        19.4
    Europe/Africa                               452           381            71        18.6
    Middle East/Asia                            339           284            55        19.4
-------------------------------------------------------------------------------------------------
         Subtotal                             2,039         1,815           224        12.3
-------------------------------------------------------------------------------------------------
Production Optimization:
    North America                             1,345         1,264            81         6.4
    Latin America                               317           277            40        14.4
    Europe/Africa                               562           556             6         1.1
    Middle East/Asia                            542           457            85        18.6
-------------------------------------------------------------------------------------------------
         Subtotal                             2,766         2,554           212         8.3
-------------------------------------------------------------------------------------------------
Landmark and Other Energy Services:
    North America                               192           284           (92)      (32.4)
    Latin America                                71           102           (31)      (30.4)
    Europe/Africa                               116           297          (181)      (60.9)
    Middle East/Asia                            168           151            17        11.3
-------------------------------------------------------------------------------------------------
         Subtotal                               547           834          (287)      (34.4)
-------------------------------------------------------------------------------------------------
Total Energy Services Group revenues      $   6,995     $   6,836     $     159         2.3%
=================================================================================================


                                       34




OPERATING INCOME (LOSS):                                              Increase/     Percentage
Millions of dollars                         2003          2002       (Decrease)       Change
-------------------------------------------------------------------------------------------------
                                                                        
Drilling and Formation Evaluation         $   177       $    160      $     17         10.6%
Fluids                                        251            202            49         24.3
Production Optimization                       421            384            37          9.6
Landmark and Other Energy Services            (23)          (108)           85         78.7
-------------------------------------------------------------------------------------------------
    Total Energy Services Group               826            638           188         29.5
Engineering and Construction Group            (36)          (685)          649         94.7
General corporate                             (70)           (65)           (5)        (7.7)
-------------------------------------------------------------------------------------------------
Operating income (loss)                   $   720       $   (112)     $    832           NM
=================================================================================================

Geographic - Energy Services Group segments only:
-------------------------------------------------------------------------------------------------
Drilling and Formation Evaluation:
    North America                        $     60       $     70      $   (10)        (14.3)%
    Latin America                              30             29            1           3.4
    Europe/Africa                              30             (6)          36            NM
    Middle East/Asia                           57             67          (10)        (14.9)
-------------------------------------------------------------------------------------------------
         Subtotal                             177            160           17          10.6
-------------------------------------------------------------------------------------------------
Fluids:
    North America                             104            119          (15)        (12.6)
    Latin America                              52             33           19          57.6
    Europe/Africa                              48             20           28         140.0
    Middle East/Asia                           47             30           17          56.7
-------------------------------------------------------------------------------------------------
         Subtotal                             251            202           49          24.3
-------------------------------------------------------------------------------------------------
Production Optimization:
    North America                             202            228          (26)        (11.4)
    Latin America                              75             41           34          82.9
    Europe/Africa                              52             46            6          13.0
    Middle East/Asia                           92             69           23          33.3
-------------------------------------------------------------------------------------------------
         Subtotal                             421            384           37           9.6
-------------------------------------------------------------------------------------------------
Landmark and Other Energy Services:
    North America                             (60)          (218)         158          72.5
    Latin America                               8              5            3          60.0
    Europe/Africa                              17            118         (101)        (85.6)
    Middle East/Asia                           12            (13)          25            NM
-------------------------------------------------------------------------------------------------
         Subtotal                             (23)          (108)          85          78.7
-------------------------------------------------------------------------------------------------
Total Energy Services Group
    operating income                     $    826       $    638      $   188          29.5%
=================================================================================================

         NM - Not Meaningful


         The increase in  consolidated  revenues  for 2003  compared to 2002 was
largely attributable to activity in our government services projects,  primarily
work in the Middle East.  International  revenues were 73% of total  revenues in
2003 and 67% of total revenues in 2002,  with the increase  attributable  to our
government  services  projects.  The United States Government has become a major
customer of ours with total revenues of  approximately  $4.2 billion,  or 26% of
total  consolidated   revenues,  for  2003.  Revenues  from  the  United  States
Government during 2002 represented less than 10% of total consolidated revenues.
The  consolidated  operating  income increase in 2003 compared to 2002 was again
largely  attributable to our government services projects and the absence of the
$644  million in asbestos and silica  charges and  restructuring  charges  which
occurred in 2002. During 2003, Iraq related work contributed  approximately $3.6
billion in  consolidated  revenues  and $85  million in  consolidated  operating

                                       35


income, a 2.4% margin before corporate costs and taxes. In addition, we recorded
a loss on the Barracuda-Caratinga project of $238 million in 2003 as compared to
a $117  million loss in 2002.  Our Energy  Services Group segments accounted for
approximately $188 million of the increase.
         Following is a discussion  of our results of  operations  by reportable
segment.
         Drilling and  Formation  Evaluation  revenues  were  essentially  flat.
Logging and perforating  services revenues increased $25 million,  primarily due
to higher  average  year-over-year  rig counts in the United  States and Mexico,
partially  offset by lower  sales in China and reduced  activity  in  Venezuela.
Drill bits  revenues  increased $21 million,  benefiting  from the increased rig
counts in the United States and Canada.  Drilling  services revenue for 2003 was
negatively  impacted  by $79  million  compared  to 2002 due to the sale of Mono
Pumps in January 2003. The remainder of drilling  services revenue increased $34
million  compared to 2002 as contracts  that were expiring were more than offset
by new contracts,  primarily in West Africa,  the Middle East and Ecuador.  Also
impacting  drilling  services  were  significant  price  discounts in the fourth
quarter of 2003 on basic drilling  services and rotary  steerables in the United
Kingdom.  International revenues were 72% of total segment revenues in both 2003
and 2002.
         The increase in operating  income for the segment was primarily  driven
by logging and perforating  services,  which increased  operating  income by $32
million,  a result of increased rig counts  internationally,  lower discounts in
the United States and the absence of start-up costs incurred in 2002.  Operating
income for 2003 also  included a $36 million gain ($24 million in North  America
and $12 million in  Europe/Africa)  on the sale of Mono Pumps.  Operating income
for  drilling  services  decreased  by $49 million and $9 million for drill bits
compared to 2002 due to lower  activity in Venezuela,  pricing  pressures in the
United States, severance expense, and facility consolidation expenses.  Drilling
services  operating  income  for  2003 was  negatively  impacted  by $5  million
compared to 2002 due to the sale of Mono Pumps.
         Fluids  increase  in  revenues  was  driven by  drilling  fluids  sales
increase  of $101  million and  cementing  activities  increase of $121  million
compared to 2002.  Cementing benefited from higher land rig counts in the United
States.  Both drilling  fluids and cementing  revenues  benefited from increased
activity  in Mexico,  primarily  with  PEMEX,  which  offset  lower  activity in
Venezuela.  Drilling  fluids also benefited from price  improvements  on certain
contracts in Europe/Africa. International revenues were 56% of total revenues in
2003 compared to 52% in 2002.
         The Fluids segment  operating  income increase was a result of drilling
fluids  increasing  $29 million and cementing  services  increasing  $24 million
compared  to  2002,  partially  offset  by  lower  results  of $4  million  from
Enventure. Drilling fluids benefited from higher sales of biodegradable drilling
fluids and improved  contract  terms.  Those benefits were  partially  offset by
contract  losses in the Gulf of Mexico and United  States  pricing  pressures in
2003.  Cementing operating income primarily increased in Middle East/Asia due to
collections on previously reserved receivables,  certain start-up costs in 2002,
and higher margin work. All regions showed improved segment  operating income in
2003 compared to 2002, except North America,  which was impacted by the decrease
in activity from the higher margin offshore business in the Gulf of Mexico.
         Production Optimization increase in revenues was mainly attributable to
production enhancement services,  which increased $187 million compared to 2002,
driven by higher  activity  in the Middle East  following  the end of the war in
Iraq and increased rig count in Mexico and North America. In addition,  sales of
tools and testing services  increased $40 million compared to 2002 due primarily
to increased land rig counts in North America,  increased activity in Brazil due
to higher  activity with national and  international  oil companies in deepwater
and increased rig activity in Mexico.  These increases were partially  offset by
lower sales of completion products and services of $5 million,  primarily in the
United  States  due to lower  activity  in the  Gulf of  Mexico  and the  United
Kingdom. The May 2003 sale of Halliburton  Measurement Systems had a $24 million
negative impact on segment revenues in 2003 compared to 2002. The improvement in
revenues  more than  offset the $9 million in equity  losses  from the Subsea 7,
Inc. joint venture.  International revenues were 56% of segment revenues in 2003
compared to 53% in 2002 as activity  picked up in the Middle East  following the
end of the war in Iraq.

                                       36


         The Production  Optimization  operating income increase  included a $24
million gain on the sale of  Halliburton  Measurement  Systems in North America,
offset by inventory write-downs.
         Landmark and Other  Energy  Services  decrease in revenues  compared to
2002 was primarily due to the  contribution of most of the assets of Halliburton
Subsea to Subsea 7, Inc. which, beginning in May 2002, was reported on an equity
basis. This accounted for approximately  $200 million of the decrease.  The sale
of  Wellstream  in March 2003 also  contributed  $49  million  to the  decrease.
Revenues for Landmark Graphics were down $13 million compared to 2002 due to the
general weakness in information technology spending. International revenues were
68% of segment  revenues in 2003  compared to 74% in 2002.  The  decrease is the
result of the contribution of the  Halliburton  Subsea assets  to Subsea 7, Inc.
which mainly conducts operations in the North Sea.
         Segment  operating  loss was $23 million in 2003  compared to a loss of
$108  million in 2002.  Included in 2003 were a $15 million  loss on the sale of
Wellstream ($11 million in North America and $4 million in Europe/Africa)  and a
$77  million  charge  related to the  October  2003  verdict in the  Anglo-Dutch
lawsuit,  which impacted North America results.  The significant items affecting
operating income in 2002 included:
              -   $108 million gain on the sale of European Marine Contractors
                  Ltd in Europe/Africa;
              -   $98 million charge for BJ Services patent infringement lawsuit
                  accrual in North America;
              -   $79  million  loss  on   the  impairment  of  our  50%  equity
                  investment in the Bredero-Shaw joint venture in North America;
                  and
              -   $64 million in  expense related to  restructuring charges ($51
                  million  in North  America, $3  million in  Latin  America, $7
                  million in Europe/Africa, and $3 million in Middle East/Asia).
         During 2003,  Landmark  Graphics  achieved its highest operating income
and highest operating margins since we acquired it as operating income increased
$8 million or 18% over 2002.
         Engineering  and  Construction  Group increase in revenues  compared to
2002 was due to  increased  activity in Iraq for the United  States  government,
and, to a lesser extent, a $264 million  increase on other  government  projects
and a $161 million increase on LNG and oil and gas projects in Africa. Partially
offsetting   the   revenue   increases   are  lower   revenues   earned  on  the
Barracuda-Caratinga  project in Brazil and a $111 million decrease on industrial
services  projects  in  the  United  States  and  production  services  projects
globally.
         Engineering and  Construction  Group operating loss improvement in 2003
was due to government related activities, partially related to operations in the
Middle  East for Iraq  related  work and a $14  million  increase in income from
other government projects. Also contributing to the improved results were income
from  liquefied  natural gas  projects  in Africa and $18  million in  favorable
adjustments to insurance  reserves as a result of revised  actuarial  valuations
and  other  changes  in  estimates  in  2003.   Partially  offsetting  the  2003
improvement are losses recognized on the  Barracuda-Caratinga  project in Brazil
of $238 million,  losses on a hydrocarbon project in Belgium and lower income on
a liquefied natural gas project in Malaysia due to project completion.  Included
in the  2002  loss  was a  charge  of  $644  million  for  asbestos  and  silica
liabilities,  $18 million of restructuring  charges,  and a  Barracuda-Caratinga
project loss of $117 million.
         General  corporate in 2002  included a $29 million  pretax gain for the
value of stock  received  from the  demutualization  of an  insurance  provider,
partially offset by 2002 restructuring  charges of $25 million.  The higher 2003
expenses  also relate to  preparations  for the  certifications  required  under
Section 404 of the Sarbanes-Oxley Act.

NONOPERATING ITEMS

         Interest  expense  increased $26 million in 2003 compared to 2002.  The
increase  was due  primarily  to $30  million in  interest  on the $1.2  billion
convertible  notes issued in June 2003 and the $1.05 billion senior floating and
fixed notes  issued in  October 2003.  The increase was  partially offset  by $5

                                       37


million in  pre-judgment  interest  recorded in 2002  related to the BJ Services
patent  infringement  judgment and $296 million of scheduled debt  repayments in
2003.
         Foreign currency  losses,  net for 2003 included gains in Canada offset
by losses in the United Kingdom and Brazil.  Losses in 2002 were due to negative
developments in Brazil, Argentina and Venezuela.
         Provision for income taxes of $234 million resulted in an effective tax
rate on continuing operations of 38.2% in 2003. The provision was $80 million in
2002 on a net  loss  from  continuing  operations.  The  inclusion  of  asbestos
accruals in continuing  operations for 2002 was the primary cause of the unusual
2002 effective tax rate on continuing operations.  There are no asbestos charges
or  related  tax  accruals  included  in  continuing  operations  for 2003.  Our
impairment  loss on  Bredero-Shaw  during  2002 could not be  benefited  for tax
purposes  due to book  and tax  basis  differences  in that  investment  and the
limited benefit generated by a capital loss carryback.  However,  due to changes
in circumstances  regarding prior years, we are now able to carry back a portion
of the capital loss, which resulted in an $11 million benefit in 2003.
         Loss from discontinued operations, net of tax of $1.151 billion in 2003
was due to the following:
              -   asbestos  and silica  liability was  increased to  reflect the
                  full amount  of the  proposed settlement  as a  result  of the
                  Chapter 11 proceeding;
              -   charges  related to our July 2003  funding of $30  million for
                  the  debtor-in-possession   financing  to  Harbison-Walker  in
                  connection  with its  Chapter 11 proceedings  that is expected
                  to be forgiven by  Halliburton on the earlier of the effective
                  date of a plan of  reorganization  for DII  Industries  or the
                  effective date of a plan of reorganization for Harbison-Walker
                  acceptable to DII Industries;
              -   $10   million   allowance   for  an   estimated   portion   of
                  uncollectible  amounts  related to the  insurance  receivables
                  purchased from Harbison-Walker;
              -   professional fees associated with the due diligence,  printing
                  and  distribution  cost of the disclosure  statement and other
                  aspects of the  proposed  settlement  for  asbestos and silica
                  liabilities; and
              -   a release  of  environmental  and legal  reserves  related  to
                  indemnities  that were part of our  disposition of the Dresser
                  Equipment Group and are no longer needed.
         The loss of $652 million in 2002 was due primarily to charges  recorded
for asbestos and silica  liabilities and a $40 million  payment  associated with
the Harbison-Walker Chapter 11 filing.
         The  provision  for  income  taxes on  discontinued  operations  was $6
million  in  2003  compared  to a tax  benefit  of  $154  million  in  2002.  We
established  a  valuation  allowance  for the net  operating  loss  carryforward
created by the 2003  asbestos  and silica  charges  resulting  in a minimal  tax
effect. In 2002, we recorded a $119 million valuation  allowance in discontinued
operations related to the asbestos and silica accrual.
         Cumulative  effect  of change in  accounting  principle,  net was an $8
million after-tax charge, or $0.02 per diluted share,  related to our January 1,
2003  adoption  of  Financial  Accounting  Standards  Board  Statement  No. 143,
"Accounting for Asset Retirement Obligations."

                                       38


RESULTS OF OPERATIONS IN 2002 COMPARED TO 2001


REVENUES                                                              Increase/     Percentage
Millions of dollars                        2002           2001       (Decrease)       Change
-------------------------------------------------------------------------------------------------
                                                                        
Drilling and Formation Evaluation        $   1,633      $    1,643    $     (10)         (0.6)%
Fluids                                       1,815           2,065         (250)        (12.1)
Production Optimization                      2,554           2,803         (249)         (8.9)
Landmark and Other Energy Services             834           1,300         (466)        (35.8)
-------------------------------------------------------------------------------------------------
    Total Energy Services Group              6,836           7,811         (975)        (12.5)
Engineering and Construction Group           5,736           5,235          501           9.6
-------------------------------------------------------------------------------------------------
Total revenues                           $  12,572      $   13,046    $    (474)         (3.6)%
=================================================================================================




OPERATING INCOME (LOSS)                                               Increase/     Percentage
Millions of dollars                        2002           2001       (Decrease)       Change
-------------------------------------------------------------------------------------------------
                                                                             
Drilling and Formation Evaluation        $     160      $      171    $     (11)         (6.4)%
Fluids                                         202             308         (106)        (34.4)
Production Optimization                        384             528         (144)        (27.3)
Landmark and Other Energy Services            (108)             29         (137)          NM
-------------------------------------------------------------------------------------------------
    Total Energy Services Group                638           1,036         (398)        (38.4)
Engineering and Construction Group            (685)            111         (796)          NM
General corporate                              (65)            (63)          (2)         (3.2)
-------------------------------------------------------------------------------------------------
Operating income (loss)                  $    (112)     $    1,084    $  (1,196)          NM
=================================================================================================

         NM - Not Meaningful


         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.
         Drilling and Formation  Evaluation  revenues  declined slightly in 2002
compared to 2001.  Approximately  $62 million of the decrease was in logging and
perforating  services  primarily  due  to  lower  North  American  activity.  An
additional $21 million of the change  resulted from decreased  drill bit revenue
principally  in North  America.  These  decreases  were offset by $74 million of
increased drilling systems activity primarily in international locations such as
Saudi Arabia,  Thailand,  Mexico,  Brazil,  and the United Arab  Emirates.  On a
geographic  basis, the decline in revenue is attributable to lower levels of rig
activity  in North  America,  putting  pressure on pricing of work in the United
States.  Latin  America  revenues  decreased  1% 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.
International  revenues were 72% of Drilling and Formation Evaluation's revenues
in 2002 as compared to 66% in 2001.
         Operating  income for the segment declined 6% in 2002 compared to 2001.
Approximately $37 million of the decrease related to reduced operating income in
logging and perforating and $8 million related to the drill bits business,  both
affected  by the  reduced  oil and  gas  drilling  activity  in  North  America.
Offsetting  these  declines  was a $22  million  increase  in  drilling  systems
operating income due to improved international  activity. On a geographic basis,
the decline in operating  income is attributable to lower levels of rig activity
and pricing pressures in North America.  The decrease in North America operating
income  was  partially  offset by higher  operating  income  from  international
sources in Brazil, Mexico, Algeria, Angola, Egypt, China, and Saudi Arabia.
         Fluids revenues  decreased 12% in 2002 compared to 2001.  Approximately
$89 million related to a decrease in drilling fluids revenues primarily in North
America.  An  additional  $160 million  related to decreases in cementing  sales
arising  primarily from  reduced rig  counts in  North America.  On a geographic

                                       39


basis,  the decline in revenue is  attributable  to lower  levels of activity in
North America,  putting pressure on pricing of work in the United States.  Latin
America  revenues  decreased  13% 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. International
revenues were 52% of Fluids revenues in 2002 as compared to 45% in 2001.
         Operating  income for the  segment  decreased  34% in 2002  compared to
2001. Drilling fluids contributed $35 million of the decrease,  primarily due to
the reduced  level of oil and gas drilling in North  America.  In addition,  the
cementing  business,  which was also affected by reduced oil and gas drilling in
North America,  represented $70 million of the decline.  On a geographic  basis,
the decline in operating  income is attributable to lower levels of activity and
pricing  pressures in North  America.  The decrease in North  America  operating
income was partially  offset by higher  operating  income from Mexico,  Algeria,
Angola, the United Kingdom, and Saudi Arabia.
         Production Optimization revenues decreased 9% in 2002 compared to 2001.
Approximately  $197  million  of the  decrease  related  to  reduced  production
enhancement  sales  primarily  due to  decreased  rig  counts in North  America.
Further, $56 million of the decrease resulted from lower completion products and
services sales primarily in North America.  Production Optimization includes our
50% ownership interest in Subsea 7, Inc., which began operations in May 2002 and
is accounted for on the equity method of accounting.  On a geographic basis, the
decline in revenue is attributable to lower levels of activity in North America,
putting pressure on pricing of work in the United States. Latin America revenues
decreased  five percent as a result of  decreases  in Argentina  due to currency
devaluation  and in  Venezuela  due to lower  activity  brought on by  uncertain
political conditions and a national strike.  International  revenues were 53% of
Production Optimization's revenues in 2002 as compared to 44% in 2001.
         Operating  income for the  segment  decreased  27% in 2002  compared to
2001.  Production  enhancement  results contributed $149 million of the decrease
and tools and testing services  contributed $5 million,  both affected primarily
by the reduced oil and gas drilling in North America. Offsetting these decreases
was an $11 million increase in completion products and services operating income
due to higher international  activity which more than offset reduced oil and gas
drilling in North  America.  On a  geographic  basis,  the decline in  operating
income is due to reduced rig counts and activity and pricing  pressures in North
America,  partially offset by higher operating income from international sources
in Brazil, Mexico, Algeria,  Angola, Egypt, the United Kingdom, China, Oman, and
Saudi Arabia.
         Landmark  and  Other  Energy  Services  revenues  declined  36% in 2002
compared  to 2001.  Approximately  $117  million  of the  decline  is from lower
revenues from integrated  solutions  projects as a result of the sale of several
properties during 2002. In addition,  approximately  $353 million of the decline
is due to lower  revenues  from the  remaining  subsea  operations.  Most of the
assets of Halliburton Subsea were contributed to the formation of Subsea 7, Inc.
(which was formed in May 2002 and is  accounted  for under the equity  method in
our Production  Optimization  segment).  Offsetting the decline is a $40 million
increase in software and professional services revenues due to strong 2002 sales
in all geographic areas by Landmark Graphics.
         Operating loss for the segment was $108 million in 2002 compared to $29
million in operating income in 2001. Significant factors influencing the results
included:
              -   $108 million gain on the sale of our 50%  interest in European
                  Marine Contractors in 2002;
              -   $98  million   charge  recorded  in  2002  related  to  patent
                  infringement litigation;
              -   $79 million loss on the sale of our 50% equity  investment in
                  the Bredero-Shaw joint venture in 2002;
              -   $66  million of  impairments  recorded  in 2002  on integrated
                  solutions projects primarily  in the United  States, Indonesia
                  and Colombia,  partially offset by net gains of $45 million on
                  2002 disposals of properties in the United States; and
              -   $64 million in 2002 restructuring charges.

                                       40


         In  addition,  Landmark  Graphics  experienced  $32 million in improved
profitability on sales of software and professional services.
         Engineering and Construction Group revenues increased $501 million,  or
10%, in 2002 compared to 2001.  Year-over-year revenues were $150 million higher
in North America and $351 million higher  outside North  America.  Several major
projects were awarded in 2001 and 2002,  which combined with other major ongoing
projects,   resulted  in  approximately   $756  million  of  increased  revenue,
including:
              -   liquefied  natural gas and gas projects  in Algeria,  Nigeria,
                  Chad, Cameroon and Egypt; and
              -   the Belenak offshore project in Indonesia.
         Activities  in the  Barracuda-Caratinga  project  in  Brazil  were also
increasing  in 2002,  which  generated  higher  revenue in  comparison  to 2001.
Partially  offsetting the  increasing  activities in the new projects was a $446
million  reduction in revenue due to reduced  activity of a major project at our
shipyard  in the United  Kingdom,  a gas project in  Algeria,  lower  volumes of
United  States  government   logistical  support  in  the  Balkans  and  reduced
downstream maintenance work.
         Operating  loss for the  segment of $685  million in 2002  compared  to
operating income of $111 million in 2001.  Significant  factors  influencing the
results included:
              -   $644 million  of expenses  related to net  asbestos and silica
                  liabilities  recorded  in  2002  compared  to  $11  million in
                  asbestos charges recorded in 2001;
              -   an increase  in our  total probable  unapproved claims  during
                  2002  which reduced  reported  losses  by  approximately  $158
                  million as compared to 2001;
              -   $18 million in 2002 restructuring costs; and
              -   goodwill amortization in 2001 of $18 million.
         Further,  operating  income  in 2002 was  negatively  impacted  by loss
provisions on offshore engineering,  procurement, installation and commissioning
work in Brazil ($117 million on  Barracuda-Caratinga)  and the Philippines  ($36
million).  The  2002  operating  income  was  also  negatively  impacted  by the
completion  of a gas  project in Algeria  during 2002 and  construction  work in
North America.  Partially offsetting the declines was increased income levels on
an ongoing liquefied natural gas project in Nigeria, the Alice Springs to Darwin
Rail Line project in Australia,  and  government  projects in the United States,
the United Kingdom and Australia.
         In 2002, we recorded no amortization of goodwill due to the adoption of
SFAS No. 142. For 2001,  we recorded $42 million in goodwill  amortization  ($18
million in Engineering and Construction Group, $17 million in Landmark and Other
Energy  Services,  $5  million  in  Production  Optimization,  and $2 million in
Drilling and Formation Evaluation).
         General corporate expenses were $65 million for 2002 as compared to $63
million in 2001. Expenses in 2002 include  restructuring  charges of $25 million
and a gain from the value of stock received from demutualization of an insurance
provider of $29 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.

                                       41


         Provision  for  income  taxes was $80  million  in 2002  compared  to a
provision for income taxes of $384 million in 2001.  In 2002,  the effective tax
rate was  impacted by our  asbestos and silica  accrual  recorded in  continuing
operations and losses on our Bredero-Shaw  disposition.  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.

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  estimate 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 estimates to be:
              -   percentage-of-completion    accounting   for   our   long-term
                  engineering and construction contracts;
              -   accounting for government 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;
              -   asbestos and silica insurance recoveries; and
              -   litigation matters.

                                       42


         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.
         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 reduces 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 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 are actively  engaged 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 and Risk Factors". These factors can affect
the  accuracy  of our  estimates  and  materially  impact  our  future  reported
earnings.
         Accounting for government contracts
         Most of the  services  provided  to the United  States  government  are
governed by cost-reimbursable contracts. Generally, these contracts contain both
a base fee (a guaranteed  percentage  applied to our estimated costs to complete
the work adjusted for general,  administrative and overhead costs) and a maximum
award  fee  (subject  to our  customer's  discretion  and  tied to the  specific

                                       43


performance measures defined in the contract).  The general,  administrative and
overhead fees are estimated  periodically in accordance with government contract
accounting  regulations  and may change based on actual costs  incurred or based
upon the  volume of work  performed.  Award  fees are  generally  evaluated  and
granted  by  our  customer  periodically.   Similar  to  many  cost-reimbursable
contracts,  these  government  contracts  are  typically  subject  to audit  and
adjustment by our customer.  Services under our RIO,  LogCAP and Balkans
support contracts are examples of these types of arrangements.
         For  these  contracts,  base  fee  revenues  are  recorded  at the time
services  are  performed  based  upon the  amounts  we  expect to  realize  upon
completion of the contracts.  Revenues may be adjusted for our estimate of costs
that may be  categorized as disputed or unallowable as a result of cost overruns
or the audit process.
         For contracts  entered into prior to June 30, 2003,  all award fees are
recognized  during the term of the contract  based on our estimate of amounts to
be  awarded.  Our  estimates  are often based on our past award  experience  for
similar types of work. As a result of our adoption of Emerging Issues Task Force
Issue No. 00-21 (EITF 00-21), "Revenue Arrangements with Multiple Deliverables,"
for contracts  entered into  subsequent to June 30, 2003, we will not  recognize
award fees for the services portion of the contract based on estimates. Instead,
they will be  recognized only  when awarded  by the customer.  Award fees on the
construction portion of the contract will still be recognized based on estimates
in accordance with SOP 81-1. There were no government contracts affected by EITF
00-21 in 2003.
         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  consists  of 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:
              -   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:

                                       44


              -   identifying the types and amounts of existing temporary
                  differences;
              -   measuring  the  total  deferred  tax   liability  for  taxable
                  temporary differences using the applicable tax rate;
              -   measuring  the   total  deferred  tax   asset  for  deductible
                  temporary differences  and operating  loss carryforwards using
                  the applicable tax rate;
              -   measuring the deferred  tax assets for each type of tax credit
                  carryforward; and
              -   reducing 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.
         The valuation  allowance recorded on tax benefits arising from asbestos
and  silica  liabilities  attributable  to  displaced  foreign  tax  credits  is
determined quarterly based on an estimate of the future foreign taxes that would
be  creditable  but  for the  asbestos  and  silica  liabilities,  the tax  loss
carryforwards  that  these  deductions  will  generate  in the future and future
estimated  taxable  income.  Any  changes  to these  estimates,  which  could be
material,  are  recorded  in the quarter  they  arise,  if they relate to future
years,  and/or by adjusting the annual effective tax rate, if they relate to the
current year.
         Our  methodology  for  recording  income taxes  requires a  significant
amount of judgment  regarding  assumptions  and the use of estimates,  including
determining  our annual  effective  tax rate and the  valuation  of deferred tax
assets,  which can create large variances  between actual results and estimates.
The process involves making forecasts of current and future years' United States
and  foreign  taxable  income,  estimating  foreign tax credit  utilization  and
evaluating the  feasibility  of  implementing  certain tax planning  strategies.
Unforeseen  events,  such as the timing of asbestos and silica  settlements  and
other tax  timing  issues,  may  significantly  affect  these  estimates.  Those
factors,  among others, could have a material impact on our provision or benefit
for income taxes related to both continuing and discontinued operations.
         Asbestos and silica insurance recoveries
         Concurrent with the  remeasurement of our asbestos and silica liability
due to the pre-packaged  Chapter 11 filing, we evaluated the  appropriateness of
the $2 billion recorded for asbestos and silica insurance  recoveries.  In doing
so, we separately evaluated two types of policies:
              -   policies held by carriers with which we had either  settled or
                  which  were  probable  of  settling  and for  which  we  could
                  reasonably estimate the amount of the settlement; and
              -   other policies.
         In December 2003 we retained  Navigant  Consulting  (formerly  Peterson
Consulting), a nationally-recognized consultant in asbestos and silica liability
and insurance,  to assist us. In conducting their analysis,  Navigant Consulting
performed the following with respect to both types of policies:
              -   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.

                                       45


         Navigant Consulting's analysis assumed that there will be no recoveries
from insolvent carriers and that those carriers which are currently solvent will
continue to be solvent throughout the period of the applicable recoveries in the
projections.   Based  on  its  review,   analysis  and   discussions,   Navigant
Consulting's  analysis assisted  us in making our 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 included
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 Navigant Consulting is based on
information provided by us.
         In January 2004, we reached a  comprehensive  agreement with Equitas to
settle our insurance  claims against certain  Underwriters at Lloyd's of London,
reinsured by Equitas.  The settlement will resolve all  asbestos-related  claims
made  against  Lloyd's  Underwriters  by us and by  each of our  subsidiary  and
affiliated companies,  including DII Industries,  Kellogg Brown & Root and their
subsidiaries  that have filed  Chapter 11  proceedings  as part of our  proposed
settlement.  Our claims against our other London Market Company Insurers are not
affected by this  settlement.  Provided that there is final  confirmation of the
plan of  reorganization  in the Chapter 11  proceedings and the  current  United
States Congress does not pass national asbestos  litigation reform  legislation,
Equitas  will  pay  us  $575  million,  representing  approximately  60%  of the
applicable limits of liability that DII Industries had substantial likelihood of
recovering from Equitas.  The first payment of $500 million will occur within 15
working  days of the later of  January 5, 2005 or the date on which the order of
the bankruptcy court confirming DII Industries' plan of  reorganization  becomes
final and non-appealable.  A second payment of $75 million will be made eighteen
months after the first payment.
         As   of  December  31,  2003,  we  developed  our best  estimate of the
asbestos and silica insurance receivables as follows:
              -   included  $575 million of  insurance  recoveries  from Equitas
                  based on the January 2004 comprehensive agreement;
              -   included  insurance recoveries  from other  specific  insurers
                  with whom we had settled;
              -   estimated insurance recoveries from specific  insurers that we
                  are  probable  of  settling   with  and  for  which  we  could
                  reasonably  estimate  the  amount  of  the  settlement.   When
                  appropriate, these estimates considered prior settlements with
                  insurers with similar facts and circumstances; and
              -   estimated insurance recoveries for all other policies with the
                  assistance of the Navigant Consulting study.
         The estimate we  developed as a result of this  process was  consistent
with the  amount of  asbestos  and silica  receivables  already  recorded  as of
December  31,  2003,  causing  us  not  to  significantly  adjust  our  recorded
insurance asset at that time. Our estimate was based on a comprehensive analysis
of the situation  existing at that time which could change  significantly in the
both near- and long-term period as a result of:
              -   additional settlements with insurance companies;
              -   additional insolvencies of carriers; and
              -   legal interpretation  of  the  type  and  amount  of  coverage
                  available to us.
         Currently,  we cannot  estimate the time frame for  collection  of this
insurance  receivable,  except as  described  earlier with regard to the Equitas
settlement.
         Projecting  future events is subject to many  uncertainties  that could
cause the asbestos and silica  insurance  recoveries  to be higher or lower than
those projected and accrued, such as:
              -   future settlements with insurance carriers;
              -   coverage  issues among  layers of  insurers issuing  different
                  policies to  different  policyholders  over  extended  periods
                  of time;

                                       46


              -   the impact  on the amount of insurance recoverable in light of
                  the Harbison-Walker  and Federal-Mogul bankruptcies.  See Note
                  11 to our consolidated financial statements; and
              -   the continuing solvency of various insurance companies.
         We could ultimately  recover,  or may agree in settlement of litigation
to recover, less insurance  reimbursement than the insurance receivable recorded
in our  consolidated  financial  statements.  In  addition,  we may  enter  into
agreements  with all or some of our  insurance  carriers to negotiate an overall
accelerated payment of insurance proceeds.  If we agree to any such settlements,
we likely would recover less than the recorded amount of insurance  receivables,
which would  result in an  additional  charge to our  consolidated  statement of
operations.
         Litigation.  We are currently  involved in other legal  proceedings not
involving  asbestos  and silica.  As  discussed  in Note 13 of our  consolidated
financial  statements,  as of December 31, 2003,  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  proceedings 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  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.  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.  While the  funding  subsidiary  is
wholly-owned by us, its assets are not available to pay any creditors of ours or
of our  subsidiaries  or  affiliates,  until such time as the agreement with the
unaffiliated   companies  is  terminated  following  sufficient  collections  to
liquidate all outstanding undivided ownership interests. The undivided ownership
interest  in  the  pool  of  receivables  sold  to the  unaffiliated  companies,
therefore,   is  reflected  as  a  reduction  of  accounts   receivable  in  our
consolidated  balance sheets. The funding subsidiary retains the interest in the
pool of receivables that are not sold to the unaffiliated companies and is fully
consolidated and reported in our financial statements.
         The amount of undivided  interests  which can be sold under the program
varies based on the amount of eligible Energy Services Group  receivables in the
pool at any given time and other factors.  The funding subsidiary initially sold
a $200 million undivided ownership interest to the unaffiliated  companies,  and
could from time to time sell additional undivided ownership  interests.  In July
2003, however,  the balance outstanding under this facility was reduced to zero.
The total  amount  outstanding  under  this  facility continued to be zero as of
December 31, 2003.

