FORM 10-Q/A


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


           [X] Quarterly Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
                  For the quarterly period ended June 30, 2002

                                       OR

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



                          Commission File Number 1-3492


                               HALLIBURTON COMPANY

                            (a Delaware Corporation)
                                   75-2677995

                               3600 Lincoln Plaza
                                  500 N. Akard
                               Dallas, Texas 75201

                   Telephone Number - Area Code (214) 978-2600

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

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

Common stock, par value $2.50 per share:
Outstanding at July 24, 2002 - 436,351,938



Halliburton  Company has amended  disclosures on the calculation of our asbestos
liability  in order to utilize the third party  expert's  conclusion  based on a
50-year  period and five year  claims  history  in the  Hamilton,  Rabinovitz  &
Alschuler,  Inc.'s  econometric  study.  There is no material  difference in our
asbestos  liability  or the  related  insurance  receivables  using the  revised
assumptions  when compared to those  assumptions  originally  used in the second
quarter  of  2002.  Accordingly,   no  restatement  of  our  original  financial
statements at June 30, 2002 is necessary. The sections of the Form 10-Q affected
by the change are  Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations  "Business  Environment"  - "Asbestos"  and "Critical
Accounting  Policies" - "Loss  Contingencies";  and our  disclosure  in Note 8 -
"Commitments  and  Contingencies"  under  the  heading  "Asbestos  study and the
valuation  of  unresolved  current  and  future  asbestos  claims,  and  related
insurance receivables".





                               HALLIBURTON COMPANY

                                      Index

                                                                                                        Page No.
                                                                                                        --------
                                                                                                  
PART I.         FINANCIAL INFORMATION                                                                     2-28

Item 1.         Financial Statements                                                                       2-4

                -     Condensed Consolidated Statements of Income                                            2
                -     Condensed Consolidated Balance Sheets                                                  3
                -     Condensed Consolidated Statements of Cash Flows                                        4
                -     Notes to Quarterly Financial Statements                                             5-28
                      1.   Management Representations                                                        5
                      2.   Business Segment Information                                                    5-6
                      3.   Acquisitions and Dispositions                                                   6-7
                      4.   Restricted Cash                                                                   7
                      5.   Discontinued Operations                                                         7-8
                      6.   Receivables and Unapproved Claims                                                 8