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:

                                       47


              -   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  consolidated   financial  statements  for  additional  information  on  our
accounting policies on derivative  instruments.  See Note 18 to the consolidated
financial   statements   for  additional   disclosures   related  to  derivative
instruments.
         Interest  rate risk.  We have  exposure to interest  rate risk from our
long-term debt.
         The following table represents  principal amounts of our long-term debt
at December  31, 2003 and related  weighted  average  interest  rates by year of
maturity for our long-term debt.


Millions of dollars           2004       2005      2006      2007      2008    Thereafter    Total
------------------------------------------------------------------------------------------------------
                                                                       
Fixed rate debt               $   1      $   3     $ 284     $   -    $ 150     $2,625      $ 3,063
Weighted average
    interest rate               9.5%      10.9%      6.0%        -      5.6%       5.0%         5.1%
Variable rate debt            $  21      $ 321     $  21     $  10    $   1     $    -      $   374
Weighted average
    interest rate               4.8%       2.8%      4.8%      4.8%     5.6%         -          3.1%
======================================================================================================

         The fair market value of long-term debt was $3.6 billion as of
December 31, 2003.

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, among others:
              -   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.
         In  addition  to the  federal  laws and  regulations,  states and other
countries  where we do  business  may have  numerous  environmental,  legal  and
regulatory requirements by 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. Our Health,  Safety and
Environment group  has  several  programs  in place  to  maintain  environmental
leadership and to prevent the occurrence of environmental contamination.
         We do not expect costs  related to these  remediation  requirements  to
have a material  adverse effect on our  consolidated  financial  position or our
results of operations.  We have subsidiaries that have been named as potentially
responsible  parties  along with other third  parties for nine federal and state
superfund  sites for which we have  established a liability.  As of December 31,
2003,  those nine sites accounted for  approximately $7 million of our total $31
million liability. See Note 13 to the consolidated financial statements.

                                       48


FORWARD-LOOKING INFORMATION AND RISK FACTORS

         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,"  "anticipates,"
"do not anticipate," and other expressions.  We may also provide oral or written
forward-looking  information  in  other  materials  we  release  to the  public.
Forward-looking  information  involves risks and  uncertainties and reflects our
best judgment  based on current  information.  Our results of operations  can be
affected  by  inaccurate  assumptions  we make or by known or unknown  risks and
uncertainties.  In  addition,  other  factors  may  affect the  accuracy  of our
forward-looking  information. As a result, no forward-looking information can be
guaranteed. Actual events and the results of operations may vary materially.
         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.
         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  materially and adversely affect our
financial condition and results of operations, including risks relating to:

Asbestos and Silica Liability
         Our  ability   to  complete   our  proposed  settlement   and  plan  of
reorganization
         As  contemplated  by our  proposed  settlement  of asbestos  and silica
personal  injury  claims,  DII  Industries,  Kellogg  Brown & Root and our other
affected subsidiaries  (collectively  referred to herein as the "debtors") filed
Chapter 11 proceedings  on December 16, 2003 in bankruptcy  court in Pittsburgh,
Pennsylvania.  Although the debtors have filed Chapter 11 proceedings and we are
proceeding with the proposed  settlement,  completion of the settlement  remains
subject to several  conditions,  including the requirements  that the bankruptcy
court confirm the plan of  reorganization  and the federal district court affirm
such  confirmation,  and that the  bankruptcy  court and federal  district court
orders become final and non-appealable. Completion of the proposed settlement is
also  conditioned on continued  availability of financing on terms acceptable to
us in order to allow us to fund the cash  amounts to be paid in the  settlement.
There can be no assurance that such conditions will be met.
         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 United States Bankruptcy Code;
              -   the  debtors  have  complied  with  the applicable  provisions
                  of the United States Bankruptcy Code;
              -   the trusts will  value  and  pay similar  present  and  future
                  claims in substantially the same manner; and
              -   the plan of reorganization has been proposed in good faith and
                  not by any means forbidden by law.
         The bankruptcy  court  presiding  over the Chapter 11  proceedings  has
scheduled a hearing on confirmation of the proposed plan of  reorganization  for
May 10 through 12, 2004.  Some of the insurance  carriers of DII  Industries and
Kellogg Brown & Root have filed various motions in and objections to the Chapter
11  proceedings in an attempt to seek dismissal of the Chapter 11 proceedings or
to delay the proposed plan of  reorganization.  The motions and objections filed
by the  insurance  carriers  include a request that the court grant the insurers
standing in the Chapter 11 proceedings to be heard on a wide range of matters, a
motion to dismiss  the  Chapter 11  proceedings  and a motion  objecting  to the

                                       49


proposed  legal  representative  for future  asbestos and silica  claimants.  On
February  11,  2004,  the  bankruptcy   court  presiding  over  the  Chapter  11
proceedings issued a ruling holding that the insurance carriers lack standing to
bring motions  seeking to dismiss the pre-packaged  plan of  reorganization  and
denying  standing to the insurance  carriers to object to the appointment of the
proposed  legal   representative  for  future  asbestos  and  silica  claimants.
Notwithstanding the bankruptcy court ruling, we expect the insurance carriers to
object to confirmation of the pre-packaged plan of reorganization.  In addition,
we believe that these insurance  carriers will take additional  steps to prevent
or delay  confirmation  of a plan of  reorganization,  including  appealing  the
rulings  of the  bankruptcy  court,  and  there  can be no  assurance  that  the
insurance carriers would not be successful or that such efforts would not result
in delays in the reorganization  process. There can be no assurance that we will
obtain the required  judicial approval of the proposed plan of reorganization or
any revised plan of reorganization acceptable to us.
         Effect of inability to complete a plan of reorganization
         If the currently  proposed plan of  reorganization  is not confirmed by
the  bankruptcy  court and the Chapter 11  proceedings  are not  dismissed,  the
debtors could propose an alternative plan of reorganization.  Chapter 11 permits
a company  to remain in  control  of its  business,  protected  by a stay of all
creditor action,  while that company attempts to negotiate and confirm a plan of
reorganization with its creditors.  If the debtors are unsuccessful in obtaining
confirmation of the currently  proposed plan of reorganization or an alternative
plan of  reorganization,  the assets of the debtors  could be  liquidated in the
Chapter  11  proceedings.  In  the  event  of  a  liquidation  of  the  debtors,
Halliburton  could lose its  controlling  interest in DII Industries and Kellogg
Brown & Root.  Moreover,  if the plan of reorganization is not confirmed and the
debtors have  insufficient  assets to pay the  creditors,  Halliburton's  assets
could be drawn into the liquidation  proceedings because Halliburton  guarantees
certain of the debtors' obligations.
         If the Chapter 11 proceedings are dismissed  without  confirmation of a
plan of  reorganization,  we could be  required  to resolve  current  and future
asbestos  claims  in the tort  system  or,  in the  case of the  Harbison-Walker
Refractories  Company claims,  possibly through the  Harbison-Walker  Chapter 11
proceedings.
         If  we were required to resolve  asbestos claims in the tort system, we
would be subject to numerous uncertainties, 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; and
              -   any  adverse changes  to the tort  system allowing  additional
                  claims or judgments against us.
         Substantial  adverse  judgments or  substantial  claims  settlement and
defense costs could materially and adversely affect our liquidity, especially if
combined with a lowering of our credit  ratings or other  events.  If an adverse
judgment were entered  against us, we may be required to post a bond in order to
perfect an appeal of that judgment.  If the bonds were not available  because of
uncertainties  in  the  bonding  market  or if,  as a  result  of our  financial
condition or credit rating,  bonding  companies  would not provide a bond on our
behalf,  we could be  required  to provide a cash bond in order to  perfect  any
appeal.  As a result,  a  substantial  judgment  or  judgments  could  require a
substantial  amount of cash to be posted by us in order to appeal,  which we may
not be able to provide from cash on hand or borrowings,  or which we may only be
able to provide by incurring high borrowing costs. In such event, our ability to
pursue our legal rights to appeal could be materially and adversely affected.

                                       50


         There can be no assurance  that our financial  condition and results of
operations,  our stock price or our debt  ratings  would not be  materially  and
adversely affected in the absence of a completed plan of reorganization.
         Proposed federal legislation may affect our liability and agreements
         We understand  that the United  States Congress  may consider  adopting
legislation  that would set up a national trust fund as the exclusive  means for
recovery for asbestos-related disease. We are uncertain as to what contributions
we would be required to make to a national  trust,  if any,  although it is
possible that they could be substantial and that they could continue for several
years. It is also possible that our level of participation and contribution to a
national trust could be greater than it otherwise would have been as a result of
having  subsidiaries  that have filed  Chapter 11  proceedings  due to  asbestos
liabilities.
         It is a condition to the  effectiveness  of our settlement with Equitas
that no law shall be passed by the  United  States  Congress  that  relates  to,
regulates,  limits or controls  the  prosecution  of  asbestos  claims in United
States  state or  federal  courts  or any  other  forum.  If  national  asbestos
litigation  legislation  is passed by the United  States  Congress  on or before
January 5, 2005,  we would not receive the $575 million in cash  provided by the
Equitas settlement, but we would retain the rights we currently have against our
insurance carriers.
         Possible remaining asbestos and silica exposure
         Our proposed settlement of asbestos and silica claims includes asbestos
and silica personal  injury claims against DII Industries,  Kellogg Brown & Root
and their  current  and  former  subsidiaries,  as well as  Halliburton  and its
subsidiaries and the predecessors and successors of them. However,  the proposed
settlement is subject to bankruptcy  court approval as well as federal  district
court  confirmation.  No  assurance  can be given that the court  reviewing  and
approving  the  plan of  reorganization  that is  being  used to  implement  the
proposed  settlement  will grant relief as broad as contemplated by the proposed
settlement.
         In addition,  a Chapter 11  proceeding  and  injunctions  under Section
524(g) and Section 105 of the Bankruptcy  Code may not apply to protect  against
all asbestos and silica  claims.  For example,  while we have  historically  not
received a  significant  number of claims  outside the United  States,  any such
future  claims  would  be  subject  to  the  applicable   legal  system  of  the
jurisdiction  where  the  claim  was  made.  In  addition,  the  Section  524(g)
injunction   would  not  apply  to  some  claims  under  worker's   compensation
arrangements.  Although  we do not  believe  that we have  material  exposure to
foreign or worker's compensation claims, there can be no assurance that material
claims  would  not be  made  in the  future.  Further,  to  our  knowledge,  the
constitutionality  of an injunction  under Section 524(g) of the Bankruptcy Code
has not been tested in a court of law. We can provide no assurance  that, if the
constitutionality  is challenged,  the injunction would be upheld.  In addition,
although we would have other significant  affirmative defenses,  the injunctions
issued under the Bankruptcy Code may not cover all silica personal injury claims
arising as a result of future silica exposure. Moreover, the proposed settlement
does not resolve claims for property damage as a result of materials  containing
asbestos.  Accordingly,  although we have historically  received no such claims,
claims  could  still be made as to damage to  property  or  property  value as a
result of asbestos-containing products having been used in a particular property
or structure.
         Insurance recoveries
         We have substantial  insurance intended to reimburse us for portions of
the costs  incurred in defending  asbestos and silica claims and amounts paid to
settle  claims and to satisfy  court  judgments.  We had $2 billion in  probable
insurance  recoveries  accrued  as of  December  31,  2003.  We may be unable to
recover,  or we may be delayed in recovering,  insurance  reimbursements  in the
amounts accrued to cover a part of the costs incurred in defending  asbestos and
silica  claims  and  amounts  paid to  settle  claims  or as a  result  of court
judgments due to, among other things:
              -   the inability or unwillingness of insurers to timely reimburse
                  for claims in the future;
              -   disputes as to documentation  requirements for DII Industries,
                  Kellogg Brown & Root or other subsidiaries 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 others;

                                       51


              -   the possible insolvency or reduced financial  viability of our
                  insurers;
              -   the cost of litigation to obtain insurance reimbursement; and
              -   possible  adverse court  decisions as to our rights to obtain
                  insurance reimbursement.
         If the  proposed  plan of  reorganization  is  completed,  we  would be
required to contribute up to an aggregate of approximately $2.5 billion in cash,
but may be  delayed  in  receiving  reimbursement  from our  insurance  carriers
because of extended negotiations or litigation with those insurance carriers. If
we were unable to recover from a substantial  number of our insurance  carriers,
or if we were delayed significantly in our recoveries,  it could have a material
adverse effect on our consolidated financial condition.
         We could ultimately  recover,  or may agree in settlement of litigation
to recover, less insurance  reimbursement than the insurance receivable recorded
in our  consolidated  financial  statements.  In  addition,  we may  enter  into
agreements  with all or some of our  insurance  carriers to negotiate an overall
accelerated payment of insurance proceeds.  If we agree to any such settlements,
we likely would recover less than the recorded amount of insurance  receivables,
which would  result in an  additional  charge to the  consolidated  statement of
operations.
         Effect of Chapter 11 proceedings on our business and operations
         Because Halliburton's financial condition and its results of operations
depend on distributions from its subsidiaries,  the Chapter 11 filing of some of
them,  including DII  Industries  and Kellogg Brown & Root,  may have a negative
impact on Halliburton's  cash flow and  distributions  from those  subsidiaries.
These  subsidiaries will not be able to make distributions to Halliburton during
the Chapter 11 proceedings  without court  approval.  The Chapter 11 proceedings
may also  hinder  the  subsidiaries'  ability to take  actions  in the  ordinary
course. In addition, the Chapter 11 filing could materially and adversely affect
the ability of our  subsidiaries  in Chapter 11 proceedings to obtain new orders
from  current  or  prospective  customers.   As  a  result  of  the  Chapter  11
proceedings, some current and prospective customers, suppliers and other vendors
may assume  that our  subsidiaries  are  financially  weak and will be unable to
honor obligations, making those customers, suppliers and other vendors reluctant
to do business with our  subsidiaries.  In particular,  some  governments may be
unwilling to conduct business with a subsidiary in Chapter 11 or having recently
filed a Chapter 11 proceeding.  The Chapter 11 proceedings also could materially
and adversely affect the subsidiaries  ability to negotiate favorable terms with
customers,  suppliers and other  vendors.  DII  Industries'  and Kellogg Brown &
Root's  financial  condition and results of operations  could be materially  and
adversely affected if they cannot attract customers, suppliers and other vendors
or  obtain   favorable  terms  from  customers,   suppliers  or  other  vendors.
Consequently,  our  financial  condition  and  results  of  operations  could be
materially and adversely affected.
         Further,   prolonged   Chapter  11  proceedings  could  materially  and
adversely affect the relationship that DII Industries,  Kellogg Brown & Root and
their  subsidiaries  involved  in the  Chapter 11  proceedings  have with  their
customers, suppliers and employees, which in turn could materially and adversely
affect  their  competitive  positions,   financial  conditions  and  results  of
operations.  A weakening of their financial conditions and results of operations
could  materially  and  adversely  affect their ability to implement the plan of
reorganization.

Legal Matters
         SEC investigation
         We  are currently the  subject of  a formal  investigation by  the SEC,
which we  believe  is  focused  on the  accuracy,  adequacy  and  timing  of our
disclosure of the change in our accounting practice for revenues associated with
estimated cost overruns and unapproved claims for specific long-term engineering
and construction  projects.  The resolution of this  investigation  could have a
material adverse effect on us and result in:
              -   the  institution  of  administrative,  civil,  or  injunctive
                  proceedings;
              -   sanctions and the payment of fines and penalties; and
              -   increased review and scrutiny of us by regulatory authorities,
                  the media and others.

                                       52


         Audits and inquiries about government contracts work
         We provide substantial work under our government  contracts business to
the  United  States  Department  of  Defense  and other  governmental  agencies,
including under  world-wide United  States Army  logistics  contracts,  known as
LogCAP, and under contracts to rebuild Iraq's petroleum industry,  known as RIO.
Our units  operating in Iraq and elsewhere  under  government  contracts such as
LogCAP  and RIO  consistently  review  the  amounts  charged  and  the  services
performed under these  contracts.  Our operations under these contracts are also
regularly  reviewed and audited by the Defense  Contract Audit Agency,  or DCAA,
and other governmental  agencies.  When issues are found during the governmental
agency audit process,  these issues are typically discussed and reviewed with us
in order to reach a resolution.
         The results of a preliminary audit by the DCAA in December 2003 alleged
that we may have  overcharged  the  Department  of  Defense  by $61  million  in
importing fuel into Iraq. After a review, the Army Corps of Engineers,  which is
our client and oversees the project, concluded that we obtained a fair price for
the fuel.  However,  Department of Defense officials have referred the matter to
the agency's  inspector  general with a request for additional  investigation by
the agency's  criminal  division.  We  understand  that the  agency's  inspector
general has commenced an investigation.  We have also in  the past had inquiries
by the DCAA and the civil fraud  division  of the United  States  Department  of
Justice into  possible  overcharges  for work under a contract  performed in the
Balkans, which is still under review with the Department of Justice.
         On January 22, 2004,  we announced the  identification  by our internal
audit function of  a potential over  billing of approximately  $6 million by one
of our subcontractors  under the LogCAP contract in Iraq. In accordance with our
policy and government  regulation,  the potential overcharge was reported to the
Department of Defense Inspector General's office as well as to our customer, the
Army Materiel  Command.  On January 23, 2004, we issued a check in the amount of
$6 million to the Army  Materiel  Command to cover that  potential  over billing
while we conduct our own  investigation  into the matter.  We are  continuing to
review  whether third party  subcontractors  paid or attempted to pay one or two
former employees in connection with the potential $6 million over billing.
         The  DCAA has  raised  issues  relating  to our  invoicing  to the Army
Materiel  Command  for  food  services  for  soldiers  and  supporting  civilian
personnel in Iraq and Kuwait.  We have taken two actions in response.  First, we
have  temporarily  credited  $36  million to the  Department  of  Defense  until
Halliburton,  the DCAA and the Army  Materiel  Command  agree on a process to be
used for invoicing for food services. Second, we are not submitting $141 million
of  additional  food  services  invoices  until an internal  review is completed
regarding  the number of meals  ordered  by the Army  Materiel  Command  and the
number of soldiers actually served at dining facilities for United States troops
and supporting civilian personnel in Iraq and Kuwait. The $141 million amount is
our "order of magnitude"  estimate of the remaining  amounts (in addition to the
$36 million we already credited) being questioned by the DCAA. The issues relate
to whether  invoicing should be based on the number of meals ordered by the Army
Materiel Command or whether invoicing should be based on the number of personnel
served. We have been invoicing based on the number of meals ordered. The DCAA is
contending that the invoicing should be based on the number of personnel served.
We believe our position is correct,  but have undertaken a comprehensive  review
of its propriety and the views of the DCAA.  However, we cannot predict when the
issue will be resolved with the DCAA. In the meantime,  we may withhold all or a
portion of the payments to our subcontractors  relating to the withheld invoices
pending resolution of the issues.  Except for the $36 million in credits and the
$141  million of withheld  invoices,  all our  invoicing  in Iraq and Kuwait for
other food services and other  matters are being  processed and sent to the Army
Materiel Command for payment in the ordinary course.
         All  of  these  matters  are  still  under  review  by  the  applicable
government  agencies.  Additional  review and allegations are possible,  and the
dollar amounts at issue could change significantly.  We could also be subject to
future DCAA  inquiries  for other  services we provide in Iraq under the current
LogCAP contract or the RIO contract.  For example, as a result of an increase in

                                       53


the level of work  performed in Iraq or the DCAA's review of additional  aspects
of  our  services  performed in  Iraq,  it is  possible that  we may, or may  be
required to, withhold additional invoicing or make refunds to our customer, some
of which could be  substantial,  until these  matters are  resolved.  This could
materially and adversely affect our liquidity.
         To the extent we or our subcontractors  make mistakes in our government
contracts  operations,  even if  unintentional,  insignificant  or  subsequently
self-reported to the applicable  government agency, we will likely be subject to
intense  scrutiny.  Some of this scrutiny is  a result of  the Vice President of
the United States being a former chief executive  officer of  Halliburton.  This
scrutiny has recently centered on our government  contracts work,  especially in
Iraq and the Middle East.  In part because of the  heightened  level of scrutiny
under which we operate, audit issues between us and government auditors like the
DCAA or the  inspector  general of the  Department  of Defense may arise and are
more likely to become public. We could be asked to reimburse payments made to us
and that are  determined  to be in excess  of those  allowed  by the  applicable
contract,  or we could agree to delay billing for an  indefinite  period of time
for work we have performed  until any billing and cost issues are resolved.  Our
ability to secure future  government  contracts  business or renewals of current
government  contracts  business  in  the  Middle  East  or  elsewhere  could  be
materially and adversely affected.  In addition,  we may be required to expend a
significant  amount of resources  explaining  and/or  defending  actions we have
taken under our government contracts.
         Nigerian joint venture investigation
         It has been reported that a French magistrate is investigating  whether
illegal  payments were made in connection with the  construction  and subsequent
expansion  of a  multi-billion  dollar gas  liquefication  complex  and  related
facilities  at  Bonny  Island,  in  Rivers  State,   Nigeria.   TSKJ  and  other
similarly-owned entities have entered into various contracts to build and expand
the liquefied natural gas project for Nigeria LNG Limited, which is owned by the
Nigerian  National  Petroleum  Corporation,  Shell Gas B.V.,  Cleag  Limited (an
affiliate  of  Total)  and Agip  International  BV.  TSKJ is a  private  limited
liability company  registered in Madeira,  Portugal whose members are Technip SA
of France,  Snamprogetti  Netherlands  B.V., which is an affiliate of ENI SpA of
Italy, JGC Corporation of Japan and Kellogg Brown & Root, each of which owns 25%
of the venture.  The United  States  Department  of Justice and the SEC have met
with  Halliburton  to  discuss  this  matter  and  have  asked  Halliburton  for
cooperation  and access to  information in reviewing this matter in light of the
requirements of the United States Foreign Corrupt Practices Act. Halliburton has
engaged outside  counsel to investigate any allegations and is cooperating  with
the government's inquiries.
         Office of Foreign Assets Control inquiry
         We have a Cayman Islands  subsidiary with operations in Iran, and other
European  subsidiaries  that  manufacture  goods destined for Iran and/or render
services  in Iran,  and we own several  non-United  States  subsidiaries  and/or
non-United  States joint ventures that operate in or manufacture  goods destined
for, or render services in Libya.  The United States imposes trade  restrictions
and economic  embargoes that prohibit  United States  incorporated  entities and
United States  citizens and residents from engaging in commercial,  financial or
trade transactions with some foreign countries, including Iran and Libya, unless
authorized  by the  Office of Foreign  Assets  Control,  or OFAC,  of the United
States Treasury Department or exempted by statute.
         We received  and  responded  to an inquiry in  mid-2001  from OFAC with
respect  to  the  operations  in  Iran  by  a  Halliburton  subsidiary  that  is
incorporated in the Cayman Islands. The OFAC inquiry requested  information with
respect to compliance with the Iranian Transaction Regulations. Our 2001 written
response to OFAC stated that we believed  that we were in full  compliance  with
applicable sanction regulations. In January 2004, we received a follow-up letter
from OFAC  requesting  additional  information.  We are  responding to questions
raised in the most recent letter. We have been asked to and could be required to
respond to other  questions and  inquiries  about  operations in countries  with
trade restrictions and economic embargoes.

                                       54


Liquidity
         Working capital requirements related to Iraq work
         We currently  expect the working capital  requirements  related to Iraq
will  increase  through  the first  half  of  2004. An increase in the amount of
services we are engaged to perform could place additional demands on our working
capital.  As described in "Legal Matters:  Audits and inquiries about government
contracts  work"  above,  it is possible  that we may,  or may be  required  to,
withhold  additional  invoicing or make  refunds to our customer  related to the
DCAA's  review of  additional  aspects of our  services,  some of which could be
substantial,  until  these  matters  are  resolved.  This could  materially  and
adversely affect our liquidity.
         Credit facilities
         The plan of reorganization  through which the proposed settlement would
be implemented will require us to contribute up to approximately $2.5 billion in
cash to the trusts  established for the benefit of asbestos and silica claimants
pursuant to the Bankruptcy  Code. We may need to finance  additional  amounts in
connection with the settlement.
         In  connection  with the  plan of  reorganization  contemplated  by the
proposed  asbestos  and  silica  settlement,  in the  fourth  quarter of 2003 we
entered into:
              -   a delayed-draw  term facility that would currently provide for
                  draws of up  to $500 million  to be available for cash funding
                  of  the  trusts   for  the  benefit  of  asbestos  and  silica
                  claimants if required conditions are met;
              -   a master  letter of credit  facility  intended  to ensure that
                  existing letters of credit  supporting our contracts remain in
                  place during the Chapter 11 filing; and
              -   a  $700  million  three-year  revolving  credit  facility  for
                  general  working  capital  purposes, which  expires in October
                  2006.
Although the master  letter of credit  facility  and the $700 million  revolving
credit facility are now effective, there are a number of conditions that must be
met before the  delayed-draw  term facility will become  effective and available
for our use,  including  bankruptcy  court  approval and federal  district court
confirmation of the plan of reorganization.  Moreover, these facilities are only
available  for  limited  periods of time:  advances  under our master  letter of
credit  facility  are  available  until the  earlier of June 30, 2004 or when an
order  confirming  the  proposed  plan  of  reorganization   becomes  final  and
non-appealable, and our delayed-draw term facility currently expires on June 30,
2004 if not drawn by that  time.  As a result,  if the  debtors  are  delayed in
completing the plan of  reorganization,  these credit facilities may not provide
us  with  the   necessary   financing  to  complete  the  proposed   settlement.
Additionally,  there may be other conditions to funding that we may be unable to
satisfy.  In such  circumstances,  we would be unable to complete  the  proposed
settlement if replacement financing were not available on acceptable terms.
         In addition,  we experience increased working capital requirements from
time to time  associated  with our  business.  An  increased  demand for working
capital could affect our liquidity needs and could impair our ability to finance
the proposed settlement on acceptable terms.
         Letters of credit
         We  entered  into  a  master  letter  of credit  facility in the fourth
quarter  2003 that is intended to replace any cash  collateralization  rights of
issuers of substantially  all our existing letters of credit during the pendency
of the Chapter 11 proceedings of DII Industries and Kellogg Brown & Root and our
other filing subsidiaries. The master letter of credit facility is now in effect
and governs at least 90% of the face amount of our existing letters of credit.
         Under the master  letter of credit  facility,  if any letters of credit
that are  covered by the  facility  are drawn on or before  June 30,  2004,  the
facility  will  provide  the  cash  needed  for such  draws,  as well as for any
collateral  or  reimbursement  obligations  in  respect  thereof,  with any such
borrowings being converted into term loans. However, with respect to the letters
of credit that are not subject to the master letter of credit facility, we could
be subject to reimbursement and cash collateral obligations.  In addition, if an
order  confirming our proposed plan of  reorganization  has not become final and
non-appealable  by June 30,  2004 and we are  unable to  negotiate  a renewal or
extension of the  master letter of credit  facility, the letters  of credit that

                                       55


are now governed by that facility will be governed by the arrangements  with the
banks that existed prior to the  effectiveness  of the facility.  In many cases,
those  pre-existing  arrangements  impose  reimbursement  and/or cash collateral
obligations on us and/or our subsidiaries.
         Uncertainty may also hinder our ability to access new letters of credit
in the future.  This could  impede our  liquidity  and/or our ability to conduct
normal operations.
         Credit ratings
         Late in 2001 and early in 2002,  Moody's  Investors Service 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.  In December  2003,  Moody's  Investors
Service  confirmed  our ratings  with a positive  outlook and  Standard & Poor's
revised its credit  watch  listing for us from  "negative"  to  "developing"  in
response to our  announcement  that DII  Industries and Kellogg Brown & Root and
other of our subsidiaries filed Chapter 11 proceedings to implement the proposed
asbestos and silica settlement.
         Although our  long-term unsecured debt  ratings  continue at investment
grade levels,  the cost of new borrowing is relatively  higher and our access to
the debt markets is more volatile at these new rating levels.  Investment  grade
ratings are BBB- or higher for  Standard & Poor's and Baa3 or higher for Moody's
Investors  Service.  Our current  ratings are one level above BBB- on Standard &
Poor's and one level above Baa3 on Moody's Investors Service.
         If our debt ratings fall below investment grade, we will be required to
provide additional collateral to secure our new master letter of credit facility
and our new revolving credit facility.  With respect to the outstanding  letters
of credit that are not subject to the new master letter of credit  facility,  we
may be in technical  breach of the bank  agreements  governing  those letters of
credit and we may be  required  to  reimburse  the bank for any draws or provide
cash  collateral  to secure those  letters of credit.  In addition,  if an order
confirming  our  proposed  plan of  reorganization  has  not  become  final  and
non-appealable  by June 30,  2004 and we are  unable to  negotiate  a renewal or
extension of the terms of the master letter of credit  facility,  advances under
our master  letter of credit  facility  will no longer be available  and will no
longer  override the  reimbursement,  cash  collateral  or other  agreements  or
arrangements  relating to any of the letters of credit that existed prior to the
effectiveness of the master letter of credit facility.  In that event, we may be
required to provide reimbursement for any draws or cash collateral to secure our
or our  subsidiaries'  obligations  under  arrangements  in  place  prior to our
entering into the master letter of credit facility.
         In addition,  our elective  deferral  compensation plan has a provision
which  states that if the Standard & Poor's  credit  rating falls below BBB, the
amounts  credited to  participants'  accounts will be paid to  participants in a
lump-sum within 45 days. At December 31, 2003, this amount was approximately $51
million.
         In the event our debt ratings are lowered by either agency, we may have
to issue  additional  debt or  equity  securities  or obtain  additional  credit
facilities in order to meet our liquidity needs. We anticipate that any such new
financing or credit  facilities  would not be on terms as attractive as those we
have  currently and that we would also be subject to increased  costs of capital
and interest rates. We also may be required to provide cash collateral to obtain
surety  bonds or letters of credit,  which would  reduce our  available  cash or
require additional financing.  Further, if we are unable to obtain financing for
our proposed  settlement on terms that are acceptable to us, we may be unable to
complete the proposed settlement.

                                       56


Geopolitical and International Events
         International and Political Events
         A  significant portion of our revenue is  derived  from our  non-United
States operations,  which exposes us to risks inherent in doing business in each
of the more  than  100  other  countries  in which  we  transact  business.  The
occurrence  of any of the risks  described  below could have a material  adverse
effect on our  consolidated  results of operations  and  consolidated  financial
condition.
         Our operations in more than 100 countries  other than the United States
accounted for approximately 73% of our consolidated revenues during 2003, 67% of
our  consolidated  revenues  during  2002 and 62% of our  consolidated  revenues
during 2001. Operations in countries other than the United States are subject to
various risks peculiar to each country.  With respect to any particular country,
these risks may include:
              -   expropriation  and  nationalization  of  our  assets  in  that
                  country;
              -   political and economic instability;
              -   social unrest, acts of terrorism, force majeure, war or  other
                  armed  conflict;
              -   inflation;
              -   currency    fluctuations,    devaluations    and    conversion
                  restrictions;
              -   confiscatory taxation or other adverse tax policies;
              -   governmental   activities  that   limit  or  disrupt  markets,
                  restrict payments or limit the movement of funds;
              -   governmental activities that  may result in the deprivation of
                  contract rights; and
              -   trade  restrictions and  economic  embargoes  imposed  by  the
                  United   States   and  other   countries,  including   current
                  restrictions  on our ability to provide  products and services
                  to Iran and Libya, both of which are significant  producers of
                  oil and gas.
         Due to  the  unsettled  political  conditions  in  many  oil  producing
countries and countries in which we provide governmental logistical support, our
revenues and profits are subject to the adverse consequences of war, the effects
of terrorism, civil unrest, strikes, currency controls and governmental actions.
Countries  where we operate  that have  significant  amounts of  political  risk
include: Argentina, Afghanistan, Algeria, Indonesia, Iran, Iraq, Libya, Nigeria,
Russia and Venezuela.  For example,  continued  economic unrest in Venezuela, as
well as the social, economic, and political climate in Nigeria, could affect our
business and  operations in these  countries.  In addition,  military  action or
continued  unrest in the Middle East 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.
         Military Action, Other Armed Conflicts or Terrorist Attacks
         Military action in Iraq,  increasing  military tension  involving North
Korea,  as well as the terrorist  attacks of September  11, 2001 and  subsequent
threats of terrorist attacks and unrest,  have caused instability in the world's
financial and commercial  markets,  have significantly  increased  political and
economic  instability in some of the geographic areas in which we operate.  Acts
of terrorism and threats of armed  conflicts in or around various areas in which
we  operate,  such as the  Middle  East and  Indonesia,  could  limit or disrupt
markets and our operations,  including disruptions resulting from the evacuation
of personnel, cancellation of contracts or the loss of personnel or assets.
         Such events may cause further  disruption  to financial and  commercial
markets generally and may generate greater political and economic instability in
some of the  geographic  areas in which we operate.  In  addition,  any possible
reprisals as a consequence of the war with and ongoing  military action in Iraq,
such as acts of terrorism in the United  States or elsewhere,  could  materially
and adversely affect us in ways we cannot predict at this time.
         Taxation
         We have  operations  in more than 100  countries  other than the United
States and as a result are subject to taxation in many jurisdictions. Therefore,
the final  determination of our tax liabilities  involves the  interpretation of
the statutes and requirements of taxing  authorities  worldwide.  Foreign income
tax  returns of foreign  subsidiaries,  unconsolidated  affiliates  and  related
entities  are  routinely   examined  by  foreign  tax  authorities.   These  tax

                                       57


examinations may result in assessments of additional taxes or penalties or both.
Additionally,  new taxes,  such as the proposed  excise tax in the United States
targeted at heavy equipment of the type we own and use in our operations,  could
negatively affect our results of operations.
         Foreign Exchange and Currency Risks
         A  sizable  portion  of  our  consolidated  revenues  and  consolidated
operating  expenses are in foreign  currencies.  As a result,  we are subject to
significant risks, including:
              -   foreign  exchange  risks  resulting  from  changes  in foreign
                  exchange  rates and the  implementation  of exchange  controls
                  such as those  experienced in Argentina in late 2001 and early
                  2002; and
              -   limitations   on  our  ability  to  reinvest   earnings   from
                  operations  in one  country to fund the  capital  needs of our
                  operations in other countries.
         We do business in countries that have  non-traded or "soft"  currencies
which,  because of their  restricted  or limited  trading  markets,  may be more
difficult  to  exchange  for "hard"  currency.  We may  accumulate  cash in soft
currencies  and we may be limited in our  ability to convert  our  profits  into
United States dollars or to repatriate the profits from those countries.
         We selectively use hedging  transactions to limit our exposure to risks
from doing business in foreign  currencies.  For those  currencies  that are not
readily  convertible,  our  ability to hedge our  exposure  is  limited  because
financial hedge instruments for those currencies are nonexistent or limited. Our
ability to hedge is also limited because pricing of hedging  instruments,  where
they exist, is often volatile and not necessarily efficient.
         In   addition,  the  value  of  the  derivative  instruments  could  be
impacted by:
              -   adverse movements in foreign exchange rates;
              -   interest rates;
              -   commodity prices; or
              -   the value and time  period of the derivative  being  different
                  than the exposures or cash flows being hedged.

Customers and Business
         Exploration and Production Activity
         Demand for our  services  and  products  depends on oil and natural gas
industry activity and expenditure levels that are directly affected by trends in
oil and  natural gas prices.  A prolonged  downturn in oil and gas prices  could
have a material  adverse  effect on our  consolidated  results of operations and
consolidated financial condition.
         Demand for our products and services is  particularly  sensitive to the
level  of  development,   production  and  exploration   activity  of,  and  the
corresponding  capital  spending  by, oil and natural gas  companies,  including
national  oil  companies.  Prices for oil and  natural  gas are subject to large
fluctuations in response to relatively minor changes in the supply of and demand
for oil and natural gas, market  uncertainty and a variety of other factors that
are beyond our control.  Any  prolonged  reduction in oil and natural gas prices
will depress the level of  exploration,  development  and  production  activity,
often  reflected as changes in rig counts.  Lower levels of activity result in a
corresponding  decline in the demand for our oil and natural  gas well  services
and  products  that could have a material  adverse  effect on our  revenues  and
profitability. Factors affecting the prices of oil and natural gas include:
              -   governmental regulations;
              -   global weather conditions;
              -   worldwide   political,   military  and  economic   conditions,
                  including  the ability of OPEC to set and maintain  production
                  levels and prices for oil;
              -   the level of oil production by non-OPEC countries;
              -   the policies of governments regarding the exploration for and
                  production  and  development of  their  oil  and  natural  gas
                  reserves;

                                       58


              -   the cost of producing and delivering oil and gas; and
              -   the level of demand for oil and natural gas, especially demand
                  for natural gas in the United States.
         Historically,  the markets for oil and gas have been  volatile  and are
likely to continue to be volatile  in the future.  Spending on  exploration  and
production  activities and capital  expenditures  for refining and  distribution
facilities  by large  oil and gas  companies  have a  significant  impact on the
activity levels of our businesses.
         Barracuda-Caratinga Project
         See Note 3  to the consolidated financial  statements  and "Fixed-Price
Engineering  and  Construction  Projects"  below  for a  discussion  of the risk
factors associated with this project.
         Governmental and Capital Spending
         Our business is directly  affected by changes in  governmental spending
and  capital  expenditures  by  our customers.  Some  of  the changes  that  may
materially and adversely affect us include:
              -   a decrease  in the  magnitude  of  governmental  spending  and
                  outsourcing  for military and  logistical  support of the type
                  that we provide.  For example, the current level of government
                  services  being  provided in the Middle East may not  continue
                  for an extended period of time;
              -   an increase in the  magnitude  of  governmental  spending  and
                  outsourcing  for military and  logistical  support,  which can
                  materially  and  adversely  affect  our  liquidity  needs as a
                  result of additional or continued working capital requirements
                  to support this work;
              -   a   decrease   in   capital   spending   by   governments  for
                  infrastructure projects of the type that we undertake;
              -   the  consolidation  of our  customers,  which  has  (1) caused
                  customers to  reduce their capital spending, which has in turn
                  reduced  the demand for our  services and  products,  and  (2)
                  resulted in customer personnel changes,  which in turn affects
                  the timing of contract  negotiations and settlements of claims
                  and  claim  negotiations  with  engineering  and  construction
                  customers  on  cost  variances  and  change  orders  on  major
                  projects;
              -   adverse  developments  in the business and  operations  of our
                  customers in the oil and gas industry,  including  write-downs
                  of  reserves   and   reductions   in  capital   spending   for
                  exploration,  development,  production,  processing, refining,
                  and pipeline delivery networks; and
              -   ability of our customers to timely pay the amounts due us.
         Acquisitions, Dispositions, Investments and Joint Ventures
         We may actively seek  opportunities  to maximize  efficiency  and value
through  various   transactions,   including   purchases  or  sales  of  assets,
businesses,  investments or contractual  arrangements or joint  ventures.  These
transactions  would be intended  to result in the  realization  of savings,  the
creation of  efficiencies,  the generation of cash or income or the reduction of
risk.  Acquisition  transactions may be financed by additional  borrowings or by
the  issuance  of our  common  stock.  These  transactions  may also  affect our
consolidated results of operations.
         These transactions also involve risks and we cannot assure you that:
              -   any acquisitions would result in an increase in income;
              -   any acquisitions  would be  successfully integrated  into  our
                  operations;
              -   any  disposition  would  not  result  in  decreased  earnings,
                  revenue or cash flow;
              -   any dispositions,  investments, acquisitions  or  integrations
                  would not divert management resources; or
              -   any  dispositions, investments,  acquisitions or  integrations
                  would  not  have  a material  adverse effect  on  our  results
                  of operations or financial condition.
         We conduct some operations through joint ventures, where control may be
shared with unaffiliated third parties.  As with any joint venture  arrangement,
differences in views among the joint venture  participants may result in delayed
decisions or in failures to agree on major  issues.  We also cannot  control the

                                       59


actions of our joint venture partners, including any nonperformance,  default or
bankruptcy  of our joint  venture  partners.  These  factors  could  potentially
materially and adversely affect the business and operations of the joint venture
and, in turn, our business and operations.
         Fixed-Price Engineering and Construction Projects
         We contract to provide services either on a time-and-materials basis or
on a fixed-price basis, with fixed-price (or lump sum) contracts  accounting for
approximately 24% of KBR's revenues for the year ended December 31, 2003 and 47%
of KBR's revenues for the year ended December 31, 2002. We bear the risk of cost
over-runs,  operating cost inflation,  labor  availability  and productivity and
supplier and  subcontractor  pricing and performance in connection with projects
covered by  fixed-price  contracts.  Our  failure  to  estimate  accurately  the
resources  and time  required  for a  fixed-price  project,  or our  failure  to
complete our contractual  obligations within the time frame and costs committed,
could have a material adverse effect on our business,  results of operations and
financial condition.
         Environmental Requirements
         Our businesses are subject to a variety of  environmental  laws,  rules
and  regulations  in the United  States  and other  countries,  including  those
covering hazardous  materials and requiring emission  performance  standards for
facilities.  For example,  our well  service  operations  routinely  involve the
handling of significant amounts of waste materials, some of which are classified
as hazardous substances.  Environmental requirements include, for example, those
concerning:
              -   the containment and disposal of hazardous substances, oilfield
                  waste and other waste materials;
              -   the use of underground storage tanks; and
              -   the use of underground injection wells.
         Environmental  requirements generally are becoming increasingly strict.
Sanctions  for failure to comply with these  requirements,  many of which may be
applied retroactively, may include:
              -   administrative, civil and criminal penalties;
              -   revocation of permits; and
              -   corrective  action  orders,  including  orders  to investigate
                  and/or clean up contamination.
         Failure  on   our  part   to  comply   with  applicable   environmental
requirements could have a material adverse effect on our consolidated  financial
condition.  We are also exposed to costs arising from environmental  compliance,
including compliance with changes in or expansion of environmental requirements,
such as the potential  regulation  in the United  States of our Energy  Services
Group's  hydraulic  fracturing  services and products as underground  injection,
which could have a material adverse effect on our business, financial condition,
operating results or cash flows.
         We are exposed to claims under environmental requirements and from time
to  time  such  claims  have  been  made  against  us.  In  the  United  States,
environmental  requirements and regulations  typically impose strict  liability.
Strict  liability means that in some situations we could be exposed to liability
for cleanup costs, natural resource damages and other damages as a result of our
conduct  that  was  lawful  at the  time it  occurred  or the  conduct  of prior
operators or other third parties.  Liability for damages  arising as a result of
environmental laws could be substantial and could have a material adverse effect
on our consolidated results of operations.
         Changes in environmental  requirements may negatively impact demand for
our  services.  For  example,  activity by oil and natural gas  exploration  and
production may decline as a result of environmental requirements (including land
use policies  responsive to environmental  concerns).  Such a decline,  in turn,
could have a material adverse effect on us.
         Intellectual Property Rights
         We rely on a variety of intellectual property rights that we use in our
products  and  services.  We may  not be  able to  successfully  preserve  these
intellectual   property   rights  in  the  future  and  these  rights  could  be
invalidated,  circumvented or challenged.  In addition, the laws of some foreign
countries  in  which  our  products  and  services  may be sold  do not  protect
intellectual  property  rights  to the same  extent  as the  laws of the  United

                                       60


States.  Our failure to protect our  proprietary  information and any successful
intellectual  property  challenges or infringement  proceedings against us could
materially and adversely affect our competitive position.
         Technology
         The market for our products and services is  characterized by continual
technological  developments to provide better and more reliable  performance and
services.  If we are not  able  to  design,  develop  and  produce  commercially
competitive  products and to implement  commercially  competitive  services in a
timely  manner in response to changes in  technology,  our business and revenues
could be  materially  and adversely  affected and the value of our  intellectual
property may be reduced.  Likewise, if our proprietary  technologies,  equipment
and  facilities  or  work  processes  become  obsolete,  we  may  no  longer  be
competitive  and our business and revenues  could be  materially  and  adversely
affected.
         Systems
         Our business  could be materially  and  adversely  affected by problems
encountered in the installation of a new financial system to replace the current
systems for our Engineering and Construction Group.
         Technical Personnel
         Many of the services  that we provide and the products that we sell are
complex and highly  engineered  and often must  perform or be performed in harsh
conditions.  We believe that our success  depends upon our ability to employ and
retain technical personnel with the ability to design, utilize and enhance these
products and services. In addition, our ability to expand our operations depends
in part on our  ability to  increase  our skilled  labor  force.  The demand for
skilled workers is high and the supply is limited. A significant increase in the
wages paid by  competing  employers  could  result in a reduction of our skilled
labor force,  increases in the wage rates that we must pay or both. If either of
these events were to occur, our cost structure could increase, our margins could
decrease and our growth potential could be impaired.
         Weather
         Our  business  could be  materially  and  adversely  affected by severe
weather,   particularly  in  the  Gulf  of  Mexico  where  we  have  significant
operations. Repercussions of severe weather conditions 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.
Because  demand for natural gas in the United States  drives a  disproportionate
amount of our Energy Services Group's United States business, warmer than normal
winters in the United States are  detrimental  to the demand for our services to
gas producers.

                                       61


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 2003  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 Audit  Committee.
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 2003 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, 2003,  our system of internal  control over  financial
reporting met those criteria.

HALLIBURTON COMPANY

by



      /s/ DAVID J. LESAR                           /s/  C. CHRISTOPHER GAUT
    -----------------------------                 ------------------------------
          David J. Lesar                                C. Christopher Gaut
      Chairman of the Board,                        Executive Vice President and
          President, and                               Chief Financial Officer
      Chief Executive Officer

                                       62


INDEPENDENT AUDITORS' REPORT


TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF HALLIBURTON COMPANY:


We have audited the  accompanying  consolidated  balance  sheets of  Halliburton
Company and  subsidiaries as of December 31, 2003 and December 31, 2002, and the
related consolidated  statements of operations,  shareholders'  equity, and cash
flows for the years 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 audits.  The
accompanying 2001 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 5 to the  consolidated
financial  statements  and  before  the  revision related to goodwill and other
intangibles  described in Note 1 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 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 consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Halliburton Company
and  subsidiaries as of December 31, 2003 and December 31, 2002, and the results
of their  operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.

As described in Note 5 to the  consolidated  financial  statements,  the Company
changed the  composition of its reportable  segments in 2003. The amounts in the
2002 and 2001 consolidated  financial  statements related to reportable segments
have been restated to conform to the 2003 composition of reportable segments.

As discussed above, the 2001  consolidated  financial  statements of Halliburton
Company  and  subsidiaries  were  audited  by other  auditors  who  have  ceased
operations.  As described  above,  the Company  changed the  composition  of its
reportable segments in 2003, and the amounts in the 2001 consolidated  financial
statements  relating to reportable  segments have been restated.  We audited the
adjustments that were applied to restate the disclosures for reportable segments
reflected in the 2001 consolidated  financial  statements.  In our opinion, such
adjustments are appropriate and have been properly  applied.  Also, as described
in Note 1, 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 in
Note 1 are appropriate.  However, we were not engaged to audit, review, or apply
any  procedures to the 2001  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 consolidated financial statements taken as a whole.


/s/ KPMG LLP
--------------------
    KPMG LLP
Houston, Texas
February 18, 2004

                                       63


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.)

                                       64




                               HALLIBURTON COMPANY
                      Consolidated Statements of Operations
             (Millions of dollars and shares except per share data)

                                                                              Years ended December 31
                                                                  -------------------------------------------------
                                                                       2003             2002            2001
  -----------------------------------------------------------------------------------------------------------------
                                                                                            
  Revenues:
  Services                                                          $  14,383        $  10,658       $  10,940
  Product sales                                                         1,863            1,840           1,999
  Equity in earnings of unconsolidated affiliates, net                     25               74             107
  -----------------------------------------------------------------------------------------------------------------
  Total revenues                                                       16,271           12,572          13,046
  -----------------------------------------------------------------------------------------------------------------
  Operating costs and expenses:
  Cost of services                                                     13,589           10,737           9,831
  Cost of sales                                                         1,679            1,642           1,744
  General and administrative                                              330              335             387
  Gain on sale of business assets                                         (47)             (30)              -
  -----------------------------------------------------------------------------------------------------------------
  Total operating costs and expenses                                   15,551           12,684          11,962
  -----------------------------------------------------------------------------------------------------------------
  Operating income (loss)                                                 720             (112)          1,084
  Interest expense                                                       (139)            (113)           (147)
  Interest income                                                          30               32              27
  Foreign currency losses, net                                              -              (25)            (10)
  Other, net                                                                1              (10)              -
  -----------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations before income taxes,
      minority interest, and change in accounting principle               612             (228)            954
  Provision for income taxes                                             (234)             (80)           (384)
  Minority interest in net income of subsidiaries                         (39)             (38)            (19)
  -----------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations before change in
      accounting principle                                                339             (346)            551
  -------------------------------------------------------------------------------- --------------------------------
  Discontinued operations:
  Loss from discontinued operations, net of tax
      (provision) benefit of $(6), $154, and $20                       (1,151)            (652)            (42)
  Gain on disposal of discontinued operations, net of tax
  provision of $199                                                         -                -              299
  -----------------------------------------------------------------------------------------------------------------
  Income (loss) from discontinued operations, net                      (1,151)            (652)            257
  -----------------------------------------------------------------------------------------------------------------
  Cumulative effect of change in accounting principle, net of
      tax benefit of $5, $0 and $0                                         (8)               -               1
  -----------------------------------------------------------------------------------------------------------------
  Net income (loss)                                                 $    (820)       $    (998)      $     809
  =================================================================================================================

  Basic income (loss) per share:
  Income (loss) from continuing operations before change
      in accounting principle                                       $     0.78       $    (0.80)     $     1.29
  Loss from discontinued operations, net                                 (2.65)           (1.51)          (0.10)
  Gain on disposal of discontinued operations, net                           -                -            0.70
  Cumulative effect of change in accounting principle, net               (0.02)               -               -
  -----------------------------------------------------------------------------------------------------------------
  Net income (loss)                                                 $    (1.89)      $    (2.31)     $     1.89
  =================================================================================================================

  Diluted income (loss) per share:
  Income (loss) from continuing operations before change
      in accounting principle                                       $     0.78       $    (0.80)     $     1.28
  Loss from discontinued operations, net                                 (2.64)           (1.51)          (0.10)
  Gain on disposal of discontinued operations, net                           -                -            0.70
  Cumulative effect of change in accounting principle, net               (0.02)               -               -
  -----------------------------------------------------------------------------------------------------------------
  Net income (loss)                                                 $    (1.88)      $    (2.31)     $     1.88
  =================================================================================================================

  Basic weighted average common shares outstanding                         434              432             428
  Diluted weighted average common shares outstanding                       437              432             430
  =================================================================================================================

     See notes to consolidated financial statements.



                                       65




                               HALLIBURTON COMPANY
                           Consolidated Balance Sheets
             (Millions of dollars and shares except per share data)
                                                                                          December 31
                                                                                    -------------------------
                                                                                        2003        2002
  -----------------------------------------------------------------------------------------------------------
                                        Assets
                                                                                            
    Current assets:
    Cash and equivalents                                                              $  1,815    $  1,107
    Receivables:
       Notes and accounts receivable (less allowance for bad debts of $175 and $157)     3,005       2,533
       Unbilled work on uncompleted contracts                                            1,760         724
  -----------------------------------------------------------------------------------------------------------
    Total receivables                                                                    4,765       3,257
    Inventories                                                                            695         734
    Current deferred income taxes                                                          188         200
    Other current assets                                                                   456         262
  -----------------------------------------------------------------------------------------------------------
    Total current assets                                                                 7,919       5,560
    Net property, plant and equipment                                                    2,526       2,629
    Equity in and advances to related companies                                            579         413
    Goodwill                                                                               670         723
    Noncurrent deferred income taxes                                                       738         607
    Insurance for asbestos and silica related liabilities                                2,038       2,059
    Other assets                                                                           993         853
  -----------------------------------------------------------------------------------------------------------
    Total assets                                                                      $ 15,463    $ 12,844
  ===========================================================================================================
                          Liabilities and Shareholders' Equity
    Current liabilities:
    Short-term notes payable                                                          $     18    $     49
    Current maturities of long-term debt                                                    22         295
    Accounts payable                                                                     1,776       1,077
    Current asbestos and silica related liabilities                                      2,507           -
    Accrued employee compensation and benefits                                             400         370
    Advance billings on uncompleted contracts                                              741         641
    Deferred revenues                                                                      104         100
    Income taxes payable                                                                   236         148
    Other current liabilities                                                              738         592
  -----------------------------------------------------------------------------------------------------------
    Total current liabilities                                                            6,542       3,272
    Long-term debt                                                                       3,415       1,181
    Employee compensation and benefits                                                     801         756
    Asbestos and silica related liabilities                                              1,579       3,425
    Other liabilities                                                                      479         581
  -----------------------------------------------------------------------------------------------------------
    Total liabilities                                                                   12,816       9,215
  -----------------------------------------------------------------------------------------------------------
    Minority interest in consolidated subsidiaries                                         100          71
    Shareholders' equity:
    Common shares, par value $2.50 per share - authorized 600 shares,
       issued 457 and 456 shares                                                         1,142       1,141
    Paid-in capital in excess of par value                                                 273         293
    Deferred compensation                                                                  (64)        (75)
    Accumulated other comprehensive income                                                (298)       (281)
    Retained earnings                                                                    2,071       3,110
  -----------------------------------------------------------------------------------------------------------
                                                                                         3,124       4,188
    Less 18 and 20 shares of treasury stock, at cost                                       577         630
  -----------------------------------------------------------------------------------------------------------
    Total shareholders' equity                                                           2,547       3,558
  -----------------------------------------------------------------------------------------------------------
    Total liabilities and shareholders' equity                                        $ 15,463    $ 12,844
  ===========================================================================================================

      See notes to consolidated financial statements.



                                       66




                               HALLIBURTON COMPANY
                 Consolidated Statements of Shareholders' Equity
                              (Millions of dollars)

                                                              2003              2002              2001
--------------------------------------------------------------------------------------------------------------
                                                                                      
Balance at January 1                                       $  3,558          $  4,752          $  3,928
Dividends and other transactions with shareholders             (174)             (151)              (37)
Comprehensive income (loss):
     Net income (loss)                                         (820)             (998)              809
     Cumulative translation adjustment                           43                69               (32)
     Realization of losses included in net income                15                15               102
--------------------------------------------------------------------------------------------------------------
         Net cumulative translation adjustment                   58                84                70
     Pension liability adjustments                              (88)             (130)              (15)
     Unrealized gains (losses) on investments and
        derivatives                                              13                 1                (3)
--------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss)                              (837)           (1,043)              861
--------------------------------------------------------------------------------------------------------------
Balance at December 31                                     $  2,547          $  3,558          $  4,752
==============================================================================================================

     See notes to consolidated financial statements.



                                       67




                               HALLIBURTON COMPANY
                      Consolidated Statements of Cash Flows
                              (Millions of dollars)
                                                                               Years ended December 31
                                                                       -----------------------------------------
                                                                           2003          2002         2001
----------------------------------------------------------------------------------------------------------------
                                                                                            
   Cash flows from operating activities:
   Net income (loss)                                                      $   (820)    $   (998)     $    809
   Adjustments to reconcile net income (loss) to net cash from operations:
   Loss (income) from discontinued operations                                1,151          652          (257)
   Asbestos and silica charges not included in discontinued                      -          564            11
   operations, net
   Depreciation, depletion and amortization                                    518          505           531
   Provision (benefit) for deferred income taxes, including $27,
      $(133) and $(35) related to discontinued operations                      (86)        (151)           26
   Distributions from related companies, net of equity in (earnings)            13            3             8
      losses
   Change in accounting principle, net                                           8            -            (1)
   Gain on sale of assets                                                      (52)         (25)            -
   Asbestos and silica liability payment prior to Chapter 11 filing           (311)           -             -
   Other changes:
   Receivables and unbilled work on uncompleted contracts                   (1,442)         675          (199)
   Sale (reduction) of receivables in securitization program                  (180)         180             -
   Inventories                                                                   7           62           (91)
   Accounts payable                                                            676           71           118
   Other                                                                      (257)          24            74
----------------------------------------------------------------------------------------------------------------
   Total cash flows from operating activities                                 (775)       1,562         1,029
----------------------------------------------------------------------------------------------------------------
   Cash flows from investing activities:
   Capital expenditures                                                       (515)        (764)         (797)
   Sales of property, plant and equipment                                      107          266           120
   Acquisitions of businesses, net of cash acquired                              -            -          (220)
   Dispositions of businesses, net of cash disposed                            224          170            61
   Proceeds from sale of securities                                             57           62             -
   Investments - restricted cash                                               (18)        (187)            4
   Other investing activities                                                  (51)         (20)          (26)
----------------------------------------------------------------------------------------------------------------
   Total cash flows from investing activities                                 (196)        (473)         (858)
----------------------------------------------------------------------------------------------------------------
   Cash flows from financing activities:
   Proceeds from long-term borrowings                                        2,192           66           425
   Payments on long-term borrowings                                           (296)         (81)          (13)
   Repayments of short-term debt, net of borrowings                            (32)          (2)       (1,528)
   Payments of dividends to shareholders                                      (219)        (219)         (215)
   Other financing activities                                                   (9)         (12)          (24)
----------------------------------------------------------------------------------------------------------------
   Total cash flows from financing activities                                1,636         (248)       (1,355)
----------------------------------------------------------------------------------------------------------------
   Effect of exchange rate changes on cash                                      43          (24)          (20)
   Net cash flows from discontinued operations, including $1.27 billion
      proceeds from the Dresser Equipment Group sale                             -            -         1,263
----------------------------------------------------------------------------------------------------------------
   Increase in cash and equivalents                                            708          817            59
   Cash and equivalents at beginning of year                                 1,107          290           231
----------------------------------------------------------------------------------------------------------------
   Cash and equivalents at end of year                                    $  1,815     $  1,107      $    290
----------------------------------------------------------------------------------------------------------------
  Supplemental disclosure of cash flow information:
  Cash payments during the year for:
  Interest                                                               $    114      $    104      $    132
  Income taxes                                                           $    173      $     94      $    382
================================================================================================================

     See notes to consolidated financial statements.



                                       68


                               HALLIBURTON COMPANY
                      Notes to Consolidated Financial Statements

Note 1. Description of Company and Significant Accounting Policies
         Description  of  Company.   Halliburton   Company's   predecessor   was
established in 1919 and incorporated  under the laws of the State of Delaware in
1924.  We are one of the  world's  largest  oilfield  services  companies  and a
leading provider of engineering and construction services. We have five business
segments  that are  organized  around how we manage our  business:  Drilling and
Formation  Evaluation,  Fluids,  Production  Optimization and Landmark and Other
Energy  Services,  collectively,  the Energy Services Group; and the Engineering
and  Construction  Group,  known as KBR.  Through our Energy  Services Group, we
provide a comprehensive  range of discrete and integrated  products and services
for the  exploration,  development and production of oil and gas. We serve major
national  and  independent  oil and gas  companies  throughout  the  world.  Our
Engineering and  Construction  Group provides a wide range of services to energy
and industrial customers and governmental entities worldwide.
         Use of estimates.  Our financial  statements are prepared in conformity
with accounting principles generally accepted in the United States, requiring 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.
         Basis of presentation.  The consolidated  financial  statements include
the accounts of our company and all of our  subsidiaries in which we own greater
than  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. The consolidated  financial  statements also include the accounts of all
of our subsidiaries currently in Chapter 11 proceedings.
         Prior year  amounts  have been  reclassified  to conform to the current
year presentation.
         Pre-packaged  Chapter 11 proceedings.  DII Industries, LLC,  Kellogg
Brown  & Root,  Inc.  and our  other  affected  subsidiaries  filed  Chapter  11
proceedings   on  December  16,  2003  in   bankruptcy   court  in   Pittsburgh,
Pennsylvania.  With the filing of the Chapter 11  proceedings,  all asbestos and
silica personal injury claims and related lawsuits  against  Halliburton and our
affected  subsidiaries  have  been  stayed.  See  Note 11 and Note 12 for a more
detailed discussion.
         The  proposed  plan of  reorganization,  which is  consistent  with the
definitive  settlement  agreements reached with our asbestos and silica personal
injury  claimants in early 2003,  provides that, if and when an order confirming
the  proposed  plan of  reorganization  becomes  final  and  non-appealable,  in
addition to the $311 million paid to claimants in December  2003,  the following
will be contributed to trusts for the benefit of current and future asbestos and
silica personal injury claimants:
              -   up to approximately $2.5 billion in cash;
              -   59.5 million shares of Halliburton common stock;
              -   notes currently valued at approximately $52 million; and
              -   insurance proceeds, if any, between $2.3 billion and $3.0
                  billion received by DII Industries and Kellogg Brown & Root.
         Upon  confirmation  of the plan of  reorganization,  current and future
asbestos  and  silica  personal  injury  claims  against   Halliburton  and  its
subsidiaries  will be  channeled  into  trusts  established  for the  benefit of
claimants, thus releasing Halliburton and its affiliates from those claims.
         Revenue  recognition.  We generally  recognize revenues as services are
rendered or products are shipped.  Usually the date of shipment  corresponds  to
the date upon which the  customer  takes  title to the  product  and assumes all
risks 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

                                       69


performed.  As a result of our adoption of Emerging  Issues Task Force Issue No.
00-21 (EITF No. 00-21),  "Revenue Arrangements with Multiple  Deliverables," for
contracts entered into after June 30, 2003 that contain performance awards, such
award fees are recognized  when they are awarded by our customer.  For contracts
entered into prior to June 30, 2003, these award fees are recognized as services
are  performed  based on our  estimate  of the  amount  to be  awarded.  Revenue
recognition for specialized products and services is as follows:
         Engineering and construction  contracts.  Revenues from engineering and
construction  contracts are reported on the  percentage-of-completion  method of
accounting.  Progress is generally  based upon physical  progress,  man-hours or
costs incurred, depending on the type of job. All known or anticipated losses on
contracts  are provided for when they become  evident.  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.
         Accounting for government  contracts.  Most of the services provided to
the United  States  government  are  governed  by  cost-reimbursable  contracts.
Generally,  these  contracts  contain both a base fee (a  guaranteed  percentage
applied to our  estimated  costs to  complete  the work  adjusted  for  general,
administrative  and  overhead  costs) and a maximum  award fee  (subject  to our
customer's  discretion and tied to the specific  performance measures defined in
the  contract).  The general,  administrative  and overhead  fees are  estimated
periodically in accordance with government contract  accounting  regulations and
may  change  based on actual  costs  incurred  or based  upon the volume of work
performed.  Award fees are  generally  evaluated  and  granted  by our  customer
periodically.  Similar to many  cost-reimbursable  contracts,  these  government
contracts  are  typically  subject  to audit  and  adjustment  by our  customer.
Services  under our RIO,  LogCAP and Balkans  support  contracts are examples of
these types of arrangements.
         For  these  contracts,  base  fee  revenues  are  recorded  at the time
services  are  performed  based  upon the  amounts  we  expect to  realize  upon
completion of the contracts.  Revenues may be adjusted for our estimate of costs
that may be  categorized as disputed or unallowable as a result of cost overruns
or the audit process.
         For contracts  entered into prior to June 30, 2003,  all award fees are
recognized  during the term of the contract  based on our estimate of amounts to
be  awarded.  Our  estimates  are often based on our past award  experience  for
similar  types of work.  As a result of our adoption of EITF 00-21 for contracts
entered into  subsequent to June 30, 2003, we will not recognize  award fees for
the services portion of the contract based on estimates.  Instead,  they will be
recognized  only when awarded by the  customer.  Award fees on the  construction
portion  of the  contract  will  still  be  recognized  based  on  estimates  in
accordance with SOP 81-1.  There were no government  contracts  affected by EITF
00-21 in 2003.
         Software sales.  Software 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.
         Research and development. Research and development expenses are charged
to income as incurred.  Research and  development  expenses were $221 million in
2003 and $233 million in 2002 and 2001.
         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 $17 million in
2003,  $11  million  in 2002 and $19  million in 2001.  Amortization  expense of
software  development  costs was $17 million for 2003,  $19 million for 2002 and
$16 million for 2001. 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.

                                       70


         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 domestic 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.
         Property,  plant and equipment.  Other than those assets that have been
written  down to their  fair  values  due to  impairment,  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.  We follow the
successful efforts method of accounting for oil and gas properties.
         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 and other  intangibles.  Prior to 2002, for acquisitions  that
occurred before July 1, 2001,  goodwill was amortized on a  straight-line  basis
over periods not  exceeding 40 years.  Effective  January 1, 2002, we ceased the
amortization  of goodwill.  The reported  amounts of goodwill for each reporting
unit  (segment) 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 for goodwill 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.  Our  annual
impairment tests resulted in no goodwill or intangible asset impairment.
         In 2001,  we recorded $42 million  pretax ($38 million  after-tax),  or
$0.09 per basic and diluted earnings per share, in goodwill amortization.  If we
had not  amortized  goodwill  during  2001,  our net income would have been $847
million,  our basic  earnings  per share  would have been $1.98 and our  diluted
earnings per share would have been $1.97.
         Evaluating  impairment of long-lived assets.  When events or changes in
circumstances  indicate  that  long-lived  assets  other  than  goodwill  may be
impaired,  an evaluation is performed.  For an asset classified as held for use,
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.  When an asset is  classified  as held for sale,  the asset's
book value is evaluated and adjusted to the lower of its carrying amount or fair
value less cost to sell.  In  addition,  depreciation  (amortization)  is ceased
while it is classified as held for sale.
         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 not be
realized.

                                       71


         In  assessing  the  realizability  of deferred  tax assets,  management
considers  whether it is more  likely  than not that some  portion or all of the
deferred tax assets will not be realized.  The ultimate  realization of deferred
tax assets is dependent  upon the generation of future taxable income during the
periods in which  those  temporary  differences  become  deductible.  Management
considers the scheduled  reversal of deferred tax liabilities,  projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the  deferred  tax assets are  deductible,  management
believes it is more likely than not that we will  realize the  benefits of these
deductible differences, net of the existing valuation allowances.
         Derivative  instruments.  At times, 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.  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, 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 in the  consolidated  statements of income.  Gains or losses on
interest rate  derivatives are included in interest  expense and gains or losses
on commodity derivatives are included in operating income.
         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 not the United States dollar 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  as  cumulative  translation
adjustments.
         Loss  contingencies.  We accrue for loss  contingencies  based upon our
best estimates in accordance  with Statement of Financial  Accounting  Standards
(SFAS) No. 5, "Accounting for Contingencies".  See Note 13 for discussion of our
significant loss contingencies.
         Stock-based compensation. At December 31, 2003, we have six stock-based
employee  compensation  plans.  We account for these plans under the recognition
and  measurement  principles  of  Accounting  Principles  Board  Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. No cost
for stock  options  granted is reflected in net income,  as all options  granted
under  our  plans  have an  exercise  price  equal  to the  market  value of the
underlying  common  stock on the date of  grant.  In  addition,  no cost for the
Employee  Stock  Purchase  Plan is  reflected  in net  income  because it is not
considered a compensatory plan.
         The fair value of options at the date of grant was estimated  using the
Black-Scholes  option  pricing  model.  The  weighted  average  assumptions  and
resulting fair values of options granted are as follows:

                                       72




                                      Assumptions
           ---------------------------------------------------------------------   Weighted Average
              Risk-Free         Expected           Expected         Expected        Fair Value of
            Interest Rate    Dividend Yield    Life (in years)     Volatility      Options Granted
------------------------------------------------------------------------------------------------------
                                                                    
2003             3.2%             1.9%                5                59%              $ 12.37
2002             2.9%             2.7%                5                63%              $  6.89
2001             4.5%             2.3%                5                58%              $ 19.11
======================================================================================================

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



                                                        Years ended December 31
                                             -----------------------------------------------
   Millions of dollars except per share data      2003            2002           2001
--------------------------------------------------------------------------------------------
                                                                      
   Net income (loss), as reported               $    (820)     $    (998)      $     809
   Total stock-based employee compensation
    expense determined under fair value
    based method for all awards, net of
    related tax effects                               (30)           (26)            (42)
--------------------------------------------------------------------------------------------
   Net income (loss), pro forma                 $    (850)     $  (1,024)      $     767
============================================================================================

   Basic income (loss) per share:
   As reported                                  $   (1.89)      $  (2.31)     $     1.89
   Pro forma                                    $   (1.96)      $  (2.37)     $     1.79
   Diluted income (loss) per share:
   As reported                                  $   (1.88)      $  (2.31)     $     1.88
   Pro forma                                    $   (1.95)      $  (2.37)     $     1.77
============================================================================================

Note 2. Long-Term 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. Commonly used measurements
are physical progress, man-hours and costs incurred.
         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.
         Recording  of profits  and losses on  long-term  contracts  requires an
estimate  of the  total  profit  or loss  over the life of each  contract.  This
estimate requires  consideration of contract  revenue,  change orders and claims
reduced by costs incurred and estimated costs to complete. Anticipated losses on
contracts are recorded in full in the period they become  evident.  Except where
we, because of  uncertainties  in the estimation of costs on a limited number of
projects,  deem it prudent to defer income  recognition,  we do not delay income
recognition  until  projects have reached a specified  percentage of completion.
Profits are recorded from the  commencement  date of the contract based upon the
total estimated  contract profit multiplied by the current  percentage  complete
for the contract.

                                       73


         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.
Probable  unapproved  claims are  recorded to the extent of costs  incurred  and
include no profit element. In 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:


                                                                                    Probable
                                          Total Probable                        Unapproved Claims
                                         Unapproved Claims                       Accrued Revenue
                                     (included in determining                   (unbilled work on
                                     contract profit or loss)                uncompleted contracts)
                              --------------------------------------- --------------------------------------
Millions of dollars              2003         2002          2001         2003         2002         2001
------------------------------------------------------------------------------------------------------------
                                                                                 
Beginning balance              $    279       $  137       $   93        $   210      $  102       $   92
    Additions                        63          158           92             61         105           58
    Costs incurred during
       period                         -            -            -             63          19            -
    Settled/Other                  (109)         (16)         (48)          (109)        (16)         (48)
------------------------------------------------------------------------------------------------------------
Ending balance                 $    233       $  279       $  137        $   225      $  210       $  102
============================================================================================================

         The  probable  unapproved  claims  recorded  in 2003  relate  to  seven
contracts, most of which are complete or substantially complete. We are actively
engaged in claims  negotiation with our customers.  The largest claim relates to
the  Barracuda-Caratinga  contract  which  was  approximately  83%  complete  at
December 31, 2003. There are probable  unapproved claims that will likely not be
settled  within one year  totaling $204 million at December 31, 2003 included in
the table above that are reflected as "Other assets" on the consolidated balance
sheet.  All other probable  unapproved  claims  included in the table above have
been recorded to "Unbilled work on uncompleted contracts" included in the "Total
receivables"  amount on the  consolidated  balance  sheet.  In addition,  we are
negotiating  change  orders to the contract  scope where we have agreed upon the
scope of work but not the  price.  These  have a total  value of $97  million at
December  31, 2003 of which $78  million is  unlikely  to be settled  within one
year.
         Our  unconsolidated  related  companies  include   probable  unapproved
claims as revenue to determine the amount of profit or loss for their contracts.
Amounts for unapproved claims are included in "Equity in and advances to related
companies"  and  totaled  $10  million at  December  31,  2003 and $9 million at
December 31,  2002.  In  addition,  our  unconsolidated  related  companies  are
negotiating  change orders to the contract  scope  where we have agreed upon the
scope of work but not the price.  Our share is valued at $59 million at December
31, 2003 of which $36 million is unlikely to be settled within one year.

Note 3. Barracuda-Caratinga Project
         In June 2000,  KBR entered into a contract  with  Barracuda & Caratinga
Leasing  Company B.V., the project owner, to develop the Barracuda and Caratinga
crude oil fields,  which are located off the coast of Brazil.  The  construction
manager and owner's  representative  is Petroleo  Brasilero SA (Petrobras),  the

                                       74


Brazilian national oil company. When completed,  the project will consist of two
converted supertankers,  Barracuda and Caratinga, which will be used as floating
production,  storage and offloading  units,  commonly  referred to as FPSOs,  32
hydrocarbon  production  wells,  22 water  injection  wells and all sub-sea flow
lines,  umbilicals and risers  necessary to connect the underwater  wells to the
FPSOs.  The project is significantly  behind the original  schedule due in large
part to  change  orders  from  the  project  owner  and is in a  financial  loss
position.  As a result,  we have asserted  numerous  claims  against the project
owner and are subject to potential liquidated damages.  We continue to engage in
discussions  with the project owner in an attempt to settle  issues  relating to
additional claims, completion dates and liquidated damages.
         Our performance under the contract is secured by:
              -   performance   letters  of  credit,   which  together  have  an
                  available credit of approximately  $266 million as of December
                  31, 2003 and which will  continue to be adjusted to  represent
                  approximately  10% of the contract amount,  as amended to date
                  by change orders;
              -   retainage  letters of credit,  which  together have  available
                  credit of  approximately  $160 million as of December 31, 2003
                  and which will  increase in order to continue to represent 10%
                  of the cumulative cash amounts paid to us; and
              -   a guarantee of  Kellogg Brown &  Root's performance under  the
                  agreement  by  Halliburton Company  in favor  of  the  project
                  owner.
         In November 2003 we entered into  agreements  with the project owner in
which the project owner agreed to:
              -   pay $69  million to settle  a portion of  our claims,  thereby
                  reducing the  amount of  probable  unapproved  claims to  $114
                  million; and
              -   extend the original project completion dates and other
                  milestone dates, reducing our exposure to liquidated damages.
         Accordingly, as of December 31, 2003:
              -   the project was approximately 83% complete;
              -   we  have recorded  an inception  to date  pretax loss  of $355
                  million  related to  the project,  of which  $238 million  was
                  recorded in 2003 and $117 million was recorded in 2002;
              -   the probable  unapproved claims  included in  determining  the
                  loss were $114 million; and
              -   we have an exposure to liquidated damages of up to ten percent
                  of  the  contract  value.  Based  upon  the  current  schedule
                  forecast,  we would incur $96 million in liquidated damages if
                  our claim for additional time is not successful.
         Unapproved   Claims.   We  have   asserted   claims  for   compensation
substantially  in excess  of the $114  million  of  probable  unapproved  claims
recorded as  noncurrent  assets as of December 31,  2003,  as well as claims for
additional  time to  complete  the  project  before  liquidated  damages  become
applicable. The project owner and Petrobras have asserted claims against us that
are in addition to the project owner's potential claims for liquidated  damages.
In the November  2003  agreements,  the parties  have agreed to arbitrate  these
remaining  disputed  claims.  In addition,  we have agreed to cap our  financial
recovery to a maximum of $375 million,  and the project owner and Petrobras have
agreed to cap  their  recovery  to a maximum  of $380  million  plus  liquidated
damages.
         Liquidated  Damages.  The original  completion  date for the  Barracuda
vessel was December  2003,  and the original  completion  date for the Caratinga
vessel was April  2004.  We expect  that the  Barracuda  vessel  will  likely be
completed  at least 16 months  later than its  original  contract  determination
date, and the Caratinga vessel will likely be completed at least 14 months later
than  its  original  contract  determination  date.  However,  there  can  be no
assurance that further  delays will not occur.  In the event that any portion of
the delay is determined to be attributable to us and any phase of the project is
completed  after the  milestone  dates  specified in the  contract,  we could be
required to pay liquidated damages.  These damages were initially  calculated on

                                       75


an escalating  basis rising  ultimately to  approximately  $1 million per day of
delay caused by us,  subject to a total cap on liquidated  damages of 10% of the
final  contract  amount  (yielding  a cap of  approximately  $272  million as of
December 31, 2003).
         Under the  November  2003  agreements,  the  project  owner  granted an
extension of time to the original  completion  dates and other  milestone  dates
that average  approximately 12 months. In addition,  the project owner agreed to
delay any  attempt  to assess the  original  liquidated  damages  against us for
project  delays  beyond 12 months and up to 18 months  and delay any  drawing of
letters of credit with respect to such liquidated  damages until the earliest of
December  7,  2004,  the  completion  of  any  arbitration  proceedings  or  the
resolution of all claims between the project owner and us. Although the November
2003  agreements  do not delay the  drawing of letters of credit for  liquidated
damages  for  delays  beyond 18  months, our master  letter  of  credit facility
(See Note 13) will provide funding for any such draw while it is in effect.  The
November  2003  agreements  also  provide  for  a  separate  liquidated  damages
calculation  of $450,000  per day for each of the  Barracuda  and the  Caratinga
vessels if delayed beyond 18 months from the original  schedule.  That amount is
subject  to the total cap on  liquidated  damages  of 10% of the final  contract
amount. Based upon the November 2003 agreements and our most recent estimates of
project  completion dates, which are April 2005 for the Barracuda vessel and May
2005 for the  Caratinga  vessel,  we estimate  that if we were to be  completely
unsuccessful in our claims for additional time, we would be obligated to pay $96
million in liquidated  damages. We have not accrued for this exposure because we
consider the imposition of such liquidated damages to be unlikely.
         Value added taxes.  On December  16, 2003,  the State of Rio de Janeiro
issued a decree recognizing that Petrobras is entitled to a credit for the value
added taxes paid on the project. The decree also provided that value added taxes
that may have become due on the project but which had not yet been paid could be
paid in January 2004 without penalty or interest.  In response to the decree, we
have entered into an agreement with Petrobras whereby Petrobras agreed to:
              -   directly pay the  value added taxes due on  all imports on the
                  project  (including   Petrobras'  January  2004   payment   of
                  approximately $150 million); and
              -   reimburse us for value added taxes paid on local purchases, of
                  which approximately $100 million will become due during 2004.
Since the credit to Petrobras for these value added taxes is on a delayed basis,
the issue of whether we must bear the cost of money for the period from  payment
by Petrobras until receipt of the credit has not been determined.
         The validity of the  December  2003 decree has now been  challenged  in
court in Brazil.  Our legal  advisers in Brazil  believe that the decree will be
upheld. If it is overturned or rescinded,  or the Petrobras credits are lost for
any other reason not due to Petrobras, the issue of who must ultimately bear the
cost of the  value added taxes will  have to be  determined  based  upon the law
prior to the  December  2003  decree.  We believe that the value added taxes are
reimbursable  under the contract  and prior law,  but,  until the December  2003
decree was issued,  Petrobras  and the  project  owner had been  contesting  the
reimbursability  of up to $227  million of value  added  taxes.  There can be no
assurance  that we will not be  required  to pay all or a portion of these value
added taxes. In addition,  penalties and interest of $40 million to $100 million
could be due if the December 2003 decree is invalidated. We have not accrued any
amounts for these taxes, penalties or interest.
         Default provisions.  Prior to the filing of the pre-packaged Chapter 11
proceedings  in  connection  with the  proposed  settlement  of our asbestos and
silica claims, we obtained a waiver from the project owner (with the approval of
the lenders  financing  the  project) so that the filing did not  constitute  an
event of  default  under the  contract.  In  addition,  the  project  owner also
obtained  a waiver  from the  lenders  so that the  Chapter  11  filing  did not
constitute an event of default under the project  owner's loan  agreements  with
the lenders. The waiver received by the project owner from the lender is subject
to  certain  conditions  which  have  thus far  been  fulfilled.  Included  as a
condition  is that the  pre-packaged plan of  reorganization be confirmed by the
bankruptcy court within  120 days of  the filing  of the Chapter 11 proceedings.
The  currently   scheduled  hearing  date  for  confirmation   of  the  plan  of

                                       76


reorganization  is not within the 120-day period. We understand that the project
owner is seeking and expects to receive, an extension of the 120-day period, but
can give no assurance that it will be granted.  In the event that the conditions
do not continue to be fulfilled the lenders,  among other things, could exercise
a right to suspend the  project  owner's use of  advances  made,  and  currently
escrowed,  to fund the project.  We believe it is unlikely that the lenders will
exercise any right to stop funding the project  given the current  status of the
project  and the fact  that a failure  to pay may allow us to cease  work on the
project without  Petrobras  having a readily  available  substitute  contractor.
However,  there can be no assurance  that the lenders will  continue to fund the
project.
         In the  event  that we  were  determined  to be in  default  under  the
contract, and if the project was not completed by us as a result of such default
(i.e.,  our services are  terminated as a result of such  default),  the project
owner may seek direct damages.  Those damages could include  completion costs in
excess of the contract price and interest on borrowed  funds,  but would exclude
consequential  damages.  The total  damages could be up to $500 million plus the
return of up to $300 million in advance  payments  previously  received by us to
the extent  they have not been  repaid.  The  original  contract  terms  require
repayment  of the $300 million in advance  payments by  crediting  the last $350
million of our invoices related to the contract by that amount, but the November
2003  agreements  delay the  repayment  of any of the $300  million  in  advance
payments  until at least  December 7, 2004. A termination of the contract by the
project owner could have a material  adverse  effect on our financial  condition
and results of operations.
         Cash  flow  considerations.  The  project  owner has  procured  project
finance funding  obligations from various lenders to finance the payments due to
us under the contract. The project owner currently has no other committed source
of funding on which we can necessarily rely. In addition,  the project financing
includes borrowing capacity in excess of the original contract amount.  However,
only  $250  million  of this  additional  borrowing  capacity  is  reserved  for
increases in the contract amount payable to us and our subcontractors.
         Under the loan documents,  the availability date for loan draws expired
December  1, 2003 and  therefore,  the  project  owner  drew down all  remaining
available  funds on that date.  As a condition to the draw down of the remaining
funds,  the project owner was required to escrow the funds for the exclusive use
of paying project costs. The availability of the escrowed funds can be suspended
by the lenders if applicable  conditions  are not met. With limited  exceptions,
these funds may not be paid to Petrobras or its subsidiary (which is funding the
drilling  costs of the project) until all amounts due to us,  including  amounts
due for the claims, are liquidated and paid. While this potentially  reduces the
risk that the funds would not be  available  for payment to us, we are not party
to the  arrangement  between the  lenders and the project  owner and can give no
assurance that there will be adequate  funding to cover current or future claims
and change orders.
         We have now begun to fund operating cash  shortfalls on the project and
would be obligated to fund such shortages over the remaining  project life in an
amount we currently  estimate to be  approximately  $480  million.  That funding
level assumes  generally that neither we nor the project owner are successful in
recovering claims against the other and that no liquidated  damages are imposed.
Under the same assumptions, except assuming that we recover unapproved claims in
the amounts currently  recorded,  the cash shortfall would be approximately $360
million. We have already funded  approximately $85 million of such shortfall and
expect that our funded  shortfall  amount will  increase to  approximately  $416
million by December 2004, of which  approximately  $225 million would be paid to
the project  owner in December 2004 as part of the return of the $300 million in
advance payments. The remainder of the advance payments would be returned to the
project owner over the remaining life of the project after December 2004.  There
can be no assurance that we will recover the amount of unapproved claims we have
recognized, or any amounts in excess of that amount.

                                       77


Note 4. Acquisitions and Dispositions
         Enventure  and  WellDynamics.  In January 2004,  Halliburton  and Shell
Technology  Ventures (Shell, an unrelated party) agreed to restructure two joint
venture   companies,   Enventure   Global   Technologies   LLC  (Enventure)  and
WellDynamics  B.V.  (WellDynamics),  in an  effort  to more  closely  align  the
ventures with near-term priorities in the core businesses of the venture owners.
Enventure and  WellDynamics  were owned equally by Halliburton and Shell.  Shell
acquired an additional  33.5% of Enventure,  leaving us with 16.5%  ownership in
return for  enhanced  and extended  agreements  and licenses  with Shell for its
Poroflex(TM)  expandable  sand  screens  and a  distribution  agreement  for its
Versaflex(TM)  expandable liner hangers.  Halliburton acquired an additional one
percent of WellDynamics from Shell, giving Halliburton 51% ownership and control
of  day-to-day  operations.  In  addition,  Shell  received  an option to obtain
Halliburton's   remaining   interest  in  Enventure  by  giving  Halliburton  an
additional  14%  interest in  WellDynamics.  The  transaction  required no cash,
except for the cash necessary to adjust and re-balance the current and projected
working capital positions.
         Halliburton Measurement Systems. In May 2003, we sold certain assets of
Halliburton  Measurement  Systems,  which provides flow measurement and sampling
systems,  to NuFlo  Technologies,  Inc. for  approximately  $33 million in cash,
subject to post-closing  adjustments. The pretax gain on the sale of Halliburton
Measurement  Systems assets was $24 million ($14 million after tax, or $0.03 per
diluted share) and is included in our Production Optimization segment.
         Wellstream.  In  March  2003,  we  sold  the  assets  relating  to  our
Wellstream  business,  a global provider of flexible pipe products,  systems and
solutions,  to Candover  Partners Ltd. for $136 million in cash. The assets sold
included  manufacturing  plants in Newcastle on the Tyne,  United  Kingdom,  and
Panama City,  Florida,  as well as certain  assets and  contracts in Brazil.  In
addition,  Wellstream  had $34 million in goodwill  recorded at the  disposition
date.  The  transaction  resulted in a pretax loss of $15 million  ($12  million
after tax, or $0.03 per diluted  share),  which is included in our  Landmark and
Other Energy Services  segment.  Included in the pretax loss is the write-off of
the cumulative  translation adjustment related to Wellstream of approximately $9
million.  The cumulative  translation  adjustment could not be tax benefited and
therefore the effective  tax benefit for the loss on  disposition  of Wellstream
was only 20%.
         Mono  Pumps.  In  January  2003,  we sold our Mono  Pumps  business  to
National Oilwell, Inc. The sale price of approximately $88 million was paid with
$23 million in cash and 3.2 million  shares of National  Oilwell  common  stock,
which were valued at $65 million on January 15, 2003.  We recorded a pretax gain
of $36 million ($21 million after tax, or $0.05 per diluted  share) on the sale,
which is included in our Drilling and Formation Evaluation segment.  Included in
the  pretax  gain is the  write-off  of the  cumulative  translation  adjustment
related to Mono Pumps of  approximately $5 million.  The cumulative  translation
adjustment  could not be tax  benefited and therefore the effective tax rate for
this  disposition  was 42%.  In  February  2003,  we sold 2.5 million of our 3.2
million  shares of the National  Oilwell  common  stock for $52  million,  which
resulted  in a gain of $2 million  pretax,  or $1 million  after tax,  which was
recorded in "Other, net." In February 2004, we sold the remaining shares for $20
million, resulting in a gain of $6 million.
         Subsea 7 formation.  In May 2002, we contributed  substantially  all of
our Halliburton  Subsea assets,  with a book value of approximately $82 million,
to a newly formed company,  Subsea 7, Inc. The contributed  assets were recorded
by the new company at a fair value of approximately $94 million. The $12 million
difference is being amortized over ten years  representing the average remaining
useful life of the assets contributed.  We own 50% of Subsea 7, Inc. and account
for this  investment  using the  equity  method in our  Production  Optimization
segment. The remaining 50% is owned by DSND Subsea ASA.
         Bredero-Shaw.  In the second quarter of 2002, we incurred an impairment
charge of $61 million ($0.14 per diluted share) related to our then-pending sale
of  Bredero-Shaw.  On  September  30,  2002,  we sold  our 50%  interest  in the
Bredero-Shaw  joint  venture to our partner  ShawCor Ltd. The sale price of $149
million was  comprised of $53 million in cash, a short-term  note of $25 million
and 7.7 million of ShawCor Class A Subordinate shares. Consequently, we recorded

                                       78


a 2002  third  quarter  pretax  loss on the sale of $18  million,  or $0.04  per
diluted  share,  which is reflected  in our  Landmark and Other Energy  Services
segment.  Included  in this  loss  was $15  million  of  cumulative  translation
adjustment  loss which was realized upon the  disposition  of our  investment in
Bredero-Shaw.  During the 2002 fourth quarter,  we recorded in "Other, net" a $9
million pretax loss on the sale of ShawCor shares.
         European  Marine  Contractors  Ltd.  In January  2002,  we sold our 50%
interest in European Marine  Contractors Ltd., an  unconsolidated  joint venture
reported  within our Landmark and Other Energy  Services  segment,  to our joint
venture partner,  Saipem.  At the date of sale, we received $115 million in cash
and a contingent  payment  option  valued at $16 million,  resulting in a pretax
gain of $108  million,  or $0.15 per  diluted  share after tax.  The  contingent
payment  option was based on a formula  linked to performance of the Oil Service
Index.  In February 2002, we exercised our option and received an additional $19
million and  recorded a pretax gain of $3  million,  or $0.01 per diluted  share
after tax, in "Other,  net" in the  statement of  operations  as a result of the
increase in value of this option.
         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 Landmark and Other Energy
Services  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.
         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 Landmark and Other Energy Services  segment,  $9
million of which is non-deductible  for tax purposes.  The intangible assets are
being amortized based on a three-year life.
         Dresser Equipment Group disposition.  In April 2001, we disposed of the
remaining  businesses  in the Dresser  Equipment  Group,  which is  reflected in
discontinued operations. See Note 21.

Note 5. Business Segment Information
         During the second quarter of 2003, we restructured  our Energy Services
Group into four divisions and our Engineering and  Construction  Group into one,
which is the basis for the five segments we now report. We grouped product lines
in order to better align ourselves with how our customers  procure our services,
and to capture new  business and achieve  better  integration,  including  joint
research and development of new products and  technologies  and other synergies.
The new segments mirror the way our chief executive officer (our chief operating
decision  maker)  now  regularly   reviews  the  operating   results,   assesses
performance and allocates resources.
         Our five business  segments are now organized  around how we manage the
business:  Drilling and Formation Evaluation,  Fluids,  Production Optimization,
Landmark and Other Energy Services and the Engineering and  Construction  Group.
We sometimes refer to  the combination of  Drilling  and  Formation  Evaluation,
Fluids,  Production Optimization and Landmark and Other Energy Services segments
as the Energy Services Group.
         The  amounts in  the 2002 and 2001 notes  to the consolidated financial
statements  related  to  segments  have been  restated  to  conform  to the 2003
composition of reportable segments.
         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  (which  currently  consists  of  the  Barracuda-Caratinga  project  in
Brazil),  Granherne  and  Production  Services  better  aligned  with KBR in the

                                       79


current  business  environment.  These  businesses were moved for management and
reporting  purposes  from  the  Energy  Services  Group to the  Engineering  and
Construction Group during the second quarter of 2002.
         Following is a summary of our new segments.
         Drilling  and   Formation   Evaluation.   The  Drilling  and  Formation
Evaluation  segment  is  primarily  involved  in  drilling  and  evaluating  the
formations  related to bore-hole  construction and initial oil and gas formation
evaluation.  The products and  services in this segment  incorporate  integrated
technologies,  which offer  synergies  related to drilling  activities  and data
gathering.  The segment  consists of drilling  services,  including  directional
drilling    and    measurement-while-drilling/logging-while-drilling;    logging
services;  and drill bits.  Included in this  business  segment are  Sperry-Sun,
logging  and  perforating  and  Security  DBS.  Also  included is our Mono Pumps
business, which we disposed of in the first quarter of 2003.
         Fluids. The Fluids segment focuses on fluid management and technologies
to assist in the drilling and construction of oil and gas wells. Drilling fluids
are used to provide for well  control,  drilling  efficiency,  and as a means of
removing  wellbore  cuttings.  Cementing  services  provide  zonal  isolation to
prevent fluid movement between formations,  ensure a bond to provide support for
the casing, and provide wellbore  reliability.  Our Baroid and cementing product
lines,  along  with  our equity  method investment in  Enventure, an  expandable
casing joint venture, are included in this segment.
         Production Optimization.  The Production Optimization segment primarily
tests, measures and provides means to manage and/or improve well production once
a well is drilled and, in some cases, after it has been producing.  This segment
consists of:
              -   production   enhancement   services   (including   fracturing,
                  acidizing,  coiled tubing,  hydraulic workover,  sand control,
                  and pipeline and process services);
              -   completion products and services  (including  well  completion
                  equipment, slickline and safety systems);
              -   tools   and   testing   services    (including   underbalanced
                  applications,   tubular  conveyed  perforating   and   testing
                  services); and
              -   subsea operations conducted  in our 50%  owned company, Subsea
                  7, Inc.
         Landmark and Other Energy Services.  This segment represents integrated
exploration and production software  information  systems,  consulting services,
real-time operations,  smartwells,  and other integrated solutions.  Included in
this business segment are Landmark  Graphics,  integrated  solutions,  Real Time
Operations   and   our   equity   method   investment   in    WellDynamics,   an
intelligent  well  completions  joint  venture.  Also  included are  Wellstream,
Bredero-Shaw and European Marine Contractors Ltd., all of which have been sold.
         Engineering and  Construction  Group.  The Engineering and Construction
Group provides engineering,  procurement,  construction, project management, and
facilities  operation and maintenance  for oil and gas and other  industrial and
governmental customers. Our Engineering and Construction Group offers:
              -   onshore  engineering and  construction  activities,  including
                  engineering and construction of liquefied natural gas, ammonia
                  and crude oil refineries and natural gas plants;
              -   offshore deepwater  engineering,  marine  technology,  project
                  management, and worldwide construction capabilities;
              -   government operations, construction, maintenance and logistics
                  activities for government facilities and installations;
              -   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
              -   civil engineering, consulting and project management services.


                                       80


         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  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.
         Total  revenues  for  2003  include  $4.2  billion,  or  26%  of  total
consolidated  revenues, from the United  States  Government,  which are  derived
almost entirely from our Engineering and Construction  Group.  Revenues from the
United States Government during 2002 and 2001 represented less than 10% of total
consolidated   revenues.   No  other  customer  represented  more  than  10%  of
consolidated revenues in any period presented.
         The tables  below  present  information  on our  continuing  operations
business segments.


   Operations by Business Segment
                                                           Years ended December 31
                                                 ------------------------------------------
   Millions of dollars                               2003          2002          2001
-------------------------------------------------------------------------------------------
                                                                      
   Revenues:
   Drilling and Formation Evaluation               $   1,643    $   1,633      $   1,643
   Fluids                                              2,039        1,815          2,065
   Production Optimization                             2,766        2,554          2,803
   Landmark and Other Energy Services                    547          834          1,300
-------------------------------------------------------------------------------------------
      Total Energy Services Group                      6,995        6,836          7,811
   Engineering and Construction Group                  9,276        5,736          5,235
-------------------------------------------------------------------------------------------
   Total                                           $  16,271    $  12,572      $  13,046
===========================================================================================
   Operating income (loss):
   Drilling and Formation Evaluation               $     177    $     160      $     171
   Fluids                                                251          202            308
   Production Optimization                               421          384            528
   Landmark and Other Energy Services                    (23)        (108)            29
-------------------------------------------------------------------------------------------
      Total Energy Services Group                        826          638          1,036
   Engineering and Construction Group                    (36)        (685)           111
   General corporate                                     (70)         (65)           (63)
-------------------------------------------------------------------------------------------
   Total                                           $     720    $    (112)     $   1,084
===========================================================================================
   Capital expenditures:
   Drilling and Formation Evaluation               $     145    $     190      $     225
   Fluids                                                 54           55             92
   Production Optimization                               124          118            209
   Landmark and Other Energy Services Group               27          149            105
   Shared energy services                                103           91            112
-------------------------------------------------------------------------------------------
      Total Energy Services Group                        453          603            743
   Engineering and Construction Group                     62          161             54
-------------------------------------------------------------------------------------------
   Total                                           $     515    $     764      $     797
===========================================================================================

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

                                       81


segments  within  the  Energy  Services  Group.  For  segment  operating  income
presentation  the  depreciation  expense  associated  with these  shared  Energy
Services  Group assets is allocated to the Energy  Services  Group  segments and
general corporate.


   Operations by Business Segment (continued)
                                                             Years ended December 31
                                                 ---------------------------------------------
   Millions of dollars                               2003          2002            2001
----------------------------------------------------------------------------------------------
                                                                      
   Depreciation, depletion and amortization:
   Drilling and Formation Evaluation               $     144    $     137      $     126
   Fluids                                                 50           48             50
   Production Optimization                               104           99             95
   Landmark and Other Energy Services                     77          112            137
   Shared energy services                                 92           79             66
----------------------------------------------------------------------------------------------
      Total Energy Services Group                        467          475            474
   Engineering and Construction Group                     50           29             56
   General corporate                                       1            1              1
----------------------------------------------------------------------------------------------
   Total                                           $     518    $     505      $     531
==============================================================================================
   Total assets:
   Drilling and Formation Evaluation               $   1,074    $   1,163      $   1,253
   Fluids                                              1,030          830          1,071
   Production Optimization                             1,558        1,365          1,402
   Landmark and Other Energy Services                    895        1,399          1,766
   Shared energy services                              1,240        1,187          1,072
----------------------------------------------------------------------------------------------
      Total Energy Services Group                      5,797        5,944          6,564
   Engineering and Construction Group                  5,082        3,104          3,187
   General corporate                                   4,584        3,796          1,215
----------------------------------------------------------------------------------------------
   Total                                           $  15,463    $  12,844      $  10,966
==============================================================================================


   Operations by Geographic Area
                                                          Years ended December 31
                                                 --------------------------------------------
   Millions of dollars                               2003          2002           2001
---------------------------------------------------------------------------------------------
   Revenues:
   United States                                   $   4,415    $   4,139      $   4,911
   Iraq                                                2,399            1              2
   United Kingdom                                      1,473        1,521          1,800
   Other areas (numerous countries)                    7,984        6,911          6,333
---------------------------------------------------------------------------------------------
   Total                                           $  16,271    $  12,572      $  13,046
=============================================================================================
   Long-lived assets:
   United States                                   $   4,461    $   4,617      $   3,030
   United Kingdom                                        630          691            617
   Other areas (numerous countries)                      917          711            744
---------------------------------------------------------------------------------------------
   Total                                           $   6,008    $   6,019      $   4,391
=============================================================================================

Note 6. Receivables
         Our receivables are generally not collateralized. Included in notes and
accounts  receivable are notes with varying  interest rates totaling $11 million
at December 31, 2003 and $53 million at December 31, 2002. At December 31, 2003,
41% of our total receivables related to our United States government  contracts,

                                       82


primarily  for projects in the Middle East.  Receivables  from the United States
government at December 31, 2002 were less than 10% of consolidated receivables.
         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.  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.  While the  funding  subsidiary  is
wholly-owned by us, its assets are not available to pay any creditors of ours or
of our  subsidiaries  or  affiliates,  until such time as the agreement with the
unaffiliated   companies  is  terminated  following  sufficient  collections  to
liquidate all outstanding undivided ownership interests. The undivided ownership
interest  in  the  pool  of  receivables  sold  to the  unaffiliated  companies,
therefore,   is  reflected  as  a  reduction  of  accounts   receivable  in  our
consolidated  balance sheets. The funding subsidiary retains the interest in the
pool of receivables that are not sold to the unaffiliated companies and is fully
consolidated and reported in our financial statements.
         The amount of undivided  interests  which can be sold under the program
varies based on the amount of eligible Energy Services Group  receivables in the
pool at any given time and other factors.  The funding subsidiary initially sold
a $200 million undivided ownership interest to the unaffiliated  companies,  and
could from time to time sell additional undivided ownership  interests.  In July
2003, however,  the balance outstanding under this facility was reduced to zero.
The total  amount  outstanding  under this  facility  continued to be zero as of
December 31, 2003.

Note 7. Inventories
         Inventories  are stated at the lower of cost or market.  We manufacture
in the United States certain finished  products and parts  inventories for drill
bits,  completion  products,  bulk materials,  and other tools that are recorded
using the last-in,  first-out  method  totaling $38 million at December 31, 2003
and $43 million at December 31, 2002.  If the average cost method had been used,
total  inventories  would have been $17 million higher than reported at December
31, 2003 and December 31, 2002.
         Inventories  at December 31, 2003 and December 31, 2002 are composed of
the following:


                                                     December 31
                                            ------------------------------
   Millions of dollars                         2003            2002
--------------------------------------------------------------------------
                                                      
   Finished products and parts              $    503        $    545
   Raw materials and supplies                    159             141
   Work in process                                33              48
--------------------------------------------------------------------------
   Total                                    $    695        $    734
==========================================================================

         Finished  products and parts are reported net of obsolescence  reserves
of $117 million at December 31, 2003 and $140 million at December 31, 2002.

Note 8. Restricted Cash
         At  December  31,  2003,  we  had  restricted  cash  of  $259  million.
Restricted cash consists of:
              -   $107 million  deposit that  collateralizes a bond for a patent
                  infringement judgment on  appeal, included  in "Other  current
                  assets" (See Note 13);
              -   $78 million as collateral for potential future insurance claim
                  reimbursements, included in "Other assets";
              -   $37 million ordered by the bankruptcy court to be set aside as
                  part of  the reorganization  proceedings, included  in  "Other
                  current assets"; and



                                       83


              -   $37  million ($22 million in "Other assets" and $15 million in
                  "Other current assets")  primarily  related to cash collateral
                  agreements for  outstanding  letters  of  credit  for  various
                  construction projects.
         At December 31, 2002, we had $190 million in restricted  cash in "Other
assets".

Note 9. Property, Plant and Equipment
         Property,  plant  and  equipment  at  December  31,  2003  and 2002 are
composed of the following:


   Millions of dollars                       2003          2002
---------------------------------------------------------------------
                                                   
   Land                                    $     80      $     86
   Buildings and property improvements        1,065         1,024
   Machinery, equipment and other             4,921         4,842
---------------------------------------------------------------------
   Total                                      6,066         5,952
   Less accumulated depreciation              3,540         3,323
---------------------------------------------------------------------
   Net property, plant and equipment       $  2,526      $  2,629
=====================================================================

         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 $359
million at December 31, 2003 and $356 million at December 31, 2002.

Note 10. Debt
         Short-term notes payable consist primarily of overdraft  facilities and
other  facilities  with varying rates of interest.  Long-term debt at the end of
2003 and 2002 consists of the following:


  Millions of dollars                                                2003          2002
---------------------------------------------------------------------------------------------
                                                                             
  3.125% convertible senior notes due July 2023                      $ 1,200       $    -
  5.5% senior notes due October 2010                                     748            -
  1.5% plus LIBOR senior notes due October 2005                          300            -
  Medium-term notes due 2006 through 2027                                600          750
  7.6% debentures of Halliburton due August 2096                         294            -
  8.75% debentures due February 2021                                     200          200
  7.6% debentures of DII Industries, LLC due August 2096                   6          300
  Variable interest credit facility maturing September 2009               69           66
  8% senior notes which matured April 2003                                 -          139
  Effect of interest rate swaps                                            9           13
  Other notes with varying interest rates                                 11            8
---------------------------------------------------------------------------------------------
  Total long-term debt                                                 3,437        1,476
  Less current portion                                                    22          295
---------------------------------------------------------------------------------------------
  Noncurrent portion of long-term debt                               $ 3,415      $ 1,181
=============================================================================================

         Convertible  notes.  In June  2003,  we issued  $1.2  billion of 3.125%
convertible senior notes due July 15, 2023, with interest payable semi-annually.
The notes are our senior unsecured  obligations  ranking equally with all of our
existing and future senior unsecured indebtedness.
         The  notes  are  convertible  into our  common  stock  under any of the
following circumstances:
              -   during any  calendar  quarter  (and only during such  calendar
                  quarter) if the last  reported  sale price of our common stock
                  for  at  least  20  trading  days  during  the  period  of  30

                                       84


                  consecutive trading days ending on the last trading day of the
                  previous  quarter  is  greater  than or  equal  to 120% of the
                  conversion  price per share of our  common  stock on such last
                  trading day;
              -   if the notes have been called for redemption;
              -   upon the  occurrence of specified  corporate transactions that
                  are described in  the indenture  relating to  the offering; or
              -   during any period in which the credit ratings  assigned to the
                  notes by both Moody's Investors Service  and Standard & Poor's
                  are lower than Ba1 and BB+, respectively,  or the notes are no
                  longer rated by at least one of these rating services or their
                  successors.
         The  initial  conversion  price is $37.65  per share and is  subject to
adjustment.  Upon  conversion,  we will  have the right to  deliver,  in lieu of
shares of our common stock, cash or a combination of cash and common stock.
         The notes are  redeemable  for cash at our  option on or after July 15,
2008.  Holders  may  require us to  repurchase  the notes for cash on July 15 of
2008,  2013 or 2018 or,  prior to July 15, 2008,  in the event of a  fundamental
change as  defined in the  underlying  indenture.  In each  case,  we will pay a
purchase  price equal to 100% of the  principal  amount plus  accrued and unpaid
interest and additional amounts owed, if any.
         Floating and fixed rate senior notes.  In October 2003, we completed an
offering of $1.05 billion of floating and fixed rate unsecured senior notes. The
fixed rate notes,  with an  aggregate  principal  amount of $750  million,  will
mature on October  15, 2010 and bear  interest at a rate equal to 5.5%,  payable
semi-annually. The fixed rate notes were initially offered on a discounted basis
at 99.679% of their face  value.  The  discount is being  amortized  to interest
expense over the life of the bond.  The floating  rate notes,  with an aggregate
principal  amount of $300  million,  will  mature on October  17,  2005 and bear
interest at a rate equal to three-month  LIBOR (London  interbank offered rates)
plus 1.5%, payable quarterly.
         Medium-term notes. At December 31, 2003, we had outstanding notes under
our medium-term note program as follows:


        Amount                Due             Rate
-------------------------------------------------------
                                       
  $ 275 million             08/2006          6.00%
  $ 150 million             12/2008          5.63%
  $  50 million             05/2017          7.53%
  $ 125 million             02/2027          6.75%
=======================================================

         Each holder of the 6.75%  medium-term notes has the right to require us
to repay their 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.  The 7.53%
notes may not be redeemed prior to maturity.  The medium-term  notes do not have
sinking fund requirements.
         Exchange of DII Industries debentures.  In October 2003, DII Industries
commenced a consent  solicitation  in which it  requested  consents to amend the
indenture  governing  its  $300  million  aggregate  principal  amount  of  7.6%
debentures  due 2096 to, among other things,  eliminate  the  bankruptcy-related
events of default.  Halliburton  commenced an exchange offer in which it offered
to issue  its new 7.6%  debentures  due 2096 in  exchange  for a like  amount of
outstanding 7.6% debentures due 2096 of DII Industries held by holders qualified
to  participate  in the exchange  offer.  On December 15, 2003,  the consents to
amend the DII Industries  indenture  became  effective and the exchange offer in
which Halliburton issued its new 7.6% debentures due 2096 in exchange for a like
amount of outstanding  7.6% debentures due 2096 of DII Industries was completed.
Following the exchange offer,  approximately  $6 million of the 7.6%  debentures
due 2096 of DII Industries remained  outstanding and, prior to the completion of
the  exchange  offer,  Halliburton  became a  co-obligor  on the  remaining  DII
Industries debentures.

                                       85


         Variable interest credit facility.  In the fourth quarter 2002, our 51%
owned consolidated  subsidiary,  Devonport  Management Limited (DML),  signed an
agreement for a credit facility of (pound)80 million maturing in September 2009.
This credit  facility  has a variable  interest  rate that was equal to 4.73% on
December  31,  2003.  There  are  various  financial  covenants  which  must  be
maintained by DML. DML has drawn down $69 million as of December 31, 2003. Under
this  agreement,  annual  payments  of  approximately  $20  million  are  due in
quarterly installments. As of December 31, 2003, the available credit under this
facility was approximately $57 million.
         Interest rate swaps.  In the second  quarter of 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. Upon termination, the fair value of the interest rate swap was
not material.  In the fourth  quarter 2002, we terminated the interest rate swap
agreement  on our  6.00%  medium-term  note.  The  notional  amount  of the swap
agreement  was $150 million.  This  interest rate swap was  designated as a fair
value hedge. 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  adjustments to the hedged  6.00% medium-term note
are being  amortized as a reduction  in interest  expense  using the  "effective
yield method" over the remaining life of the medium-term note.
         Maturities. Our debt, excluding the effects of our interest rate swaps,
matures as follows:  $22 million in 2004;  $324 million in 2005; $296 million in
2006; $10 million in 2007; $151 million in 2008; and $2,625 million thereafter.
         Senior  notes due 2007.  On January 26,  2004,  we issued $500  million
aggregate  principal  amount of  senior  notes due 2007  bearing  interest  at a
floating  rate equal to  three-month  LIBOR plus 0.75%,  payable  quarterly.  On
January 26, 2005, or on any interest payment date thereafter, we have the option
to redeem all or a portion of the outstanding notes.
         Chapter  11-related   financing  activities.  In  anticipation  of  the
pre-packaged Chapter 11 filing, in the fourth quarter of 2003 we entered into:
              -   a   delayed-draw   term   facility  (Senior  Unsecured  Credit
                  Facility) that would currently provide for draws of up to $500
                  million to be available for cash funding of the trusts for the
                  benefit  of   asbestos   and  silica  claimants,  if  required
                  conditions are met; and
              -   a  $700   million   three-year   revolving   credit   facility
                  (Revolving   Credit  Facility)  for  general  working  capital
                  purposes, which expires in October 2006.
         At December 31, 2003, there were no borrowings  outstanding under these
facilities.
         Drawings  under the Senior  Unsecured  Credit  Facility  are subject to
satisfaction of certain conditions,  including confirmation of the proposed plan
of reorganization,  maintenance of certain financial covenants and the long-term
senior unsecured debt of Halliburton  shall have been confirmed at BBB or higher
(stable  outlook)  by Standard & Poor's and Baa2 or higher  (stable  outlook) by
Moody's Investors  Service.  Proceeds  received by Halliburton from the issuance
of debt  securities,  asset sales and from the settlement of asbestos and silica
insurance claims reduce commitments under the Senior Unsecured Credit Facility.
         Borrowings  under the  Revolving  Credit  Facility  will be  secured by
certain of our assets until:
              -   final and   non-appealable confirmation of  our proposed  plan
                  of reorganization;
              -   our long-term  senior  unsecured  debt is  rated BBB or higher
                  (stable  outlook)  by  Standard &  Poor's and  Baa2 or  higher
                  (stable outlook) by Moody's Investors Service;
              -   there is no material adverse change in our business condition;
              -   we are not in default under the Revolving Credit Facility; and
              -   there  are no  court proceedings pending  or threatened  which
                  could have a material adverse affect on our business.
         To  the  extent  that  the  aggregate  principal  amount of all secured
indebtedness  exceeds five percent of the  consolidated  net tangible  assets of
Halliburton  and its  subsidiaries,  all collateral will be shared pro rata with
holders of Halliburton's  8.75% notes due 2021, 3.125%  convertible senior notes
due 2023,  senior  notes  due  2005,  5.5%  senior  notes due 2010,  medium-term


                                       86


notes,  7.6%  debentures due 2096,  senior notes issued in January 2004 due 2007
and  any  other  new  issuance  to the  extent  that  the  issuance  contains  a
requirement  that the  holders  thereof  be equally  and  ratably  secured  with
Halliburton's other secured creditors. Security to be provided includes:
              -   100% of  the stock  of Halliburton  Energy Services,  Inc.  (a
                  wholly-owned subsidiary of Halliburton);
              -   100%  of  the   stock  or  other  equity   interests  held  by
                  Halliburton and  Halliburton Energy  Services, Inc. in certain
                  of their first-tier domestic subsidiaries;
              -   66% of  the stock  or other  equity interests  of  Halliburton
                  Affiliates LLC (a wholly-owned subsidiary of Halliburton); and
              -   66% of the stock or other equity  interests of certain foreign
                  subsidiaries  of Halliburton or Halliburton  Energy  Services,
                  Inc.

Note 11. Asbestos and Silica Obligations and Insurance Recoveries
Summary
         Several of our  subsidiaries,  particularly  DII Industries and Kellogg
Brown & Root,  have been named as  defendants in a large number of asbestos- and
silica-related  lawsuits.  The plaintiffs allege injury primarily as a result of
exposure to:
              -   asbestos  used in  products  manufactured  or  sold by  former
                  divisions of DII Industries  (primarily  refractory materials,
                  gaskets  and  packing   materials  used  in  pumps  and  other
                  industrial products);
              -   asbestos in materials used in our construction and maintenance
                  projects of Kellogg Brown & Root or its subsidiaries; and
              -   silica related to sandblasting and drilling fluids operations.
         We have substantial insurance to reimburse us for portions of the costs
of  judgments,  settlements  and  defense  costs for these  asbestos  and silica
claims.  Since  1976,  approximately  683,000  asbestos  claims  have been filed
against us and  approximately  238,000  asbestos claims have been closed through
settlements in court proceedings at a total cost of approximately  $227 million.
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.  In 2001,  we were subject to
several  large  adverse  judgments in trial court  proceedings.  At December 31,
2003,  approximately  445,000  asbestos  claims  were  open,  and we  anticipate
resolving all open and future claims in the pre-packaged  Chapter 11 proceedings
of DII  Industries,  Kellogg Brown & Root and other of our  subsidiaries,  which
were filed on December 16, 2003.  The  following  tables  summarize  the various
charges we have  incurred  over the past three  years and a  rollforward  of our
asbestos- and silica-related liabilities and insurance receivables.

                                       87



                                        2003                      2002                       2001
                              ------------------------------------------------------------------------------
                              Continuing   Discontinued  Continuing   Discontinued Continuing   Discontinued
Millions of dollars           Operations   Operations    Operations   Operations   Operations   Operations
------------------------------------------------------------------------------------------------------------
                                                                              
Asbestos and silica charges:
Pre-packaged Chapter 11
    proceedings                 $    -       $   1,016     $    -        $      -     $    -       $      -
2002 Rabinovitz Study                -               -        564           2,256          -              -
Liabilities for Harbison-
    Walker claims                    -               -          -               -          -            632
------------------------------------------------------------------------------------------------------------
       Subtotal                      -           1,016        564           2,256          -            632
------------------------------------------------------------------------------------------------------------
Asbestos and silica
insurance write-off/
(receivables):
Navigant Study                       -               6          -          (1,530)         -              -
Write-off of  Highlands
    accounts receivable              -               -         80               -          -              -
Insurance recoveries for
    Harbison-Walker claims           -               -          -               -          -           (537)
------------------------------------------------------------------------------------------------------------
       Subtotal                      -               6         80          (1,530)         -           (537)
------------------------------------------------------------------------------------------------------------
Other Costs:
Harbison-Walker matters              -              51          -              45          -              -
Professional fees                    -              58          -              35          -              4
Cash in lieu of interest             -              24          -               -          -              -
Other costs                          5               -          -               -         11              -
------------------------------------------------------------------------------------------------------------
       Subtotal                      5             133          -              80         11              4
------------------------------------------------------------------------------------------------------------
Pretax asbestos & silica
    charges                          5           1,155        644             806         11             99
Tax (provision) benefit             (2)              5       (114)           (154)        (4)           (35)
------------------------------------------------------- ----------------------------------------------------
Total asbestos & silica
   charges, net of tax          $    3       $   1,160     $  530        $    652     $    7       $     64
============================================================================================================




                                                                             December 31
                                                               -----------------------------------------
Millions of dollars                                                    2003                 2002
--------------------------------------------------------------------------------------------------------
                                                                                    
Asbestos and silica related liabilities:
     Beginning balance                                               $   3,425            $    737
     Accrued liability                                                   1,016               2,820
     Payments on claims                                                   (355)               (132)
--------------------------------------------------------------------------------------------------------
Asbestos and silica related liabilities - ending  balance
     (of which $2,507 and $0 is current)                             $   4,086            $  3,425
========================================================================================================
Insurance for asbestos and silica related liabilities:
     Beginning balance                                               $  (2,059)           $   (612)
     (Accrual)/write-off of insurance recoveries                             6              (1,530)
     Write off of Highlands receivable                                       -                  45
     Insurance billings                                                     15                  38
--------------------------------------------------------------------------------------------------------
Insurance for asbestos and silica related liabilities -
     ending balance                                                  $  (2,038)           $ (2,059)
========================================================================================================
Accounts receivable for billings to insurance companies:
     Beginning balance                                               $     (44)           $    (53)
     Billed insurance recoveries                                           (15)                (38)
     Purchase of Harbison-Walker receivable,
          net of allowance                                                 (40)                  -
     Write-off of Highlands receivable                                       -                  35
     Payments received                                                       3                  12
--------------------------------------------------------------------------------------------------------
Accounts receivable for billings to insurance companies -
     ending balance                                                  $     (96)           $    (44)
========================================================================================================

Pre-packaged Chapter 11 proceedings and recent insurance developments
         Pre-packaged  Chapter 11 proceedings.  DII Industries,  Kellogg Brown &
Root and our  other  affected  subsidiaries  filed  Chapter  11  proceedings  on
December 16, 2003 in  bankruptcy  court in  Pittsburgh,  Pennsylvania.  With the

                                       88


filing of the Chapter 11  proceedings,  all asbestos and silica  personal injury
claims and related  lawsuits against  Halliburton and our affected  subsidiaries
have been stayed. See Note 12.
         Our subsidiaries  sought Chapter 11 protection  because Sections 524(g)
and 105 of the  Bankruptcy  Code may be used to  discharge  current  and  future
asbestos and silica personal injury claims against us and our subsidiaries. Upon
confirmation  of the plan of  reorganization,  current and future  asbestos  and
silica  personal  injury claims against us and our affiliates  will be channeled
into trusts  established  for the benefit of claimants  under Section 524(g) and
105 of the Bankruptcy  Code, thus releasing  Halliburton and its affiliates from
those claims.
         A  pre-packaged  Chapter 11  proceeding  is one in which a debtor seeks
approval of a plan of reorganization  from affected  creditors before filing for
Chapter 11  protection.  Prior to  proceeding  with the  Chapter 11 filing,  our
affected  subsidiaries  solicited  acceptances  from known present  asbestos and
silica  claimants to a proposed plan of  reorganization.  In the fourth  quarter
of 2003, valid votes were received from approximately 364,000 asbestos claimants
and approximately  21,000 silica claimants, representing substantially all known
claimants.  Of the votes validly cast, over 98% of voting asbestos claimants and
over 99% of  voting  silica  claimants  voted to  accept  the  proposed  plan of
reorganization,  meeting the voting requirements of Chapter 11 of the Bankruptcy
Code for  approval of the  proposed  plan.  The  pre-approved  proposed  plan of
reorganization was filed as part of the Chapter 11 proceedings.
         The  proposed  plan of  reorganization,  which is  consistent  with the
definitive  settlement  agreements reached with our asbestos and silica personal
injury  claimants in early 2003,  provides that, if and when an order confirming
the  proposed  plan of  reorganization  becomes  final  and  non-appealable,  in
addition to the $311 million paid to claimants in December  2003,  the following
will be contributed to trusts for the benefit of current and future asbestos and
silica personal injury claimants:
              -   up to approximately $2.5 billion in cash;
              -   59.5 million shares of Halliburton common stock   (valued   at
                  approximately  $1.6 billion for accrual purposes using a stock
                  price of  $26.17  per  share,  which  is based on the  average
                  trading  price  for the  five  days  immediately  prior to and
                  including December 31, 2003);
              -   a  one-year non-interest bearing  note  of $31 million for the
                  benefit of asbestos claimants;
              -   a silica note with an initial  payment  into a silica trust of
                  $15  million.  Subsequently  the  note  provides  that we will
                  contribute an amount to the silica trust balance at the end of
                  each  year for the next 30 years  to bring  the  silica  trust
                  balance to $15 million, $10 million or $5 million based upon a
                  formula which uses average yearly disbursements from the trust
                  to  determine  that  amount.  The note  also  provides  for an
                  extension of the note for 20  additional  years under  certain
                  circumstances. We have estimated the amount of this note to be
                  approximately $21 million.  We will periodically  reassess our
                  valuation  of this  note  based  upon our  projections  of the
                  amounts we believe we will be required to fund into the silica
                  trust; and
              -   insurance  proceeds, if  any, between  $2.3  billion  and $3.0
                  billion received by DII Industries and Kellogg Brown & Root.
         In  connection  with  reaching an  agreement  with  representatives  of
asbestos  and silica  claimants  to limit the cash  required  to settle  pending
claims to $2.775 billion, DII Industries paid $311 million on December 16, 2003.
Halliburton  also agreed to guarantee the payment of an additional  $156 million
of the remaining  approximately $2.5 billion cash amount,  which must be paid on
the earlier to occur of June 17,  2004 or the date on which an order  confirming
the proposed plan of reorganization becomes final and non-appealable.  As a part
of the definitive settlement agreements,  we have been accruing cash payments in
lieu of  interest  at a rate of five  percent  per annum for these  amounts.  We
recorded approximately $24 million in pretax charges in 2003 related to the cash
in lieu of  interest.  On December  16,  2003,  we paid $22 million to satisfy a
portion of our cash in lieu of interest payment obligations.

                                       89


         As a result  of the  filing of the Chapter 11 proceedings,  we adjusted
the  asbestos  and silica  liability  to reflect the full amount of the proposed
settlement and certain  related costs,  which resulted in a before tax charge of
approximately  $1.016 billion to  discontinued  operations in the fourth quarter
2003.  The tax effect on this charge was minimal,  as a valuation  allowance was
established for the net operating loss  carryforward  created by the charge.  We
also reclassified a portion of our asbestos and silica related  liabilities from
long-term to short-term,  resulting in an increase of short-term  liabilities by
approximately $2.5 billion, because we believe we will be required to fund these
amounts within one year.
         In accordance  with the  definitive  settlement  agreements  entered in
early 2003, we have been reviewing  plaintiff files to establish a medical basis
for payment of settlement amounts and to establish that the claimed injuries are
based on exposure to our products.  We have reviewed  substantially  all medical
claims  received.  During the fourth quarter  of 2003, we  received  significant
numbers of the product  identification  due diligence files. Based on our review
of these files,  we received the  necessary  information  to allow us to proceed
with  the  pre-packaged  Chapter  11  proceedings.  As  of  December  31,  2003,
approximately  63% of the value of claims  passing  medical due  diligence  have
submitted  satisfactory  product  identification.  We expect the  percentage  to
increase as we receive additional  plaintiff files.  Based on these results,  we
found that  substantially  all of the asbestos and silica  liability  relates to
claims filed against our former  operations that have been divested and included
in  discontinued  operations.  Consequently,  all 2003 changes in our  estimates
related to the asbestos and silica liability were recorded through  discontinued
operations.
         Our proposed  plan of  reorganization  calls for a portion of our total
asbestos and silica liability to be settled by contributing  59.5 million shares
of  Halliburton  common  stock into the trusts.  We will  continue to adjust our
asbestos  and silica  liability  related to the  shares if the average  value of
Halliburton  stock for the five days immediately  prior to and including the end
of each  fiscal  quarter  has  increased  by five  percent or more from the most
recent valuation of the shares. At December 31, 2003, the value of the shares to
be  contributed  is  classified  as a long-term  liability  on our  consolidated
balance sheet, and the shares have not been included in our calculation of basic
or  diluted  earnings  per  share.  If  the  shares  had  been  included  in the
calculation as of the beginning of the fourth quarter,  our diluted earnings per
share from continuing operations for the year ended December 31, 2003 would have
been  reduced  by  $0.03.  When  and  if we  receive  final  and  non-appealable
confirmation of our proposed plan of reorganization, we will:
              -   increase or decrease  our  asbestos  and silica  liability  to
                  value  the 59.5  million shares  of Halliburton  common  stock
                  based on the value of Halliburton  stock on  the date of final
                  and  non-appealable  confirmation  of  our  proposed  plan  of
                  reorganization;
              -   reclassify from a  long-term liability to shareholders' equity
                  the  final value of  the 59.5  million shares  of  Halliburton
                  common stock; and
              -   include  the  59.5  million  shares  in  our  calculations  of
                  earnings per share on a prospective  basis.
         We understand that  the United States Congress  may  consider  adopting
legislation  that would  establish a national trust fund as the exclusive  means
for  recovery  for  asbestos-related  disease.  We  are  uncertain  as  to  what
contributions we would be required to make to a national trust, if any, although
it is possible that they could be  substantial  and that they could continue for
several  years.  It is  also  possible  that  our  level  of  participation  and
contribution  to a national trust could be greater than it otherwise  would have
been as a result of having  subsidiaries  that have filed Chapter 11 proceedings
due to asbestos liability.
         Recent insurance developments. Concurrent with the remeasurement of our
asbestos and silica  liability  due to the  pre-packaged  Chapter 11 filing,  we
evaluated  the  appropriateness  of the $2.0  billion  recorded for asbestos and
silica insurance  recoveries.  In doing so, we separately evaluated two types of
policies:

                                       90


              -   policies held  by carriers with which we had either settled or
                  which  were  probable  of  settling   and  for which  we could
                  reasonably estimate the amount of the settlement; and
              -   other policies.
         In December 2003, we retained Navigant  Consulting  (formerly  Peterson
Consulting), a nationally-recognized consultant in asbestos and silica liability
and insurance,  to assist us. In conducting their analysis,  Navigant Consulting
performed the following with respect to both types of policies:
              -   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.
         Navigant Consulting's analysis assumed that there will be no recoveries
from insolvent carriers and that those carriers which are currently solvent will
continue to be solvent throughout the period of the applicable recoveries in the
projections.   Based  on  its  review,   analysis  and   discussions,   Navigant
Consulting's  analysis assisted us in making our 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 included
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 Navigant Consulting is based on
information provided by us.
         In January 2004, we reached a  comprehensive  agreement with Equitas to
settle our insurance  claims against certain  Underwriters at Lloyd's of London,
reinsured by Equitas.  The settlement will resolve all  asbestos-related  claims
made  against  Lloyd's  Underwriters  by us and by  each of our  subsidiary  and
affiliated companies,  including DII Industries,  Kellogg Brown & Root and their
subsidiaries  that have filed  Chapter 11  proceedings  as part of our  proposed
settlement.  Our claims against our other London Market Company Insurers are not
affected by this  settlement.  Provided that there is final  confirmation of the
plan of  reorganization  in the Chapter 11  proceedings  and the current  United
States Congress does not pass national asbestos  litigation reform  legislation,
Equitas  will  pay  us  $575  million,  representing  approximately  60%  of the
applicable limits of liability that DII Industries had substantial likelihood of
recovering from Equitas.  The first payment of $500 million will occur within 15
working  days of the later of  January 5, 2005 or the date on which the order of
the bankruptcy court confirming DII Industries' plan of  reorganization  becomes
final and non-appealable.  A second payment of $75 million will be made eighteen
months after the first payment.
         As   of  December  31,  2003,  we  developed  our best  estimate of the
asbestos and silica insurance  receivables as follows:
              -   included $575  million of  insurance  recoveries  from Equitas
                  based on the January 2004 comprehensive agreement;
              -   included  insurance  recoveries from  other specific  insurers
                  with whom we had settled;

                                       91


              -   estimated insurance  recoveries from specific insurers that we
                  are  probable  of  settling   with  and  for  which  we  could
                  reasonably  estimate  the  amount  of  the  settlement.   When
                  appropriate, these estimates considered prior settlements with
                  insurers with similar facts and circumstances; and
              -   estimated insurance recoveries for all other policies with the
                  assistance of the Navigant Consulting study.
         The estimate we  developed as a result of this  process was  consistent
with the amount of asbestos and silica  receivables  recorded as of December 31,
2003,  causing us not to  significantly  adjust our recorded  insurance asset at
that time. Our estimate was based on a  comprehensive  analysis of the situation
existing at that time which  could  change  significantly  in the both near- and
long-term period as a result of:
              -   additional settlements with insurance companies;
              -   additional insolvencies of carriers; and
              -   legal interpretation of the type and amount of coverage
                  available to us.
         Currently,  we cannot  estimate the time frame for  collection  of this
insurance  receivable,  except as  described  earlier with regard to the Equitas
settlement.
Asbestos  and  silica  obligations  and  receivables  based  upon  2002  outside
studies
         Rabinovitz 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's  estimates are based on historical data
supplied by us and publicly available  studies,  including annual surveys by the
National  Institutes of Health concerning the incidence of mesothelioma  deaths.
In addition, Dr. Rabinovitz used the following assumptions in her estimates:
              -   there will be no legislative or other systemic  changes to the
                  tort system;
              -   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 Chapter  11 proceedings
                  (see below).
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 report took approximately seven months to complete.
         Dr.  Rabinovitz  estimated  the current and future  total  undiscounted
liability for personal injury asbestos and silica claims through 2052, including
defense costs, would be a range between $2.2 billion and $3.5 billion. The lower
end of the range was  calculated  by using an  average of the last five years of
asbestos claims  experience and the upper end of the range was calculated  using
the more recent  two-year  elevated rate of asbestos claim filings in projecting
the rate of future claims.  As a result of reaching an agreement in principle in
December of 2002 (which was the basis of the  definitive  settlement  agreements
entered in early  2003) for the  settlement  of all of our  asbestos  and silica
claims,  we believed it was  appropriate  to adjust our accrual to use the upper
end of the range  contained  in Dr.  Rabinovitz's  study.  Therefore  in 2002 we
recorded a pretax  charge of $2.820  billion to increase our asbestos and silica
liability to the upper end of the range.
         Navigant  study.  In 2002, we retained  Navigant  Consulting  (formerly
Peterson  Consulting)  to work  with  us to  project  the  amount  of  insurance
recoveries  probable  at  that  time.  In  conducting  this  analysis,  Navigant
Consulting used the Rabinovitz Study to project  liabilities  through 2052 using
the two-year  elevated rate of asbestos claim filings.  The methodology  used by
Navigant Consulting for that study was consistent with the methodology  employed
in December 2003. Based on our analysis of the probable insurance recoveries, we
recorded a receivable of $1.530 billion.

                                       92


Other insurance matters
         Harbison-Walker Chapter 11 proceedings. A large portion of our asbestos
claims  relate to  alleged  injuries  from  asbestos  used in a small  number of
products  manufactured or sold by Harbison-Walker  Refractories  Company,  whose
operations DII Industries  acquired in 1967 and spun off in 1992. At the time of
the spin-off,  Harbison-Walker assumed liability for asbestos claims filed after
the  spin-off,  and it  agreed to  defend  and  indemnify  DII  Industries  from
liability for those  claims,  although DII  Industries  continues to have direct
liability to tort claimants for all post spin-off  refractory  asbestos  claims.
DII Industries retained responsibility for all asbestos claims pending as of the
date of the  spin-off.  The  agreement  governing  the  spin-off  provided  that
Harbison-Walker  would  have  the  right  to  access  DII  Industries'  historic
insurance  coverage for the  asbestos-related  liabilities that  Harbison-Walker
assumed in the spin-off.
         In  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 obligations to DII Industries.  Accordingly,  DII Industries
took up the defense of unsettled post spin-off refractory claims that name it as
a defendant in order to prevent  Harbison-Walker from unnecessarily  eroding the
insurance  coverage both companies access for these claims. As a result, in 2001
we  recorded  a charge of $632  million  to  increase  our  asbestos  and silica
liability  to cover the  Harbison-Walker  asbestos  and  silica  claims and $537
million in anticipated insurance recoveries.
         On February 14, 2002,  Harbison-Walker  filed a voluntary  petition for
reorganization  under Chapter 11 of the Bankruptcy  Code. In its initial Chapter
11 filings,  Harbison-Walker stated 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 and silica claims asserted directly against  Harbison-Walker
or asserted  against DII  Industries.  In order to protect the shared  insurance
from dissipation,  DII Industries began to assist Harbison-Walker in its Chapter
11 proceedings as follows:
              -   on  February  14,  2002,  DII  Industries  paid $40 million to
                  Harbison-Walker's  United States parent holding  company,  RHI
                  Refractories Holding Company (RHI Refractories);
              -   DII Industries  agreed to provide up to $35 million in debtor-
                  in-possession financing  to Harbison-Walker  ($5  million  was
                  paid  in 2002  and  the  remaining  $30 million  was  paid  in
                  2003); and
              -   during  2003,   DII   Industries   purchased  $50  million  of
                  Harbison-Walker's  outstanding insurance receivables, of which
                  $10 million were estimated to be uncollectible.
         In 2003,  DII  Industries  entered  into a  definitive  agreement  with
Harbison-Walker.    This   agreement   is   subject   to   court   approval   in
Harbison-Walker's  Chapter 11  proceedings  and would  channel all  asbestos and
silica  personal  injury  claims  against  Harbison-Walker  and  certain  of its
affiliates to the trusts created in DII  Industries'  and Kellogg Brown & Root's
Chapter  11  proceedings.  Our  asbestos  and  silica  obligations  and  related
insurance  recoveries recorded as of December 31, 2003 reflect the terms of this
definitive agreement.
         DII Industries  also agreed to pay RHI  Refractories  an additional $35
million if a plan of reorganization were proposed in the Harbison-Walker Chapter
11  proceedings  and an  additional  $85 million if a plan is  confirmed  in the
Harbison-Walker  Chapter  11  proceedings,   in  each  case  acceptable  to  DII
Industries  in its  sole  discretion.  This  plan  must  include  an  injunction
channeling  to Section  524(g)/105  trusts all present and future  asbestos  and
silica claims against DII Industries arising out of the Harbison-Walker business
or other DII Industries'  businesses that share insurance with  Harbison-Walker.
The proposed plan of reorganization  filed by  Harbison-Walker  on July 31, 2003
did not provide  for a Section  524(g)/105  injunction.  We do not believe it is
likely that  Harbison-Walker  will  propose or will be able to confirm a plan of
reorganization  in  its  Chapter  11  proceedings  that  is  acceptable  to  DII
Industries. In early 2004, we entered into an agreement with RHI Refractories to
settle the $35  million and $85 million  potential payments. The agreement calls

                                       93


for a $10 million  payment to RHI and a $1 million  payment to our  asbestos and
silica trusts on behalf of RHI Refractories.  These amounts were expensed during
2003.
         London-based insurers.  Equitas and  other London-based  companies have
attempted  to  impose  more  restrictive   documentation   requirements  on  DII
Industries  and its  affiliates  than  are  currently  required  under  existing
covering-in-place    agreements    related   to   certain    asbestos    claims.
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.  These insurance  carriers stated that the new restrictive  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.
         DII  Industries  is a  plaintiff  in two  lawsuits  against a number of
London-based  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.  DII Industries believes that the more
restrictive  documentation   requirements  are  inconsistent  with  the  current
coverage-in-place agreements and are unenforceable. The insurance companies that
DII Industries has sued continue to pay larger claim  settlements where the more
restrictive  documentation  is obtained or where court  judgments  are  entered.
Likewise,  they continue to pay previously  agreed amounts of defense costs that
DII Industries incurs defending claims.
         If the bankruptcy court approves our settlement agreement with Equitas,
we will seek to dismiss  Equitas from the  litigation we currently have with the
London-based insurers.
         Federal-Mogul.   A  significant   portion  of  the  insurance  coverage
applicable to Worthington  Pump (a former division of DII Industries) is alleged
by Federal-Mogul Products,  Inc.  (Federal-Mogul) to be shared with it. In 2001,
Federal-Mogul  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,   DII   Industries   filed  a  lawsuit  on   December  7,  2001  in
Federal-Mogul's  Chapter 11  proceedings  asserting  DII  Industries'  rights to
asbestos  insurance coverage under historic general liability policies issued to
Studebaker-Worthington,  Inc. and its successor.  The parties to this litigation
have agreed to mediate  this  dispute.  A number of insurers  who have agreed to
coverage-in-place  agreements with DII Industries  have suspended  payment under
the shared  Worthington Pump policies until the  Federal-Mogul  bankruptcy court
resolves the insurance  issues.  Consequently,  the effect of the  Federal-Mogul
Chapter 11 proceedings on DII Industries' rights to access this shared insurance
is uncertain.
         Highlands  litigation.  Highlands Insurance Company (Highlands) was our
wholly-owned  insurance  company  until it was spun off to our  shareholders  in
1996. Highlands wrote the primary insurance coverage for the construction claims
related to Brown & Root, Inc. prior to 1980. On April 5, 2000, Highlands filed a
lawsuit  against  Halliburton in the Delaware  Chancery Court asserting that the
construction  claims insurance it wrote for Brown & Root, Inc. 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
construction claims. This decision was affirmed by the Delaware Supreme Court on
March 13, 2002.  As a result of this ruling in the first  quarter 2002, 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.
         Excess insurance on construction  claims.  As a result of the Highlands
litigation,  Kellogg  Brown & Root no  longer  has  primary  insurance  coverage
related to construction claims. However, excess insurance coverage policies with
other  insurers were in place during those periods.  On March 20, 2002,  Kellogg
Brown & Root filed a lawsuit  against  the  insurers  that issued  these  excess

                                       94


insurance  policies,  seeking to establish the specific terms under which it can
obtain  reimbursement for costs incurred in settling and defending  construction
claims.  Until this  lawsuit  is  resolved,  the scope of the  excess  insurance
coverage will remain uncertain,  and as such we have not recorded any recoveries
related to excess insurance coverage.

Note 12. Chapter 11 Reorganization Proceedings
         On December  16,  2003,  the  following  wholly-owned  subsidiaries  of
Halliburton (collectively,  the Debtors or Debtors-in-Possession)  filed Chapter
11 proceedings in bankruptcy court in Pittsburgh, Pennsylvania:
              -   DII Industries, LLC;
              -   Kellogg Brown & Root, Inc.;
              -   Mid-Valley, Inc.;
              -   KBR Technical Services, Inc.;
              -   Kellogg Brown & Root Engineering Corporation;
              -   Kellogg   Brown  &  Root   International,   Inc.  (a  Delaware
                  corporation);
              -   Kellogg  Brown  &  Root  International,   Inc.  (a  Panamanian
                  corporation); and
              -   BPM Minerals, LLC.
         The  bankruptcy  court has scheduled a hearing on  confirmation  of the
proposed  plan of  reorganization  for May 10 through  12,  2004.  The  affected
subsidiaries  will continue to be wholly-owned by Halliburton  Company under the
proposed  plan.  Halliburton  Company  (the  registrant),  Halliburton's  Energy
Services Group or Kellogg Brown & Root's government  services businesses are not
included  in  the  Chapter  11  filing.   Upon   confirmation  of  the  plan  of
reorganization,  current and future  asbestos and silica  personal injury claims
filed against us and our subsidiaries will be channeled into trusts  established
under  Sections  524(g)  and  105 of the  Bankruptcy  Code  for the  benefit  of
claimants, thus releasing Halliburton and its affiliates from such claims.
         A pre-packaged Chapter 11 proceeding such as that of the Debtors is one
in which approval of a plan of reorganization is sought from affected  creditors
before filing for Chapter 11 protection. Prior to proceeding with the Chapter 11
filing, the Debtors solicited acceptances from known present asbestos and silica
claimants to a proposed  plan of reorganization.  In the fourth quarter of 2003,
valid votes were  received  from  approximately 364,000  asbestos  claimants and
approximately  21,000 silica  claimants,  representing  substantially  all known
claimants.  Of the votes validly cast, over 98% of voting asbestos claimants and
over 99% of  voting  silica  claimants  voted to  accept  the  proposed  plan of
reorganization,  meeting the voting requirements of Chapter 11 of the Bankruptcy
Code for  approval of the  proposed  plan.  The  pre-approved  proposed  plan of
reorganization was filed as part of the Chapter 11 proceedings.
         Debtors-in-Possession  financial statements. Under the Bankruptcy Code,
we  are  required  to  file  periodically  with  the  bankruptcy  court  various
documents,  including financial statements of the  Debtors-in-Possession.  These
financial  statements are prepared  according to  requirements of the Bankruptcy
Code. While these financial  statements  accurately provide information required
by the Bankruptcy Code, they are  unconsolidated,  unaudited,  and prepared in a
format different from that used in our consolidated  financial  statements filed
under the securities laws and from that used in the condensed combined financial
statements that follow.  Accordingly, we believe the substance and format do not
allow  meaningful  comparison with the following  condensed  combined  financial
statements.
         Basis of  presentation.  We  continue  to  consolidate  the  Debtors in
our  consolidated  financial  statements.  While  generally it is appropriate to
de-consolidate a subsidiary  during its Chapter 11 proceedings on the basis that
control no longer rests with the parent, the facts and circumstances  particular
to our situation  support the  continued  consolidation  of these  subsidiaries.
Specifically:
              -   substantially all  affected creditors have  approved the terms
                  of the plan of reorganization and related transactions;

                                       95


              -   the duration  of the Chapter  11 proceedings are  likely to be
                  very short (anticipated to be approximately six months);
              -   the Debtors were solvent  and filed Chapter  11 proceedings to
                  resolve  asbestos and silica claims rather than as a result of
                  insolvency; and
              -   the plan of  reorganization  provides that we will continue to
                  own 100% of the equity of the Debtors upon  completion  of the
                  plan of  reorganization.  As such, the plan of  reorganization
                  will not impact our equity ownership of the Debtors.
         All reorganization items, including but not limited to all professional
fees,  realized gains and losses and provisions for losses, are included in both
our  consolidated  financial  statements  and the condensed  combined  financial
statements of the Debtors-in-Possession as discontinued operations. During 2003,
we  recorded  a total  of $27  million  as  reorganization  items,  all of which
consisted of  professional  fees,  including $16 million which was paid in 2003,
with the balance expected to be paid in 2004.
         Furthermore,  certain  claims against the Debtors  existing  before the
Chapter  11  filing  are  considered  liabilities  subject  to  compromise.  The
principal  categories  of claims  subject to  compromise  at  December  31, 2003
included the following:
              -   $2,507   million   current   asbestos   and   silica   related
                  liabilities; and
              -   $1,579   million   long-term   asbestos  and   silica  related
                  liabilities.
         Prior to the filing of the Chapter 11  proceedings,  DII Industries was
the parent for all of Energy  Services  Group and KBR  operations.  As part of a
pre-filing corporate restructuring,  immediately prior to Chapter 11 filing, DII
Industries  distributed  the Energy  Services  Group  operations to  Halliburton
Company,  while  the  operations  of  KBR  continued  to  be  conducted  through
subsidiaries of DII Industries.  The condensed combined financial  statements of
the Debtors-in-Possession  were prepared as if this distribution had taken place
as of the January 1, 2003.

                                       96




                              Debtors-in-Possession
                   Condensed Combined Statement of Operations
                              (Millions of dollars)
                                   (Unaudited)

                                                                      Year Ended
                                                                  December 31, 2003
--------------------------------------------------------------------------------------
                                                                
Revenues                                                           $      2,040
Equity in earnings of majority owned subsidiaries                            70
--------------------------------------------------------------------------------------
Total revenues                                                            2,110
Operating costs and expenses                                              2,328
--------------------------------------------------------------------------------------
Operating loss                                                             (218)
Nonoperating expenses, net                                                  (26)
--------------------------------------------------------------------------------------
Loss from continuing operations before income
    taxes                                                                  (244)
Income tax benefit                                                           88
--------------------------------------------------------------------------------------
Loss from continuing operations                                            (156)
Loss from discontinued operations, net of tax
    benefit of $5                                                        (1,160)
--------------------------------------------------------------------------------------
Net loss                                                           $     (1,316)
======================================================================================

         The subsidiaries of DII Industries that are not included in the Chapter
11 filing are presented in the condensed combined financial statements using the
equity method of accounting.  These  subsidiaries had revenues of $7,053 million
and operating income of $233 million for the year ended December 31, 2003. These
subsidiaries  had assets of $2,283 million and  liabilities of $2,303 million as
of December 31, 2003.

                                       97



                              Debtors-in-Possession
                        Condensed Combined Balance Sheet
                              (Millions of dollars)
                                   (Unaudited)

                                                                                        December 31,
                                                                                            2003
  ------------------------------------------------------------------------------------------------------
                                                                                     
                                        Assets
    Current assets:
    Cash and equivalents                                                                $       108
    Receivables:
    Trade, net                                                                                  191
    Intercompany, net                                                                            50
    Unbilled work on uncompleted contracts                                                       60
    Other, net                                                                                   75
  ------------------------------------------------------------------------------------------------------
    Total receivables, net                                                                      376
    Inventories                                                                                  23
    Right to Halliburton shares (1)                                                           1,547
    Other current assets                                                                         80
  ------------------------------------------------------------------------------------------------------
    Total current assets                                                                      2,134
    Property, plant and equipment, net                                                           91
    Goodwill, net                                                                               188
    Investments in majority owned subsidiaries                                                1,567
    Insurance for asbestos and silica related liabilities                                     2,038
    Noncurrent deferred income taxes                                                            436
    Other assets                                                                                257
  ------------------------------------------------------------------------------------------------------
    Total assets                                                                        $     6,711
  ======================================================================================================
                          Liabilities and Shareholders' Equity
    Current liabilities:
    Accounts payable                                                                    $        13
    Accrued employee compensation and benefits                                                   30
    Advance billings on uncompleted contracts                                                    23
    Prepetition liabilities not subject to compromise                                           834
    Current prepetition asbestos and silica related liabilities subject to compromise         2,507
    Other current liabilities                                                                    14
  ------------------------------------------------------------------------------------------------------
    Total current liabilities                                                                 3,421
    Prepetition liabilities not subject to compromise                                           137
    Noncurrent prepetition asbestos and silica related liabilities subject to                 1,579
      compromise
    Other liabilities                                                                             2
  ------------------------------------------------------------------------------------------------------
    Total liabilities                                                                         5,139
  ------------------------------------------------------------------------------------------------------
    Shareholders' equity                                                                      1,572
  ------------------------------------------------------------------------------------------------------
    Total liabilities and shareholders' equity                                          $     6,711
  ======================================================================================================

(1) This line item  represents  an option for DII  Industries  to  acquire  59.5
million  shares of  Halliburton  common  stock at no cost and was  valued at $26
based upon the closing price on December 31, 2003.



                                       98



                              Debtors-in-Possession
                   Condensed Combined Statement of Cash Flows
                              (Millions of dollars)
                                   (Unaudited)

                                                              Year Ended
                                                          December 31, 2003
-----------------------------------------------------------------------------
                                                       
   Total cash flows from operating activities                $ (1,226)
-----------------------------------------------------------------------------
   Total cash flows from investing activities                       2
-----------------------------------------------------------------------------
   Total cash flows from activities with Halliburton            1,306
-----------------------------------------------------------------------------
   Effect of exchange rate changes on cash                         (5)
-----------------------------------------------------------------------------
   Increase (decrease) in cash and equivalents                     77
   Cash and equivalents at beginning of year                       31
-----------------------------------------------------------------------------
   Cash and equivalents at end of year                       $    108
=============================================================================

         Some of the insurers of DII  Industries  and Kellogg  Brown & Root have
filed  various  motions in and  objections to the Chapter 11  proceedings  in an
attempt to seek dismissal of the Chapter 11 proceedings or to delay the proposed
plan of reorganization. The motions and objections filed by the insurers include
a  request  that the  court  grant  the  insurers  standing  in the  Chapter  11
proceedings  to be heard on a wide range of  matters,  a motion to  dismiss  the
Chapter  11   proceedings   and  a  motion   objecting  to  the  proposed  legal
representative  for future asbestos and silica claimants.  On February 11, 2004,
the bankruptcy  court presiding over the Chapter 11 proceedings  issued a ruling
holding that the insurers lack standing to bring motions  seeking to dismiss the
pre-packaged plan of  reorganization  and denying standing to insurers to object
to the appointment of the proposed legal  representative for future asbestos and
silica  claimants.  Notwithstanding  the bankruptcy court ruling,  we expect the
insurers to object to confirmation of the pre-packaged  plan of  reorganization.
In  addition,  we believe  that these  insurers  will take  additional  steps to
prevent or delay confirmation of a plan of reorganization,  including  appealing
the rulings of the  bankruptcy  court,  and there can be no  assurance  that the
insurers would not be successful or that such efforts would not result in delays
in the reorganization process.
         There can be no  assurance  that we will obtain the  required  judicial
approval  of the  proposed  plan  of  reorganization  or  any  revised  plan  of
reorganization  acceptable  to  us.  In  such  event,  a  prolonged  Chapter  11
proceeding  could adversely  effect the Debtors'  relationships  with customers,
suppliers  and  employees,  which in turn could  adversely  affect the  Debtors'
competitive  position,   financial  condition  and  results  of  operations.  In
addition, if the Debtors are unsuccessful in obtaining confirmation of a plan of
reorganization,  the assets of the Debtors could be liquidated in the Chapter 11
proceedings, which could have a material adverse affect on Halliburton.

Note 13. Other Commitments and Contingencies
         United States  government  contract work. We provide  substantial  work
under our  government  contracts  business to the United  States  Department  of
Defense and other  governmental  agencies,  including  under  world-wide  United
States Army logistics contracts, known as LogCAP, and under contracts to rebuild
Iraq's  petroleum  industry,  known  as RIO.  Our  units  operating  in Iraq and
elsewhere under government  contracts such as LogCAP and RIO consistently review
the amounts  charged and the  services  performed  under  these  contracts.  Our
operations under these contracts are also regularly  reviewed and audited by the
Defense Contract Audit Agency, or DCAA, and other  governmental  agencies.  When
issues are found during the governmental agency audit process,  these issues are
typically discussed and reviewed with us in order to reach a resolution.
         The results of a preliminary audit by the DCAA in December 2003 alleged
that we may have  overcharged  the  Department  of  Defense  by $61  million  in
importing fuel into Iraq. After a review, the Army Corps of Engineers,  which is
our client and oversees the project, concluded that we obtained a fair price for

                                       99


the fuel.  However,  Department of Defense officials have referred the matter to
the agency's  inspector  general with a request for additional  investigation by
the agency's  criminal  division.  We  understand  that the  agency's  inspector
general has commenced an  investigation.  We have also in the past had inquiries
by the DCAA and the civil fraud  division  of the United  States  Department  of
Justice into  possible  overcharges  for work under a contract  performed in the
Balkans, which is still under review with the Department of Justice.
         On January 22, 2004,  we announced the  identification  by our internal
audit function of a potential over billing of approximately $6 million by one of
our  subcontractors  under the LogCAP  contract in Iraq. In accordance  with our
policy and government  regulation,  the potential overcharge was reported to the
Department of Defense Inspector General's office as well as to our customer, the
Army Materiel  Command.  On January 23, 2004, we issued a check in the amount of
$6 million to the Army  Materiel  Command to cover that  potential  over billing
while we conduct our own  investigation  into the matter. We are also continuing
to review whether third party  subcontractors  paid, or attempted to pay, one or
two former employees in connection with the potential $6 million over billing.
         The  DCAA has  raised  issues  relating  to our  invoicing  to the Army
Materiel  Command  for  food  services  for  soldiers  and  supporting  civilian
personnel in Iraq and Kuwait.  We have taken two actions in response.  First, we
have  temporarily  credited  $36  million to the  Department  of  Defense  until
Halliburton,  the DCAA and the Army  Materiel  Command  agree on a process to be
used for invoicing for food services. Second, we are not submitting $141 million
of  additional  food  services  invoices  until an internal  review is completed
regarding  the number of meals  ordered  by the Army  Materiel  Command  and the
number of soldiers actually served at dining facilities for United States troops
and supporting civilian personnel in Iraq and Kuwait. The $141 million amount is
our "order of magnitude"  estimate of the remaining  amounts (in addition to the
$36 million we already credited) being questioned by the DCAA. The issues relate
to whether  invoicing should be based on the number of meals ordered by the Army
Materiel Command or whether invoicing should be based on the number of personnel
served. We have been invoicing based on the number of meals ordered. The DCAA is
contending that the invoicing should be based on the number of personnel served.
We believe our position is correct,  but have undertaken a comprehensive  review
of its propriety and the views of the DCAA.  However, we cannot predict when the
issue will be resolved with the DCAA. In the meantime,  we may withhold all or a
portion of the payments to our subcontractors  relating to the withheld invoices
pending resolution of the issues.  Except for the $36 million in credits and the
$141  million of withheld  invoices,  all our  invoicing  in Iraq and Kuwait for
other food services and other  matters are being  processed and sent to the Army
Materiel Command for payment in the ordinary course.
         All  of  these  matters  are  still  under  review  by  the  applicable
government  agencies.  Additional  review and allegations are possible,  and the
dollar amounts at issue could change significantly.  We could also be subject to
future DCAA  inquiries  for other  services we provide in Iraq under the current
LogCAP contract or the RIO contract.  For example, as a result of an increase in
the level of work  performed in Iraq or the DCAA's review of additional  aspects
of our  services  performed  in  Iraq,  it is  possible  that we may,  or may be
required to, withhold additional invoicing or make refunds to our customer, some
of which could be  substantial,  until these  matters are  resolved.  This could
materially and adversely affect our liquidity.
         Securities  and  Exchange  Commission  (SEC)  investigation.   The  SEC
investigation  into our recognition of revenue from unapproved claims and change
orders on long-term  construction  projects,  which began in late May 2002 as an
informal  inquiry,  was converted to a formal  investigation  in December  2002.
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.  To our knowledge,  the SEC is now focused
on the  accuracy,  adequacy  and timing of our  disclosure  of the change in our
accounting  practice for revenues  associated  with  estimated cost overruns and
unapproved claims for specific long-term engineering and construction projects.

                                      100


         Securities  and related  litigation.  On June 3, 2002,  a class  action
lawsuit was filed  against us in federal  court 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. Several
of those lawsuits also named as defendants Arthur Andersen, LLP, our independent
accountants for  the period covered  by the lawsuits, and several of our present
or former officers and directors. Those lawsuits allege that we violated federal
securities  laws in  failing  to  disclose  a change  in the  manner in which we
accounted  for  revenues   associated  with   unapproved   claims  on  long-term
engineering  and  construction  contracts,  and that we  overstated  revenue  by
accruing  the  unapproved  claims.  On  March  12,  2003,  another   shareholder
derivative  action arising out of the same events and circumstances was filed in
federal court against  certain of our present and former officers and directors.
The class  action  cases were later  consolidated  and the amended  consolidated
class action  complaint,  styled  Richard  Moore v.  Halliburton,  was filed and
served upon us on or about April 11, 2003. In early May 2003, we announced  that
we had entered into a written  memorandum  of  understanding  setting  forth the
terms upon which the  consolidated  cases would be settled.  The  memorandum  of
understanding called for Halliburton to pay $6 million, which is to be funded by
insurance  proceeds.  After  that  announcement,  one  of  the  lead  plaintiffs
announced that it was dissatisfied with the lead plaintiffs'  counsel's handling
of  settlement  negotiations  and  what  the  dissident  plaintiff  regarded  as
inadequate communications by the lead plaintiffs' counsel. It is unclear whether
this dispute within the ranks of the lead  plaintiffs  will have any impact upon
the process of approval of the  settlement  and whether the dissident  plaintiff
will object to the settlement at the time of the fairness  hearing or opt out of
the class action for settlement purposes.  The process by which the parties will
seek approval of the  settlement  is ongoing.  The  attorneys  representing  the
dissident  plaintiff filed yet another class action case in August 2003 raising,
in addition to allegations similar to those raised in the earlier filed actions,
claims  growing out of the September  1998 Dresser  merger.  We believe that the
allegations in that action,  styled Kimble v. Halliburton  Company,  et al., are
without merit and we intend to vigorously  defend  against them. We also believe
that  those  new  allegations  fall  within  the  scope  of  the  memorandum  of
understanding and that the settlement, if approved and consummated, will dispose
of those  claims in their  entirety.  The parties are awaiting an order from the
court consolidating that action with the others.
         As of the date of this filing, the $6 million settlement amount for the
consolidated  actions and the federal court derivative  action was fully covered
by our directors' and officers'  insurance  carrier.  As such, we have accrued a
contingent  liability for the $6 million  settlement and a $6 million  insurance
receivable from the insurance carrier.
         BJ Services  Company  patent  litigation.  On April 12, 2002, a federal
court jury in Houston,  Texas,  returned a verdict  against  Halliburton  Energy
Services,  Inc. in a patent infringement lawsuit brought by BJ Services Company,
or BJ. The lawsuit alleged that our Phoenix  fracturing fluid infringed a patent
issued to BJ in January  2000 for a method of well  fracturing  using a specific
fracturing fluid. The jury awarded BJ approximately $98 million in damages, plus
pre-judgment interest, and the court enjoined us from further use of our Phoenix
fracturing  fluid. BJ Services'  judgment against us was affirmed by the federal
appellate  court in August 2003.  Thereafter,  we filed a petition for rehearing
before the full federal  circuit court.  That petition was denied by order dated
October 17, 2003. In mid-January 2004 we filed a petition for writ of certiorari
requesting that the United States Supreme Court review and reverse the judgment.
In light of the trial  court's  decision in April 2002,  a total of $102 million
was accrued in the first quarter of 2002, which was comprised of the $98 million
judgment and $4 million in  pre-judgment  interest  costs.  We do not expect the
loss of the use of the  Phoenix  fracturing  fluid  to have a  material  adverse
impact on our overall energy services business.  We have alternative products to
use in our fracturing  operations and have not been using the Phoenix fracturing
fluid since April 2002.
         Anglo-Dutch (Tenge). On October 24,  2003, a Texas  district court jury
returned a verdict  finding a subsidiary of  Halliburton  liable to  Anglo-Dutch
(Tenge) L.L.C.  and Anglo-Dutch  Petroleum  International,  Inc. for 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.  On
January 20,  2004,  the judge in that case entered  judgment against us and our

                                      101


co-defendants,  Ramco  Oil  & Gas, Ltd. and  Ramco  Energy,  PLC  (collectively,
"Ramco"),  jointly and  severally, for the total sum of $106  million.  That sum
includes  approximately  $25  million in  prejudgment  interest  on future  lost
profits  damages which we believe was awarded  countrary to law. A charge in the
amount of $77 million was recorded in the third quarter of  2003 related to this
matter.  In February  2004,  the court ordered the parties to appear on March 8,
2004 at which time the court will  rehear our  motions.  We have  posted cash in
lieu of a bond in the amount of $25 million and intend to  vigorously  prosecute
our  appeal  in the  event  that  the  court  upholds  the jury  verdict  at the
conclusion of the March 8, 2004 hearing.
         Newmont Gold. In July 1998,  Newmont Gold, a gold mining and extraction
company,  filed a lawsuit over the failure of a blower manufactured and supplied
to Newmont by Roots, a former division of Dresser Equipment Group. The plaintiff
alleges that during the manufacturing  process, Roots had reversed the blades on
a component of the blower known as the inlet guide vane  assembly,  resulting in
the blower's  failure and the shutdown of the gold  extraction mill for a period
of  approximately  a month  during 1996.  In January  2002, a Nevada trial court
granted  summary  judgment  to Roots on all  counts  and  Newmont  appealed.  In
February  2004,  the Nevada  Supreme  Court  reversed  the summary  judgment and
remanded the case to the trial court,  holding  that fact issues  existed  which
would  require  trial.  We believe  our  exposure  is no more than $40  million;
however,  we believe that we have valid defenses to Newmont's  claims and intend
to vigorously defend the matter. As of December 31, 2003, we had not accrued any
amounts related to this matter.
         Improper payments  reported to the Securities and Exchange  Commission.
During the second  quarter  2002, we reported to the SEC that one of our foreign
subsidiaries  operating in Nigeria made improper payments of approximately  $2.4
million to entities  owned by a Nigerian  national who held himself out as a tax
consultant  when in fact  he was an  employee  of a  local  tax  authority.  The
payments were made to obtain  favorable  tax treatment and clearly  violated our
Code of Business Conduct and our internal control procedures.  The payments were
discovered  during  an  audit  of  the  foreign  subsidiary.   We  conducted  an
investigation  assisted by outside legal  counsel and,  based on the findings of
the investigation,  we terminated several employees. None of our senior officers
were involved.  We are cooperating with the SEC in its review of the matter.  We
took further action to ensure that our foreign subsidiary paid all taxes owed in
Nigeria. A preliminary  assessment was issued by the Nigerian Tax Authorities in
the second quarter of 2003 of approximately $4 million.  We are cooperating with
the Nigerian  Tax  Authorities  to determine  the total amount due as quickly as
possible.
         Nigerian joint venture.  It has been reported that a French  magistrate
is  investigating  whether  illegal  payments were made in  connection  with the
construction   and   subsequent   expansion  of  a   multi-billion   dollar  gas
liquefication  complex and related  facilities at Bonny Island, in Rivers State,
Nigeria.  TSKJ and other  similarly-owned  entities  have  entered  into various
contracts to build and expand the liquefied  natural gas project for Nigeria LNG
Limited,  which is owned by the Nigerian National Petroleum  Corporation,  Shell
Gas B.V., Cleag Limited (an affiliate of Total) and Agip International B.V. TSKJ
is a private limited  liability  company  registered in Madeira,  Portugal whose
members are Technip SA of France,  Snamprogetti  Netherlands  B.V.,  which is an
affiliate  of ENI SpA of Italy,  JGC  Corporation  of Japan and Kellogg  Brown &
Root,  each of which owns 25% of the venture.  The United  States  Department of
Justice and the SEC have met with  Halliburton  to discuss  this matter and have
asked  Halliburton  for  cooperation and access to information in reviewing this
matter  in  light of the  requirements  of the  United  States  Foreign  Corrupt
Practices  Act.  Halliburton  has engaged  outside  counsel to  investigate  any
allegations and is cooperating with the government's  inquiries.  As of December
31, 2003, we had not accrued any amounts related to this investigation.
         Operations in Iran. We received and responded to an inquiry in mid-2001
from the  Office of  Foreign  Assets  Control,  or OFAC,  of the  United  States
Treasury  Department  with  respect  to  operations  in  Iran  by a  Halliburton
subsidiary  that  is  incorporated  in the  Cayman  Islands.  The  OFAC  inquiry
requested  information  with respect to compliance with the Iranian  Transaction
Regulations.  These regulations  prohibit United States persons from engaging in

                                      102


commercial, financial or trade transactions with Iran, unless authorized by OFAC
or  exempted  by  statute.  Our 2001  written  response  to OFAC  stated that we
believed that we were in full compliance with applicable  sanction  regulations.
In January 2004, we received a follow-up letter from OFAC requesting  additional
information. We are responding to questions raised in the most recent letter. As
of  December  31,  2003,  we  had  not  accrued  any  amounts  related  to  this
investigation.
         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, among others:
              -   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.
         In  addition  to the  federal  laws and  regulations,  states and other
countries  where we do  business  may have  numerous  environmental,  legal  and
regulatory  requirements by 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. Our Health,  Safety and Environment group has several programs in place
to   maintain   environmental   leadership  and  to  prevent  the occurrence  of
environmental contamination.
         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
$31 million as of December 31, 2003 and $48 million as of December 31, 2002. The
liability covers numerous  properties,  and no individual  property accounts for
more than $5 million of the liability balance.  In some instances,  we have been
named a potentially  responsible  party by a regulatory  agency,  but in each of
those  cases,  we do not  believe  we  have  any  material  liability.  We  have
subsidiaries that have been named as potentially  responsible parties along with
other third parties for nine federal and state superfund sites for which we have
established a liability. As of December 31, 2003, those nine sites accounted for
approximately $7 million of our total $31 million liability.
         Letters of credit. In the normal course of business, we have agreements
with banks under which  approximately  $1.2 billion of letters of credit or bank
guarantees  were  outstanding  as of December 31, 2003,  including  $252 million
which relate to our joint ventures' operations.
         In the fourth quarter of 2003, we entered into a senior secured  master
letter of credit  facility  (Master LC Facility) with a syndicate of banks which
covers at least 90% of the face amount of our  existing  letters of credit.  The
Master LC Facility became  effective in December 2003. Each bank has permanently
waived any right that it had to demand cash collateral as a result of the filing
of Chapter 11 proceedings.  In addition, the Master LC Facility provides for the
issuance of new letters of credit, so long as the total facility does not exceed
an amount equal to the amount of the facility at closing plus $250  million,  or
approximately $1.5 billion.
         The  purpose of the  Master LC  Facility  is to provide an advance  for
letter  of  credit  draws,  if any,  as well as to  provide  collateral  for the
reimbursement  obligations for the letters of credits. Advances under the Master
LC Facility will remain  available until the earlier of June 30, 2004 or when an
order  confirming  the  proposed  plan  of  reorganization   becomes  final  and
non-appealable.  At that  time,  all  advances  outstanding  under the Master LC
Facility, if any, will become term loans payable in full on November 1, 2004 and
all other letters of credit shall cease to be subject to the terms of the Master
LC Facility.  As of December 31, 2003, there were no outstanding  advances under
the Master LC Facility.

                                      103


         The Master LC Facility requires the same asset collateralization and is
subject to similar terms and conditions as our Revolving  Credit  Facility.  See
Note 10.
         Liquidated damages. Many of our engineering and construction  contracts
have  milestone due dates that must be met or we may be subject to penalties for
liquidated  damages  if claims  are  asserted  and we were  responsible  for the
delays. These generally relate to specified activities within a project by a set
contractual  date or achievement of a specified level of output or throughput of
a plant we  construct.  Each  contract  defines  the  conditions  under  which a
customer may make a claim for liquidated damages. In most instances,  liquidated
damages  are not asserted by the  customer but the potential to do so is used in
negotiating claims and closing out the contract.  We had not accrued liabilities
for $243  million at December  31, 2003 and $364 million at December 31, 2002 of
liquidated  damages  we could  incur  based  upon  completing  the  projects  as
forecasted as we consider the  imposition of liquidated  damages to be unlikely.
We believe we have valid claims for schedule  extensions  against the  customers
which would eliminate our liability for liquidated damages.
         Leases.  We  are  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
were as follows:


  Millions of dollars       2003         2002         2001
----------------------------------------------------------------
                                             
  Rental expense            $   193      $  149       $   172
================================================================

         Future total rentals on noncancelable  operating leases are as follows:
$143 million in 2004;  $96 million in 2005;  $80 million in 2006; $58 million in
2007; $45 million in 2008; and $267 million thereafter.

Note 14. Income Taxes
         The  components  of  the   (provision)/benefit   for  income  taxes  on
continuing operations are:


                                                       Years ended December 31
                                            -------------------------------------------
          Millions of dollars                   2003           2002           2001
          -----------------------------------------------------------------------------
                                                                   
          Current income taxes:
          Federal                             $   (167)      $     71       $   (146)
          Foreign                                 (181)          (173)          (157)
          State                                      1              4            (20)
          -----------------------------------------------------------------------------
          Total Current                           (347)           (98)          (323)
          -----------------------------------------------------------------------------
          Deferred income taxes:
          Federal                                   80            (11)           (58)
          Foreign                                   25             11             (8)
          State                                      8             18              5
          -----------------------------------------------------------------------------
          Total Deferred                           113             18            (61)
          -----------------------------------------------------------------------------
          Provision for Income Taxes          $   (234)      $    (80)      $   (384)
          =============================================================================

         The  United  States  and  foreign  components  of  income  (loss)  from
continuing  operations  before  income  taxes,  minority  interest and change in
accounting principle are as follows:


                               Years ended December 31
                        ---------------------------------------
Millions of dollars         2003         2002         2001
---------------------------------------------------------------
                                            
United States             $    254      $   (537)    $    565
Foreign                        358           309          389
---------------------------------------------------------------
Total                     $    612      $   (228)    $    954
===============================================================


                                      104


         The  reconciliations  between the actual  provision for income taxes on
continuing  operations and that computed by applying the United States statutory
rate to income from continuing operations before income taxes, minority interest
and change in accounting principle are as follows:


                                                                    Years ended December 31
                                                             --------------------------------------
                                                                2003         2002         2001
---------------------------------------------------------------------------------------------------
                                                                                 
United States Statutory rate                                    35.0%        35.0%        35.0%
    Rate differentials on foreign earnings                       0.8         (1.8)         3.4
    State income taxes, net of federal income tax benefit        0.9          0.9          1.4
    Prior years                                                  1.6         14.5            -
    Dispositions                                                (1.6)       (12.3)           -
    Valuation allowance                                            -        (71.5)           -
    Other items, net                                             1.5            -          0.5
---------------------------------------------------------------------------------------------------
    Total effective tax rate on continuing operations           38.2%       (35.2)%       40.3%
===================================================================================================

         The asbestos accruals,  the losses on the Bredero-Shaw  disposition and
the associated tax benefits net of valuation allowances in continuing operations
during 2002 are the primary  causes of the unusual  2002  effective  tax rate on
continuing operations. There were no significant asbestos charges or related tax
accruals included in continuing operations for 2001 or 2003.
         Our impairment loss on Bredero-Shaw  during 2002 could not be benefited
for tax purposes due to book and tax basis  differences  in that  investment and
the limited  benefit  generated by a capital  loss  carryback.  However,  due to
changes in circumstances  regarding prior years, we are now able to carry back a
portion of the capital loss, which resulted in an $11 million benefit in 2003.
         The primary  components of our deferred tax assets and  liabilities and
the related valuation  allowances,  including  deferred tax accounts  associated
with discontinued operations are as follows:

                                      105



                                                                December 31
                                                       ------------------------------
Millions of dollars                                        2003            2002
-------------------------------------------------------------------------------------
                                                                  
Gross deferred tax assets:
    Asbestos and silica related liabilities              $  1,463       $  1,201
    Employee compensation and benefits                        275            282
    Foreign tax credit carryforward                           113             49
    Capitalized research and experimentation                  100             75
    Accrued liabilities                                       100            102
    Construction contract accounting                           94            114
    Net operating loss carryforwards                           83             81
    Insurance accruals                                         77             78
    Alternative minimum tax credit carryforward                30              5
    Other                                                     191            147
-------------------------------------------------------------------------------------
             Total                                       $  2,526       $  2,134
-------------------------------------------------------------------------------------
Gross deferred tax liabilities:
    Insurance for asbestos and silica related
       liabilities                                       $    631       $    724
    Depreciation and amortization                             129            188
    Nonrepatriated foreign earnings                            36             36
    Other                                                      11             13
-------------------------------------------------------------------------------------
             Total                                       $    807       $    961
-------------------------------------------------------------------------------------
Valuation allowances:
    Future tax attributes related to asbestos
       and silica litigation                             $    624       $    233
    Foreign tax credit limitation                             113             49
    Net operating loss carryforwards                           56             77
    Other                                                       -              7
-------------------------------------------------------------------------------------
             Total                                       $    793       $    366
-------------------------------------------------------------------------------------
Net deferred income tax asset                            $    926       $    807
=====================================================================================

         We have $190 million of net operating  loss  carryforwards  that expire
from 2004 through 2012 and net operating loss  carryforwards of $62 million with
indefinite  expiration  dates. The federal  alternative  minimum tax credits are
available to reduce future United States  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 valuation  allowance  against foreign tax credit
carryovers and certain foreign operating loss carryforwards on the basis that we
believe these assets will not be utilized in the statutory  carryover period. We
also have recorded a valuation  allowance on the asbestos and silica liabilities
based on the anticipated  impact of the future asbestos and silica deductions on
our ability to utilize future foreign tax credits.  We anticipate that a portion
of the asbestos and silica  deductions  will displace future foreign tax credits
and those credits will expire unutilized.

                                      106


Note 15.  Shareholders' Equity and Stock Incentive Plans
         The following tables summarize our common stock and other shareholders'
equity activity:


                                                Capital
                                                  in                                           Accumulated
                                                Excess                                            Other
                                      Common    of Par  Treasury      Deferred     Retained   Comprehensive
(Millions of dollars)                  Stock    Value     Stock     Compensation   Earnings      Income
------------------------------------------------------------------------------------------------------------
                                                                            
Balance at December 31, 2000           $1,132     $259    $(845)      $    (63)     $3,733       $   (288)
============================================================================================================
Cash dividends paid                        -        -        -               -       (215)              -
Reissuance of treasury stock for:
   Stock purchase, compensation and
     incentive plans, net                  2       30       51               -          -               -
   Acquisition                             4       11      140               -          -               -
   Treasury stock purchased                -        -      (34)              -          -               -
   Current year awards, net of tax         -        -        -             (24)         -               -
   Tax benefit from exercise of options    -       (2)       -               -          -               -
------------------------------------------------------------------------------------------------------------
Total dividends and other
   transactions with shareholders          6       39      157             (24)      (215)              -
------------------------------------------------------------------------------------------------------------
Comprehensive income:
   Net income                              -        -        -               -        809               -
   Other comprehensive income,
     net of tax:
     Cumulative translation
       adjustments                         -        -        -               -          -             (32)
     Realization of losses included in
       net income                          -        -        -               -          -             102
     Minimum pension liability
       adjustment, net of income
       taxes of $13                        -        -        -               -          -             (15)
     Unrealized (loss) on
       investments and derivatives         -        -        -               -          -              (3)
------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss)          -        -        -               -        809              52
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001           $1,138     $298    $(688)      $    (87)     $4,327       $   (236)
============================================================================================================

Cash dividends paid                        -        -        -               -       (219)              -
Reissuance of treasury stock for:
   Stock purchase, compensation and
     incentive plans, net                  1      (24)      62               -          -               -
   Stock issued for acquisition            2       24        -               -          -               -
   Treasury stock purchased                -        -       (4)              -          -               -
   Current year awards, net of tax         -        -        -              12          -               -
   Tax benefit from exercise of options    -       (5)       -               -          -               -
------------------------------------------------------------------------------------------------------------
Total dividends and other transactions
   with shareholders                       3       (5)      58              12       (219)              -
------------------------------------------------------------------------------------------------------------
Comprehensive income:
   Net loss                                -        -        -               -       (998)              -
   Other comprehensive income,
     net of tax:
     Cumulative translation
       adjustments                         -        -        -               -          -              69
     Realization of losses included in
       net income                          -        -        -               -          -              15
     Minimum pension liability
       adjustment, net of income
       taxes of $70                        -        -        -               -          -            (130)
     Unrealized gain on
       investments and derivatives         -        -        -               -          -               1
------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss)          -        -        -               -       (998)            (45)
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002           $1,141     $293    $(630)      $    (75)     $3,110       $   (281)
============================================================================================================


                                      107


                                                Capital
                                                  in                                           Accumulated
                                                Excess                                            Other
                                      Common    of Par  Treasury      Deferred     Retained   Comprehensive
(Millions of dollars)                  Stock    Value     Stock     Compensation   Earnings      Income
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002           $1,141   $293    $(630)        $  (75)      $3,110       $ (281)
============================================================================================================
Cash dividends paid                         -      -        -              -         (219)           -
Reissuance of treasury stock for:
   Stock purchase, compensation and
     incentive plans, net                   1    (19)      60              -            -            -
   Treasury stock purchased                 -      -       (7)             -            -            -
   Current year awards, net of tax          -      -        -             11            -            -
   Tax benefit from exercise of options     -     (1)       -              -            -            -
------------------------------------------------------------------------------------------------------------
Total dividends and other transactions
   with shareholders                        1    (20)      53             11         (219)           -
------------------------------------------------------------------------------------------------------------
Comprehensive income:
   Net loss                                 -      -        -              -         (820)           -
   Other comprehensive income,
     net of tax:
     Cumulative translation
       adjustments                          -      -        -              -            -           43
     Realization of losses included in
       net income                           -      -        -              -            -           15
     Minimum pension liability
       adjustment, net of income
       taxes of $25                         -      -        -              -            -          (88)
     Unrealized gain on
       investments and derivatives          -      -        -              -            -           13
------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss)           -      -        -              -         (820)         (17)
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003           $1,142   $273    $(577)        $  (64)      $ 2,071      $ (298)
============================================================================================================




                                                                          December 31
Accumulated other comprehensive income                ----------------------------------------------------
Millions of dollars                                         2003             2002              2001
----------------------------------------------------------------------------------------------------------
                                                                                    
Cumulative translation adjustments                       $    (63)          $  (121)         $  (205)
Pension liability adjustments                                (245)             (157)             (27)
Unrealized gains (losses) on investments
   and derivatives                                             10                (3)              (4)
----------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income             $   (298)          $  (281)         $  (236)
==========================================================================================================




                                                                          December 31
Shares of common stock                                ----------------------------------------------------
Millions of shares                                          2003             2002              2001
----------------------------------------------------------------------------------------------------------
                                                                                      
Issued                                                       457               456              455
In treasury                                                  (18)              (20)             (21)
----------------------------------------------------------------------------------------------------------
Total shares of common stock outstanding                     439               436              434
==========================================================================================================

         Our  1993 Stock and 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  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

                                      108


stock.  At December 31, 2003, 17 million shares were available for future grants
under the 1993 Stock and  Incentive  Plan of which nine  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  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:


                                         Number of        Exercise        Weighted Average
                                           Shares         Price per        Exercise Price
  Stock Options                        (in millions)        Share            per Share
---------------------------------------------------------------------------------------------
                                                                 
  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
---------------------------------------------------------------------------------------------
    Granted                                   2.4        18.60 - 24.76          23.45
    Exercised                                (0.4)        8.28 - 23.52          14.75
    Forfeited                                (1.0)        9.10 - 54.50          32.07
---------------------------------------------------------------------------------------------
  Outstanding at December 31, 2003           19.5      $  9.10 - 61.50       $  31.34
=============================================================================================

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


         Options outstanding at December 31, 2003 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 - 23.79               5.6             7.2         $  18.30               1.8          $  17.57
  $ 23.80 - 32.40               5.4             5.0            28.82               4.3             28.85
  $ 32.41 - 39.54               4.9             5.4            38.44               4.8             38.44
  $ 39.55 - 61.50               3.6             5.7            45.57               2.9             46.90
------------------------------------------------------------------------------------------------------------
  $  9.10 - 61.50              19.5             5.9         $  31.34              13.8          $  34.59
============================================================================================================

         There were 12.5 million  options  exercisable  with a weighted  average
exercise  price of  $34.98  at  December  31,  2002,  and 10.7  million  options
exercisable  with a weighted  average  exercise  price of $34.08 at December 31,
2001.
         All stock options under the 1993 Stock and  Incentive  Plan,  including
options  granted to employees of Dresser  Industries,  Inc. (now DII Industries)
since its acquisition,  are granted at the fair market value of the common stock
at the grant date.

                                      109


         Stock  options  generally  expire 10 years from the grant  date.  Stock
options  under the 1993 Stock and  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 Incentive Plan were
431,865 in 2003,  1,706,643 in 2002,  and 1,484,034 in 2001.  The shares awarded
are net of forfeitures of 248,620 in 2003,  46,894 in 2002, and 170,050 in 2001.
The weighted  average fair market value per share at the date of grant of shares
granted was $22.94 in 2003, $14.95 in 2002, and $30.90 in 2001.
         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 4,000
restricted shares in 2003, 4,400 restricted shares in 2002, and 4,800 restricted
shares in 2001.  At  December  31,  2003,  42,000  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 $22.24 in 2003,  $12.56 in
2002, and $34.35 in 2001.
         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, 2003,  151,850 shares (net of 43,550 shares forfeited) have been
issued.  Forfeitures  were 800 in 2003, 400 in 2002, and 800 in 2001. 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, 2003,  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  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, 2003,
the unamortized amount is $64 million.  We recognized  compensation costs of $20
million in 2003, $38 million in 2002, and $23 million in 2001.
         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.  Through the ESPP, there were  approximately 1.3 million shares
sold in 2003 and approximately 541,000 shares sold in 2002.
         We  account  for these  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.  In
addition,  no cost for the  Employee  Stock  Purchase  Plan is  reflected in net
income because it is not considered a compensatory plan.
         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 2003 or 2002. We  repurchased  1.2 million shares at a cost of $25 million in
2001.

                                      110


Note 16. 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  2003  made the  preferred  stock  purchase  rights
exercisable.

Note 17. Income (Loss) Per Share
         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 (consisting primarily of stock options) with a dilutive effect had
been issued.  The effect of common stock  equivalents on basic weighted  average
shares  outstanding  was an  additional  three  million  shares  in 2003  and an
additional two million shares in 2001.  Excluded from the computation of diluted
income  (loss) per share are  options to  purchase  16 million  shares of common
stock in 2003 and 10 million  shares in 2001.  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.  The shares issuable
upon  conversion of the 3.125%  convertible  senior notes due 2023 (see Note 10)
were not included in the  computation  of diluted  income (loss) per share since
the conditions for conversion had not been met as of December 31, 2003. Loss per
share for  discontinued  operations and net loss for the year ended December 31,
2003 were  antidilutive,  as the  control  number used to  determine  whether to
include any common stock equivalents in the weighted shares  outstanding for the
period is income from continuing operations.
         For 2002, we used the basic weighted  average shares in the calculation
of diluted loss per share as the effect of the common stock  equivalents  (which
totaled two million shares for this period) would be antidilutive based upon the
net loss from continuing operations.
         Included in the  computation of diluted income per common share in 2001
are  rights  we  issued  in  connection  with  the PES  (International)  Limited
acquisition  in 2000 for between  850,000 and 2.1 million  shares of Halliburton
common stock.

Note 18. Financial Instruments and Risk Management
         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.

                                      111


         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.  Beginning in 2003, we designated these contracts related
to engineering and  construction  projects as cash flow hedges.  The ineffective
portion of these  hedges are included in  operating  income in the  accompanying
consolidated  statement  of  operations  and was not  material in the year ended
2003. The unrealized net gains on these cash flow hedges were  approximately $10
million as of December 31, 2003 and are included in other  comprehensive  income
in the  accompanying  consolidated  balance sheet. We expect  approximately  $10
million of the unrealized net gain on these cash flow hedges to be  reclassified
into earnings within a year as most of these cash flow hedges settle in the next
12 months. Changes in the timing or amount of the future cash flows being hedged
could  result in hedges  becoming  ineffective  and, as a result,  the amount of
unrealized gain or loss  associated  with that hedge would be reclassified  from
other  comprehensive  income into  earnings.  At December 31, 2003,  the maximum
length of time over which we are hedging  our  exposure  to the  variability  in
future cash flows  associated with foreign currency  forecasted  transactions is
two years.  In 2002, we did not designate  these derivate  contracts  related to
engineering  and  construction  projects as cash flow hedges.  The fair value of
these contracts was immaterial as of the end of 2003 and 2002.
         Notional  amounts and fair market values.  The notional amounts of open
forward  contracts  and options  contracts for  operations  were $1.1 billion at
December 31, 2003 and $609 million at December 31, 2002. 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.  In addition,  see Note 6 for
further discussion of United States government receivables.

                                      112


         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.
         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.  As of December  31,  2003,  we held no  interest  rate
derivative instruments.
         Fair market value of financial  instruments.  The estimated fair market
value of  long-term  debt was $3.6 billion at December 31, 2003 and $1.3 billion
at December  31,  2002,  as compared to the  carrying  amount of $3.4 billion at
December 31, 2003 and $1.5  billion at December 31, 2002.  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. 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 19. Retirement Plans
         Our  company  and  subsidiaries   have  various  plans  which  cover  a
significant number of their employees.  These plans include defined contribution
plans, defined benefit plans and other postretirement plans.
              -   our   defined    contribution    plans   provide    retirement
                  contributions  in return for  services  rendered.  These plans
                  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 $87 million,  $80 million and $129 million
                  in 2003, 2002 and 2001, respectively;
              -   our defined  benefit  plans  include  both funded and unfunded
                  pension plans, which define an amount of pension benefit to be
                  provided,  usually as a function  of age,  years of service or
                  compensation; and
              -   our  postretirement  medical  plans are  offered  to  specific
                  eligible  employees.  These plans are  contributory.  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.   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.  For another  postretirement
                  medical  plan we have  generally  absorbed the majority of the
                  costs;  however, an amendment was made to this plan in 2003 to
                  limit the company's share of costs.  Total  amendments made in
                  2003  decreased  the  accumulated  benefit  obligation  by $93
                  million.
         On  December  8,  2003,  the  President  signed  into law the  Medicare
Prescription Drug Improvement and Modernization Act of 2003. Because the Act was
passed after the measurement date used for our retirement  plans, its impact has
not been  reflected in any amounts  disclosed  in the  financial  statements  or

                                      113


accompanying  notes. We are currently reviewing the effects the Act will have on
our plans and expect to complete that review  during 2004.  In addition,  we are
waiting  for  guidance  from the United  States  Department  of Health and Human
Services on how the employer subsidy provision will be administered and from the
Financial  Accounting  Standards  Board on how the  impact of the Act  should be
recognized in our financial statements.
         Plan  assets,  expenses  and  obligation  for  retirement  plans in the
following tables include both continuing and discontinued  operations.  We use a
September  30  measurement  date for our  international  plans and an October 31
measurement date for our domestic plans.


                                                        Pension Benefits
                                           -------------------------------------------         Other
                                            United                United                   Postretirement
Benefit obligations                         States      Int'l     States      Int'l           Benefits
------------------------------------------------------------------------------------------------------------
Millions of dollars                                2003                  2002               2003     2002
------------------------------------------------------------------------------------------------------------
                                                                                   
Change in benefit obligation
Benefit obligation at beginning of year      $  144     $2,239    $   140     $1,968        $ 186    $ 157
Service cost                                      1         72          1         72            1        1
Interest cost                                    10        120          9        102           12       11
Plan participants' contributions                  -         17          -         14           13       11
Effect of business combinations and new plans     -         12          -         70            -        -
Amendments                                        -          -          1         (4)         (93)       -
Divestitures                                      -        (56)         -         (5)           -        -
Settlements/curtailments                          -          4         (1)        (1)           -        -
Currency fluctuations                             -         54          -        102            -        -
Actuarial gain/(loss)                            18        107          5        (27)           4       33
Benefits paid                                   (13)       (68)       (11)       (52)         (26)     (27)
------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year            $  160     $2,501    $   144     $2,239        $  97    $ 186
============================================================================================================
Accumulated benefit obligation
   at end of year                            $  158     $2,230    $   142     $2,032        $   -    $   -
============================================================================================================





                                                      Pension Benefits
                                           ---------------------------------------          Other
                                           United              United                  Postretirement
Plan assets                                States     Int'l    States     Int'l           Benefits
--------------------------------------------------------------------------------------------------------
Millions of dollars                               2003                2002              2003     2002
--------------------------------------------------------------------------------------------------------
                                                                               
Change in plan assets
Fair value of plan assets at beginning
   of year                                  $ 113    $ 1,886    $ 130     $1,827        $   -    $   -
Actual return on plan assets                    8        152       (6)       (69)           -        -
Employer contributions                          2         53        1         36           13       16
Settlements and transfers                       -        (33)      (1)         -            -        -
Plan participants' contributions                3         17        -         14           13       11
Effect of business combinations and new plans   -          -        -         45            -        -
Divestitures                                    -        (47)       -         (5)           -        -
Currency fluctuations                           -         43        -         89            -        -
Benefits paid                                 (13)       (68)     (11)       (51)         (26)     (27)
--------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year    $ 113    $ 2,003    $ 113     $1,886        $   -    $   -
========================================================================================================



                                      114


         Our pension plan  weighted-average  asset  allocations  at December 31,
2003 and 2002 and the target  allocations  for 2004,  by asset  category  are as
follows:


                                                    Percentage of Plan Assets at Year End
                                           ---------------------------------------------------------
                            Target          United States    Int'l     United States       Int'l
                          Allocation       ---------------------------------------------------------
                             2004                    2003                         2002
----------------------------------------------------------------------------------------------------
                                                                            
Asset category
   Equity securities      45% - 70%              45%          63%           44%             61%
   Debt securities        30% - 55%              23%          34%           26%             37%
   Real estate                0%                  0%           0%            0%              0%
   Other - STIF            0% - 5%               32%           3%           30%              2%
----------------------------------------------------------------------------------------------------
Total                                           100%          100%         100%            100%
====================================================================================================

         Our   investment   strategy   varies  by  country   depending   on  the
circumstances  of the  underlying  plan.  Typically  less  mature  plan  benefit
obligations are funded by using more equity securities as they are  expected  to
achieve  long-term  growth while exceeding  inflation.  More mature plan benefit
obligations  are funded using more fixed income  securities as they are expected
to produce current income with limited  volatility.  Risk  management  practices
include the use of multiple  asset classes and investment  managers  within each
asset class for  diversification  purposes.  Specific  guidelines for each asset
class and investment manager are implemented and monitored.
         Funded status
         The funded status of the plans,  reconciled  to the amount  reported on
the statement of financial position, is as follows:


                                                    Pension Benefits
                                       -------------------------------------------           Other
                                        United                United                    Postretirement
                                        States      Int'l     States      Int'l            Benefits
----------------------------------------------------------------------------------------------------------
End of year (in millions of dollars)           2003                  2002               2003      2002
----------------------------------------------------------------------------------------------------------
                                                                                
Fair value of plan assets at end of year $   113    $2,003    $   113     $1,886        $   -     $   -
Benefit obligation at end of year            160     2,501        144      2,239           97       186

Funded status                            $   (47)   $ (498)   $   (31)    $ (353)       $ (97)    $(186)
Employer contribution                          -         5          -          -            2         2
Unrecognized transition                       (1)       (1)         -         (2)           -         -
obligation/(asset)
Unrecognized actuarial (gain)/loss            76       594         56        477           23        20
Unrecognized prior service cost/(benefit)      1        (1)         1          -          (90)        2
Purchase accounting adjustment                 -       (77)         -        (70)           -         -
----------------------------------------------------------------------------------------------------------
Net amount recognized                    $    29    $   22    $    26     $   52        $(162)    $(162)
==========================================================================================================


                                      115


         Amounts  recognized  in the  statement  of  financial  position  are as
follows:


                                                  Pension Benefits
                                         ------------------------------------           Other
                                         United            United                   Postretirement
                                         States     Int'l  States    Int'l             Benefits
------------------------------------------------------------------------------------------------------
End of year (in millions of dollars)           2003              2002              2003       2002
------------------------------------------------------------------------------------------------------
                                                                            
Amounts recognized in the consolidated
    balance sheets
Prepaid benefit cost                      $  31     $ 95    $  30    $  102        $   -      $   -
Accrued benefit liability including
    additional minimum liability            (76)    (361)     (59)     (250)         162        162
Intangible asset                              -        8        2        12            -          -
Accumulated other comprehensive income,
    net of tax                               48      197       35       122            -          -
Deferred tax asset                           26       83       18        66            -          -
------------------------------------------------------------------------------------------------------
Net amount recognized                     $  29     $ 22    $  26    $   52        $ 162      $ 162
======================================================================================================

         We  recognized  an  additional   minimum  pension   liability  for  the
underfunded  defined  benefit  plans of $107 million in 2003 and $212 million in
2002, of which $88 million was recorded as "Other comprehensive  income" in 2003
and $130  million was  recorded  as "Other  comprehensive  income" in 2002.  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.
         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, 2003 and 2002 are as
follows:


                                           Pension Benefits
                                     ------------------------------
Millions of dollars                      2003            2002
-------------------------------------------------------------------
                                                 
Projected benefit obligation           $   2,630       $  2,319
Accumulated benefit obligation         $   2,363       $  2,121
Fair value of plan assets              $   2,087       $  1,942
===================================================================

         Expected cash flows
         Funding  requirements  for each plan are determined  based on the local
laws of the country  where such plan resides.  In certain  countries the funding
requirements are mandatory while in other countries they are  discretionary.  We
currently expect to contribute $64 million to our international pension plans in
2004. For our domestic plans we expect our  contributions  to be in the range of
$1  million  to $3  million  in  2004.  We  may  make  additional  discretionary
contributions,  which will be  determined  after the  actuarial  valuations  are
complete.  The United States  Congress is expected to consider  pension  funding
relief  legislation  when they reconvene for 2004. The actual  contributions  we
make  during  2004 may be impacted  by the final  legislative  outcome,  but the
impact cannot be reasonably estimated at this time.

                                      116


         Net periodic cost


                                          Pension Benefits
                          ---------------------------------------------------             Other
                          United           United            United                   Postretirement
                          States   Int'l   States    Int'l   States   Int'l              Benefits
End of year               --------------------------------------------------------------------------------
(millions of dollars)         2003              2002             2001            2003    2002     2001
----------------------------------------------------------------------------------------------------------
                                                                        
Components of net
   periodic benefit
   cost
Service cost                $  1     $ 72    $  1    $  72     $  2    $  60       $  1    $  1    $   2
Interest cost                 10      120       9      102       13       89         12      11       15
Expected return on
   plan assets               (12)    (136)    (13)    (106)     (18)     (95)         -       -        -
Transition amount              -       (1)      -       (2)       -       (2)         -       -        -
Amortization of prior
   service cost                -        -      (2)      (6)      (2)      (6)         -       -       (3)
Settlements/curtailments       2        -       -       (2)      16        -          -       -     (221)
Recognized actuarial
   (gain)/loss                 1       18       1        3       (1)      (9)         1      (1)      (1)
----------------------------------------------------------------------------------------------------------
Net periodic benefit
   (income)/cost            $  2     $ 73    $ (4)   $  61     $ 10    $  37       $ 14    $ 11    $(208)
==========================================================================================================

         Assumptions
         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:


                                             Pension Benefits
Weighted-average        ------------------------------------------------------------            Other
assumptions used to     United             United                United                    Postretirement
determine benefit       States    Int'l    States      Int'l     States     Int'l             Benefits
obligations at          --------------------------------------------------------------------------------------
December 31                   2003                 2002                 2001            2003    2002   2001
--------------------------------------------------------------------------------------------------------------
                                                                            
Discount rate           6.25%   2.5-18.0%   7.0%    5.25-20.0%    7.25%   5.0-8.0%      6.25%   7.0%   7.25%
Rate of compensation
    increase             4.5%   2.0-15.5%   4.5%     3.0-21.0%     4.5%   3.0-7.0%      N/A     N/A    N/A
==============================================================================================================




Weighted-average                             Pension Benefits
assumptions used to     ------------------------------------------------------------            Other
determine net           United                United             United                    Postretirement
periodic benefit cost   States     Int'l      States    Int'l    States     Int'l             Benefits
for years ended         ------------------------------------------------------------------------------------
December 31                     2003                2002                2001            2003    2002   2001
------------------------------------------------------------------------------------------------------------
                                                                            
Discount rate            7.0%   2.5-20.0%    7.25%   5.0-20.0%   7.5%    5.0-8.0%     7.0%    7.25%  7.50%
Expected return on
    plan assets         8.75%   5.5-8.0%      9.0%    5.5-9.0%   9.0%    5.5-9.0%      N/A     N/A    N/A
Rate of compensation
    increase             4.5%   2.0-21.0%     4.5%   3.0-21.0%   4.5%    3.0-7.0%      N/A     N/A    N/A
=============================================================================================================


                                      117


         The overall  expected  long-term rate of return on assets is determined
based upon  an evaluation  of our plan assets, historical trends  and experience
taking into account current and expected market conditions.


Assumed health care cost trend
rates at December 31                    2003         2002         2001
---------------------------------------------------------------------------
                                                         
Health care cost trend rate
    assumed for next year               13.0%        13.0%        11.0%
Rate to which the cost trend
    rate is assumed to decline
    (the ultimate trend rate)           5.0%         5.0%         5.0%
Year that the rate reached the
    ultimate trend rate                 2008         2007         2005
===========================================================================

         Assumed  health  care  cost  trend  rates  are not  expected  to have a
significant  impact 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:


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

Note 20. Related Companies
         We conduct some of our  operations  through 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 2002 (whose  results are  reported in our  Production
Optimization  segment)  and the  partnerships  created  to  construct  the Alice
Springs to Darwin rail line in  Australia  (whose  results  are  reported in our
Engineering and Construction segment).
         Combined  summarized  financial   information  for  all  jointly  owned
operations that are accounted for under the equity method is as follows:


                                         Years ended December 31
  Combined Operating Results      ---------------------------------------
  Millions of dollars                 2003         2002         2001
-------------------------------------------------------------------------
                                                      
  Revenues                           $  2,576     $  1,948     $  1,987
=========================================================================
  Operating income                   $    124     $    200     $    231
=========================================================================
  Net income                         $     74     $    159     $    169
=========================================================================


                                      118




                                           December 31
   Combined Financial Position    -----------------------------
   Millions of dollars                 2003          2002
---------------------------------------------------------------
                                             
   Current assets                    $  1,355      $  1,404
   Noncurrent assets                    3,044         1,876
---------------------------------------------------------------
   Total                             $  4,399      $  3,280
===============================================================
   Current liabilities               $  1,332      $  1,155
   Noncurrent liabilities               2,277         1,367
   Minority interests                       3             -
   Shareholders' equity                   787           758
---------------------------------------------------------------
   Total                             $  4,399      $  3,280
===============================================================

Note 21. Other Discontinued Operations
         In addition to the asbestos and silica items  recorded in  discontinued
operations for 2003,  2002 and 2001 (see Note 11),  discontinued  operations for
2003 also  includes a $10  million  pretax  release of  environmental  and legal
accruals.  The  accruals are no longer  required as they related to  indemnities
associated with the 2001 disposition of Dresser  Equipment Group. The tax effect
of the release is $1 million.
         In late 1999 and early 2000, we sold our interest in two joint ventures
that were a significant  portion of our Dresser  Equipment Group. In April 2001,
we sold the  remaining  Dresser  Equipment  Group  businesses.  We recorded  $37
million of income (or $22  million,  net of tax effect of $15  million)  for the
financial  results  of  Dresser  Equipment  Group  through  March  31,  2001  as
discontinued operations.
         Gain on disposal of discontinued operations. As a result of the sale of
Dresser  Equipment  Group,  we  recognized a pretax gain of $498  million  ($299
million after tax). As part of the terms of the transaction,  we retained a 5.1%
equity interest of Class A common 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.
         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.


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

Note 22. Reorganization of Business Operations in 2002
         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
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 subsidiaries facilitated the
separation,  organizationally  and financially of our business groups,  which we
believe  will  significantly  improve  operating  efficiencies  in  both,  while
streamlining  management and easing  manpower  requirements.  In addition,  many

                                      119


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  remained  in  accruals  for  severance
arrangements and  approximately $2 million for other items at December 31, 2002.
During 2003, we charged $9 million of severance and other  reorganization  costs
against  the  restructuring  reserve,  leaving a balance  in the  reserve  as of
December 31, 2003 of approximately $1 million.
         Although we have no specific plans currently,  the reorganization would
facilitate  separation of the ownership of the two business groups in the future
if we identify an opportunity  that produces  greater value for our shareholders
than continuing to own both business groups.

Note 23. New Accounting Pronouncements
         On January 1, 2003 we adopted the Financial  Accounting Standards Board
(FASB) Statement of Financial  Accounting  Standard (SFAS) No. 143,  "Accounting
for Asset Retirement  Obligations" which addresses the financial  accounting and
reporting for obligations  associated with the retirement of tangible long-lived
assets and the associated  assets'  retirement costs. SFAS No. 143 requires that
the fair value of a liability  associated with an asset retirement be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated retirement costs are capitalized as part of the carrying
amount of the long-lived asset and subsequently depreciated over the life of the
asset.  The adoption of this  standard  resulted in a charge of $8 million after
tax as a  cumulative  effect  of a change  in  accounting  principle.  The asset
retirement obligations primarily relate to the removal of leasehold improvements
upon exiting certain lease  arrangements and restoration of land associated with
the  mining of  bentonite.  The total  liability  recorded  at  adoption  and at
December 31, 2003 for asset retirement obligations and the related accretion and
depreciation expense for all periods presented is immaterial to our consolidated
financial position and results of operations.
         The FASB issued FASB Interpretation No. 46,  "Consolidation of Variable
Interest  Entities,  an Interpretation of ARB No. 51" (FIN 46), in January 2003.
In December  2003,  the FASB  issued FIN 46R, a revision  which  supersedes  the
original interpretation and includes:
              -   the  deferral  of  the effective  date  for  certain  variable
                  interests until the first quarter of 2004;
              -   additional   scope  exceptions  for   certain  other  variable
                  interests; and
              -   additional guidance  on what  constitutes a  variable interest
                  entity.
         FIN 46  requires  the  consolidation  of  entities  in which a  company
absorbs a majority of another entity's  expected losses,  receives a majority of
the other entity's expected residual returns, or both, as a result of ownership,
contractual  or  other  financial  interests  in the  other  entity.  Currently,
entities are generally  consolidated based upon a controlling financial interest
through ownership of a majority voting interest in the entity.
         We have identified the following variable interest entities:
              -   during 2001,  we formed a joint  venture in which we own a 50%
                  equity interest with two other unrelated partners, each owning
                  a 25%  equity  interest.  This  variable  interest  entity was
                  formed to construct,  operate and service certain assets for a
                  third  party  and  was  funded  with  third  party  debt.  The
                  construction  of the assets is  expected  to be  completed  in



                                      120


                  2004,  and the operating and service  contract  related to the
                  assets  extends  through  2023.  The  proceeds  from  the debt
                  financing  are being used to construct  the assets and will be
                  paid down with cash flows  generated  during the operation and
                  service  phase of the  contract  with the third  party.  As of
                  December 31, 2003,  the joint venture had total assets of $157
                  million and total  liabilities of $155 million.  Our aggregate
                  exposure  to loss as a result  of our  involvement  with  this
                  joint  venture  is  limited  to  our  equity   investment  and
                  subordinated debt of $11 million and any future losses related
                  to the  construction  and operation of the assets.  We are not
                  the primary  beneficiary.  The joint  venture is accounted for
                  under the equity method of accounting in our  Engineering  and
                  Construction Group segment; and
              -   our  Engineering and  Construction  Group is involved in three
                  projects  executed  through joint  ventures to design,  build,
                  operate and maintain roadways for certain government agencies.
                  We have a 25% ownership  interest in these joint  ventures and
                  account for them under the equity method. These joint ventures
                  are  considered   variable  interest  entities  as  they  were
                  initially  formed  with  little  equity   contributed  by  the
                  partners.  The joint ventures have obtained  financing through
                  third  parties  which is not  guaranteed by us. We are not the
                  primary   beneficiary   of  these  joint  ventures  and  will,
                  therefore,  continue  to  account  for them  using the  equity
                  method.  As of December  31,  2003,  these joint  ventures had
                  total  assets of $1.3  billion and total  liabilities  of $1.3
                  billion. Our maximum exposure to loss is limited to our equity
                  investments in and loans to the joint  ventures  (totaling $40
                  million  at  December  31,  2003) and  our share of any future
                  losses to the construction of these roadways.

                                      121



                               HALLIBURTON COMPANY
                             Selected Financial Data
                                   (Unaudited)

                                                                        Years ended December 31
  Millions of dollars and shares                 ----------------------------------------------------------------------
  except per share and employee data                 2003          2002          2001          2000           1999
  ---------------------------------------------------------------------------------------- ----------------------------
                                                                                            
  Total revenues                                   $ 16,271      $ 12,572      $ 13,046      $ 11,944      $   12,313
  =====================================================================================================================
  Total operating income (loss)                         720          (112)        1,084           462             401
  Nonoperating expense, net                            (108)         (116)         (130)         (127)            (94)
  ---------------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations
      before income taxes and minority interest         612          (228)          954           335             307
  Provision for income taxes                           (234)          (80)         (384)         (129)           (116)
  Minority interest in net income of
      consolidated subsidiaries                         (39)          (38)          (19)          (18)            (17)
  ---------------------------------------------------------------------------------------------------------------------
  Income (loss) from continuing operations         $    339      $   (346)     $    551      $    188      $      174
  =====================================================================================================================
  Income (loss) from discontinued operations       $ (1,151)     $   (652)     $    257      $    313      $      283
  =====================================================================================================================
  Net income (loss)                                $   (820)     $   (998)     $    809      $    501      $      438
  =====================================================================================================================
  Basic income (loss) per share
      Continuing operations                        $   0.78      $  (0.80)     $   1.29      $   0.42      $     0.40
      Net income (loss)                               (1.89)        (2.31)         1.89          1.13            1.00
  Diluted income (loss) per share
      Continuing operations                            0.78         (0.80)         1.28          0.42            0.39
      Net income (loss)                               (1.88)        (2.31)         1.88          1.12            0.99
  Cash dividends per share                             0.50          0.50          0.50          0.50            0.50
  Return on average shareholders' equity             (26.86)%      (24.02)%       18.64%        12.20%          10.49%
  ---------------------------------------------------------------------------------------------------------------------
  Financial position
  Net working capital                              $  1,377      $  2,288      $  2,665      $  1,742      $    2,329
  Total assets                                       15,463        12,844        10,966        10,192           9,639
  Property, plant and equipment, net                  2,526         2,629         2,669         2,410           2,390
  Long-term debt (including current maturities)       3,437         1,476         1,484         1,057           1,364
  Shareholders' equity                                2,547         3,558         4,752         3,928           4,287
  Total capitalization                                6,002         5,083         6,280         6,555           6,590
  Shareholders' equity per share                       5.80          8.16         10.95          9.20            9.69
  Average common shares outstanding (basic)             434           432           428           442             440
  Average common shares outstanding (diluted)           437           432           430           446             443
  ---------------------------------------------------------------------------------------------------------------------
  Other financial data
  Capital expenditures                             $   (515)     $   (764)     $   (797)     $   (578)     $     (520)
  Long-term borrowings (repayments), net              1,896           (15)          412          (308)            (59)
  Depreciation, depletion and amortization
      expense                                           518           505           531           503             511
  Goodwill amortization included in depreciation,
      depletion and amortization expense                  -             -            42            44              33
  Payroll and employee benefits                      (5,154)       (4,875)       (4,818)       (5,260)         (5,647)
  Number of employees                               101,381        83,000        85,000        93,000         103,000
  =====================================================================================================================


                                      122



                               HALLIBURTON COMPANY
                   Quarterly Data and Market Price Information
                                   (Unaudited)

                                                                              Quarter
                                                      --------------------------------------------------------
Millions of dollars except per share data                 First         Second        Third         Fourth         Year
----------------------------------------------------------------------------------------------------------------------------
                                                                                                   
2003
Revenues                                               $   3,060        $ 3,599       $ 4,148       $ 5,464       $16,271
Operating income                                             142             71           204           303           720
Income from continuing operations                             59             42            92           146           339
Loss from discontinued operations                             (8)           (16)          (34)       (1,093)       (1,151)
Cumulative effect of change in accounting
    principal, net of tax benefit of $5                       (8)             -             -             -            (8)
Net income (loss)                                             43             26            58          (947)         (820)
Earnings per share:
    Basic income (loss) per share:
       Income (loss) from continuing operations             0.14            0.09          0.21         0.34          0.78
       Loss from discontinued operations                   (0.02)          (0.03)        (0.08)       (2.52)        (2.65)
Cumulative effect of change in accounting
    principal, net of tax benefit                          (0.02)             -             -            -          (0.02)
       Net income (loss)                                    0.10            0.06          0.13        (2.18)        (1.89)
    Diluted income (loss) per share:
       Income (loss) from continuing operations             0.14            0.09          0.21         0.34          0.78
       Loss from discontinued operations                   (0.02)          (0.03)        (0.08)       (2.51)        (2.64)
Cumulative effect of change in accounting
    principal, net of tax benefit                          (0.02)             -             -            -          (0.02)
       Net income (loss)                                    0.10            0.06          0.13        (2.17)        (1.88)
Cash dividends paid per share                              0.125           0.125         0.125        0.125          0.50
Common stock prices (1)
    High                                                   21.79           24.97         25.90        27.20         27.20
    Low                                                    17.20           19.98         20.50        22.80         17.20
============================================================================================================================
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 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 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
============================================================================================================================

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



                                      123


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
23, 2004 (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 11 and 12 of this annual report.

Audit Committee Financial Expert
         In the business judgment of the Board of Directors, all five members of
the Audit Committee,  Robert L. Crandall,  Kenneth T. Derr, W. R. Howell, Ray L.
Hunt and C. J. Silas,  are independent and have accounting or related  financial
management  experience  required  under  the  listing  standards  and have  been
designated by the Board of Directors as "audit committee financial experts".

Item 11. Executive Compensation.
         This  information  is  incorporated  by  reference  to the  Halliburton
Company  Proxy  Statement  dated  March 23,  2004 (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 2003,"  "Aggregated Option Exercises in Fiscal 2003 and December 31, 2003
Option Values," "Long-term Incentive Plans - Awards in Fiscal 2003," "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 23,  2004 (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 23,  2004 (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 23,  2004 (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 23,  2004 (File No.  1-3492),  under the
caption "Certain Relationships and Related Transactions."

Item 14. Principal Accounting Fees and Services.
         This  information  is  incorporated  by  reference  to the  Halliburton
Company  Proxy  Statement  dated  March 23,  2004 (File No.  1-3492),  under the
caption "Fees Paid to KPMG LLP."

                                      124


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 63 and 64 and pages 65 through 121 of this annual
             report. See index on page 14.

    2. Financial Statement Schedules:                                Page No.

             Report on supplemental schedule of KPMG LLP               139

             Schedule II - Valuation and qualifying accounts
             for the three years ended December 31, 2003               140

             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

      2.1             Disclosure Statement  for the Proposed  Joint Pre-packaged
                      Plan   of   Reorganization   for  Mid-Valley,   Inc.,  DII
                      Industries, LLC, Kellogg Brown & Root, Inc., KBR Technical
                      Services,   Inc.,  Kellogg   Brown   &   Root  Engineering
                      Corporation, Kellogg  Brown & Root International,  Inc. (a
                      Delaware corporation), Kellogg Brown & Root International,
                      Inc.  (a Panamanian  corporation),  and BPM  Minerals, LLC
                      under  Chapter 11  of the  United  States Bankruptcy  Code
                      dated  September 18,  2003 (incorporated  by  reference to
                      Exhibit 99 to Halliburton's Form 8-K dated as of September
                      22, 2003, File No. 1-3492).

      2.2             Supplemental Disclosure  Statement for First Amended Joint
                      Pre-packaged Plan of Reorganization for  Mid-Valley, Inc.,
                      DII  Industries, LLC,  Kellogg  Brown  & Root,  Inc.,  KBR
                      Technical Services, Inc., Kellogg Brown & Root Engineering
                      Corporation, Kellogg Brown &  Root International,  Inc. (a
                      Delaware corporation), Kellogg Brown & Root International,
                      Inc. (a  Panamanian  corporation), and  BPM  Minerals, LLC
                      under  Chapter 11  of the  United  States  Bankruptcy Code
                      dated November  14, 2003  (incorporated  by  reference  to
                      Exhibit 99 to Halliburton's Form 8-K dated as of  November
                      19, 2003, File No. 1-3492).

      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).

                                      125


      3.2             By-laws of Halliburton revised effective February 12, 2003
                      (incorporated by reference to Exhibit 3.2 to Halliburton's
                      Form 10-K for  the year ended  December 31, 2002, File No.
                      1-3492).

      4.1             Form of debt security of 8.75% Debentures due February 12,
                      2021  (incorporated by  reference  to Exhibit  4(a) to the
                      Form 8-K of Halliburton Company, now  known as Halliburton
                      Energy  Services,  Inc.  (the  Predecessor)  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).

      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).

                                      126


      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  $11  million  in the aggregate at
                      December  31,   2003,  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 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).

      4.14            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).

*     4.15            Second Supplemental Indenture dated as of October 27, 2003
                      between DII  Industries, LLC  and JPMorgan  Chase Bank, as
                      Trustee, to  the Indenture  dated as of April 18, 1996, as
                      supplemented by  the First Supplemental Indenture dated as
                      of August 6, 1996.

*     4.16            Third Supplemental Indenture dated as of December 12, 2003
                      among DII  Industries, LLC, Halliburton and JPMorgan Chase
                      Bank, as  Trustee, to  the Indenture dated as of April 18,
                      1996, as  supplemented by the First Supplemental Indenture
                      dated as  of August  6, 1996  and the  Second Supplemental
                      Indenture dated as of October 27, 2003.

      4.17            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).

                                      127


      4.18            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 (incorporated  by reference to
                      Exhibit 4.22 to Halliburton's Form 10-K for the year ended
                      December 31, 2002, File No. 1-3492).

      4.19            Senior  Indenture  dated  as  of  June  30,  2003  between
                      Halliburton   and   JPMorgan   Chase   Bank,   as  Trustee
                      (incorporated by reference to Exhibit 4.1 to Halliburton's
                      Form  10-Q for  the quarter  ended  June  30,  2003,  File
                      No. 1-3492).

      4.20            Form of note  of 3.125% Convertible  Senior Notes due July
                      15, 2023 (included as Exhibit A to Exhibit 4.19 above).

      4.21            Registration  Rights Agreement  dated as of  June 30, 2003
                      among  Halliburton and  Citigroup  Global  Markets,  Inc.,
                      Goldman, Sachs  & Co. and J.P.  Morgan Securities Inc., as
                      representatives  of  the   several  Purchasers   named  in
                      Schedule I  of the Purchase Agreement dated as of June 24,
                      2003  (incorporated   by  reference  to   Exhibit  4.3  to
                      Halliburton's   Registration   Statement   on   Form  S-3,
                      Registration No. 333-110035).

      4.22            Senior  Indenture  dated as  of October  17, 2003  between
                      Halliburton   and   JPMorgan   Chase   Bank,   as  Trustee
                      (incorporated by reference to Exhibit 4.1 to Halliburton's
                      Form  10-Q for the quarter  ended September 30, 2003, File
                      No. 1-3492).

      4.23            First Supplemental  Indenture dated as of October 17, 2003
                      between  Halliburton  and JPMorgan Chase Bank, as Trustee,
                      to the  Senior  Indenture  dated as of  October  17,  2003
                      (incorporated by reference to Exhibit 4.2 to Halliburton's
                      Form 10-Q for the quarter ended  September 30, 2003,  File
                      No. 1-3492).

      4.24            Form of note of floating rate senior notes due October 17,
                      2005 (included as Exhibit A to Exhibit 4.23 above).

      4.25            Form of  note of  5.5% senior  notes due  October 15, 2010
                      (included as Exhibit B to Exhibit 4.23 above).

      4.26            Registration Rights Agreement dated as of October 17, 2003
                      among  Halliburton   and  J.P.   Morgan  Securities  Inc.,
                      Citigroup  Global Markets, Inc. and  Goldman, Sachs & Co.,
                      as  representatives  of the  several Purchasers  named  in
                      Schedule I of the  Purchase Agreement dated  as of October
                      14,  2003 (incorporated by  reference to  Exhibit  4.5  to
                      Halliburton's   Registration   Statement   on   Form  S-4,
                      Registration No. 333-110420).

*     4.27            Second  Supplemental  Indenture  dated as  of December 15,
                      2003  between  Halliburton  and  JPMorgan  Chase  Bank, as
                      Trustee, to the Senior  Indenture dated as  of October 17,
                      2003, as supplemented by  the First Supplemental Indenture
                      dated as of October 17, 2003.

*     4.28            Form  of note  of 7.6%  debentures due  2096  (included as
                      Exhibit A to Exhibit 4.27 above).

                                      128


      4.29            Third Supplemental  Indenture dated as of January 26, 2004
                      between  Halliburton and JPMorgan  Chase Bank, as Trustee,
                      to the Senior Indenture  dated as of October  17, 2003, as
                      supplemented by the First Supplemental Indenture  dated as
                      of October 17, 2003  and the Second Supplemental Indenture
                      dated  as of December 15, 2003  (incorporated by reference
                      to Exhibit 4.2 to  Halliburton's Registration Statement on
                      Form S-4, Registration No. 333-112977).

      4.30            Form of  Senior Notes  due 2007  (included as Exhibit A to
                      Exhibit 4.29 above).

      4.31            Registration Rights Agreement dated as of January 26, 2004
                      among   Halliburton  and   J.P.  Morgan  Securities  Inc.,
                      Citigroup Global Markets, Inc.  and Goldman,  Sachs & Co.,
                      as  representatives of  the several  Purchasers  named  in
                      Schedule I of the Purchase  Agreement dated as of  January
                      21,  2004 (incorporated  by  reference to  Exhibit  4.4 to
                      Halliburton's   Registration  Statement   on   Form   S-4,
                      Registration No. 333-112977).

      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).

      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  Incentive  Plan,  as
                      amended and restated  effective May 21, 2003 (incorporated
                      by reference to Exhibit  10.1 to  Halliburton's  Form 10-Q
                      for the quarter ended June 30, 2003, 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            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).

      10.7            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).

      10.8            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).

      10.9            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).

                                      129


      10.10           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).

      10.11           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).

      10.12           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).

      10.13           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).

      10.14           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).

      10.15           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).

      10.16           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).

      10.17           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).

      10.18           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).

      10.19           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).

      10.20           Employment Agreement  (Mark A.  McCollum) (incorporated by
                      reference  to  Exhibit  10.1  to  Halliburton's  Form 10-Q
                      for  the  quarter  ended  September  30,  2003,  File  No.
                      1-3492).

      10.21           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).

                                      130


      10.22           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).

      10.23           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).

      10.24           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).

      10.25           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).

      10.26           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).

      10.27           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).

      10.28           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).

      10.29           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).

      10.30           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).

      10.31           Employment Agreement  (David  R. Smith)  (incorporated  by
                      reference  to Exhibit  10.39 to  Halliburton's  Form  10-K
                      for the year ended December 31, 2002, File No. 1-3492).

      10.32           Employment  Agreement  (John  W.  Gibson) (incorporated by
                      reference  to  Exhibit  10.40  to Halliburton's  Form 10-K
                      for the year ended December 31, 2002, File No. 1-3492).

      10.33           Employment  Agreement (C. Christopher  Gaut) (incorporated
                      by reference to  Exhibit 10.1  to Halliburton's  Form 10-Q
                      for the quarter ended March 31, 2003, File No. 1-3492).


                                      131


      10.34           3-Year Revolving Credit Agreement, dated as of October 31,
                      2003, among Halliburton, the Banks party thereto, Citicorp
                      North America,  Inc., as  Administrative  Agent,  JPMorgan
                      Chase Bank, as Syndication  Agent, and ABN AMRO Bank N.V.,
                      as  Documentation  Agent  (incorporated  by  reference  to
                      Exhibit  10.2 to  Halliburton's  Form 10-Q for the quarter
                      ended September 30, 2003, File No. 1-3492).

      10.35           Master Letter of Credit  Facility  Agreement,  dated as of
                      October 31, 2003, among Halliburton, Kellogg Brown & Root,
                      Inc., and DII  Industries,  LLC, as Account  Parties,  the
                      Banks party  thereto,  Citicorp  North  America,  Inc., as
                      Administrative  Agent, JPMorgan Chase Bank, as Syndication
                      Agent,  and ABN AMRO Bank  N.V.,  as  Documentation  Agent
                      (incorporated    by   reference   to   Exhibit   10.3   to
                      Halliburton's  Form 10-Q for the quarter  ended  September
                      30, 2003, File No. 1-3492).

      10.36           Senior  Unsecured Credit Facility  Agreement,  dated as of
                      November  4,  2003,  among  Halliburton,  the Banks  party
                      thereto,  Citicorp North America,  Inc., as Administrative
                      Agent,  JPMorgan Chase Bank, as Syndication Agent, and ABN
                      AMRO Bank N.V., as  Documentation  Agent  (incorporated by
                      reference to Exhibit 10.4 to  Halliburton's  Form 10-Q for
                      the quarter ended September 30, 2003, File No. 1-3492).

*     12              Statement of  Computation of  Ratio of  Earnings to  Fixed
                      Charges.

*     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
                      January 2004:

                      Robert L. Crandall
                      Kenneth T. Derr
                      Charles J. DiBona
                      W. R. Howell
                      Ray L. Hunt
                      Aylwin B. Lewis
                      J. Landis Martin
                      Jay A. Precourt
                      Debra L. Reed
                      C. J. Silas

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

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

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

                                      132


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


*     Filed with this Form 10-K.
**    Furnished 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 2003:

October 1, 2003          September 29, 2003     Item 9. Regulation FD Disclosure for a press release
                                                announcing Halliburton will not request a stay extension
                                                of Harbison-Walker bankruptcy court's temporary
                                                restraining order which expires on September 30, 2003.

October 10, 2003         October 9, 2003        Item 12. Disclosure of Results of Operations and Financial
                                                Condition for a press release revising 2003 third quarter
                                                earning estimate.

October 10, 2003         October 10, 2003       Item 9. Regulation FD Disclosure for a press release
                                                announcing exchange offer and consent solicitation for
                                                debentures issued by DII Industries, LLC.

October 15, 2003         October 14, 2003       Item 9. Regulation FD Disclosure for a press release
                                                announcing pricing of a private offering of $1.05 billion
                                                of senior notes.

October 23, 2003         October 22, 2003       Item 9. Regulation FD Disclosure for a press release
                                                announcing a 2003 fourth quarter dividend.

October 28, 2003         October 27, 2003       Item 5. Other Events and Item 7. Financial Statements, Pro
                                                Forma Financial Information and Exhibits informing of
                                                adjustments made to certain items from the December 31,
                                                2002 Annual Report on Form 10-K in order to update all
                                                segment information to reflect the new segment structure
                                                as disclosed in the June 30, 2003 Form 10-Q.

October 29, 2003         October 27, 2003       Item 9. Regulation FD Disclosure for a press release
                                                announcing DII Industries, LLC has received consents,
                                                subsequent to an exchange offer, from holders of more than
                                                95% of the principal amount of outstanding debentures to
                                                amend the indenture.

                                      133


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

During the fourth quarter of 2003 (continued):

October 30, 2003         October 28, 2003       Item 9. Regulation FD Disclosure for press release
                                                announcing filing of a shelf registration for previously
                                                issued $1.2 billion convertible senior notes.

October 31, 2003         October 29, 2003       Item 12. Disclosure of Results of Operations and Financial
                                                Condition for a press release announcing 2003 third
                                                quarter results.

November 6, 2003         November 6, 2003       Item 9. Regulation FD Disclosure for a press release
                                                announcing that DII Industries and Kellogg Brown & Root
                                                extended the voting deadline on the plan of reorganization
                                                until November 19, 2003.

November 7, 2003         November 6, 2003       Item 9. Regulation FD Disclosure for a press release
                                                announcing that an agreement has been reached in principle
                                                to limit cash required for asbestos settlement to $2.775
                                                billion.

November 7, 2003         November 7, 2003       Item 12. Disclosure of Results of Operations and Financial
                                                Condition for a press release announcing an amendment to
                                                correct the classification of certain items on the balance
                                                sheet as of September 30, 2003.

November 10, 2003        November 7, 2003       Item 9. Regulation FD Disclosure for a press release
                                                announcing the extension of the expiration date of the
                                                debt exchange offer relating to DII Industries debentures
                                                to November 19, 2003.

November 18, 2003        November 18, 2003      Item 9. Regulation FD Disclosure for a press release
                                                announcing DII Industries, LLC, Kellogg Brown & Root, and
                                                other affected subsidiaries have completed amendments to
                                                documents implementing the companies' planned asbestos and
                                                silica settlement and are mailing supplemental
                                                solicitation materials to asbestos and silica creditors in
                                                connection with voting on the amended plan of
                                                reorganization.

November 26, 2003        November 19, 2003      Item 9. Regulation FD Disclosure to furnish the
                                                Supplemental Disclosure Statement dated November 14, 2003
                                                to the Disclosure Statement dated September 18, 2003 of
                                                DII Industries, LLC, Kellogg Brown & Root and other
                                                affected subsidiaries with United States operations.

                                      134


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

During the fourth quarter of 2003 (continued):

December 15, 2003        December 12, 2003      Item 9. Regulation FD Disclosure for a press release
                                                announcing the preliminary results of the voting on the
                                                proposed plan of reorganization of DII Industries, LLC,
                                                Kellogg Brown & Root, and other affected subsidiaries.

December 15, 2003        December 11, 2003      Item 9. Regulation FD Disclosure for a press release
                                                defending the company's work for United States troops and
                                                the Iraqi people.

December 16, 2003        December 16, 2003      Item 9. Regulation FD Disclosure for a press release
                                                announcing the plan to move ahead with the previously
                                                announced plan to resolve asbestos and silica liabilities
                                                through a pre-packaged bankruptcy.  The affected
                                                subsidiaries filed Chapter 11 proceedings today in
                                                bankruptcy court in Pittsburgh, Pennsylvania.

December 17, 2003        December 15, 2003      Item 9. Regulation FD Disclosure for a press release
                                                announcing an analyst and investor conference will be held
                                                in Houston, Texas on May 5, 2004.

December 17, 2003        December 15, 2003      Item 9. Regulation FD Disclosure for a press release
                                                announcing a conference call to discuss 2003 fourth
                                                quarter results.

December 17, 2003        December 15, 2003      Item 9. Regulation FD Disclosure for a press release
                                                announcing the completion of the company's offer to issue
                                                its new 7.6% debentures due 2096 in exchange for a like
                                                amount of 7.60% due 2096 of its subsidiary, DII
                                                Industries, LLC.

During the first quarter of 2004

January 22, 2004         January 21, 2004       Item 9. Regulation FD Disclosure for a press release
                                                announcing the pricing of $500 million of senior notes in
                                                a private offering.

January 23, 2004         January 21, 2004       Item 9. Regulation FD Disclosure to provide information
                                                relating to the January 21, 2004 offering of  $500 million
                                                of senior notes.


                                      135


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

During the first quarter of 2004 (continued):

January 26, 2004         January 23, 2004       Item 9. Regulation FD Disclosure for a press release
                                                announcing a credit to the United States government of
                                                $6.3 million for potential over billing until an
                                                investigation is complete.

January 26, 2004         January 23, 2004       Item 9. Regulation FD Disclosure for a press release
                                                announcing the restructuring of two joint venture
                                                companies, Enventure Global Technologies LLC and
                                                WellDynamics BV, between Halliburton Energy Services and
                                                Shell Technology Ventures.

January 26, 2004         January 22, 2004       Item 9. Regulation FD Disclosure for a press release
                                                announcing the award of two contracts from the United
                                                States government through a full and fair competitive
                                                bidding process.  The terms and conditions of the
                                                contracts are reviewed.

January 29, 2004         January 28, 2004       Item 9. Regulation FD Disclosure for a press release
                                                announcing the comprehensive agreement reached to settle
                                                asbestos insurance claims with Equitas.

January 30, 2004         January 29, 2004       Item 12. Disclosure of Results of Operations and Financial
                                                Condition for a press release announcing the 2003 fourth
                                                quarter results.

February 2, 2004         February 2, 2004       Item 9. Regulation FD Disclosure for a press release
                                                announcing the company is working with the Government to
                                                improve estimates on meal preparations for troops.

February 11, 2004        February 6, 2004       Item 9. Regulation FD Disclosure to provide information
                                                disclosed in Amendment No. 1 to Halliburton's Registration
                                                Statement on Form S-3.

February 12, 2004        February 11, 2004      Item 5. Other Events for a press release announcing a
                                                Bankruptcy Court ruling that insurers lack standing to
                                                bring motions seeking to dismiss the pre-packaged Chapter
                                                11 reorganization cases filed by DII Industries, Kellogg
                                                Brown & Root and other affected  subsidiaries of
                                                Halliburton.

                                      136


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

During the first quarter of 2004 (continued):

February 19, 2004        February 16, 2004      Item 5. Other Events to report suspension by Kellogg Brown
                                                & Root of $140.8 million of subcontractor invoices to the
                                                Army Materiel Command relating to food services provided
                                                in Iraq and Kuwait, until an internal review is completed.

                                                Item 9. Regulation FD Disclosure for a  press  release  reporting
                                                voluntary  suspension of certain invoicing of subcontractor
                                                services for meal planning, food purchase and meal preparation
                                                for United States troops in Iraq and Kuwait.

February 19, 2004        February 18, 2004      Item 9. Regulation FD Disclosure for a press release
                                                announcing a 2004 first quarter dividend and scheduling of
                                                the annual shareholders' meeting on May 19, 2004.

February 25, 2004        February 24, 2004      Item 9. Regulation FD Disclosure for a press release
                                                reporting that Kellogg Brown & Root delivered fuel to Iraq
                                                at the best value, price, and terms.

March 1, 2004            February 27, 2004      Item 9. Regulation FD Disclosure for a press release responding to
                                                news reports on an internal document related to contracts with the
                                                United States government.



                                      137


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.)

                                      138


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE




The Board of Directors and Stockholders
Halliburton Company:

Under date of February 18, 2004, we reported on the consolidated  balance sheets
of Halliburton Company and subsidiaries as of December 31, 2003 and December 31,
2002,  and the related  consolidated  statements  of  operations,  shareholders'
equity,  and cash flows for the years then ended, which are included in the Form
10-K. In connection with our audits of the aforementioned consolidated financial
statements,  we  also  audited  the  related  consolidated  financial  statement
schedule  (Schedule II) included in Form 10-K. The financial  statement schedule
is the  responsibility  of the Company's  management.  Our  responsibility is to
express an opinion on the consolidated financial statement schedule based on our
audits.  The accompanying  2001  consolidated  financial  statement  schedule of
Halliburton  Company and  subsidiaries  was audited by other  auditors  who have
ceased  operations.  Those  auditors  expressed  an  unqualified  opinion on the
consolidated financial statements and schedule, before the restatement described
in Note 5 to the  consolidated  financial  statements  and before  the  revision
related  to  goodwill  and  other  intangibles   described  in  Note  1  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
     February 18, 2004

                                      139



                               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, 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) (b)   $    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
=================================================================================================================

  Year ended December 31, 2003:
   Deducted from accounts and notes receivable:
      Allowance for bad debts                  $    157     $    44         $ 4        $   (30) (a)   $  175
-----------------------------------------------------------------------------------------------------------------
   Liability for major repairs and
      maintenance                              $      7     $     1         $ -        $     -        $    8
-----------------------------------------------------------------------------------------------------------------
   Accrued reorganization charges              $     10     $     -         $ -        $    (9)       $    1
=================================================================================================================

(a) Receivable write-offs and reclassifications, net of recoveries.
(b) Includes $4 million estimate to actual adjustment.



                                      140


                                   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 individual, on this 15th day of March, 2004.

                                            HALLIBURTON COMPANY




                                  By     /s/  C. Christopher Gaut
                                    ---------------------------------------
                                              C. Christopher Gaut
                                          Executive Vice President and
                                             Chief Financial Officer



                                      141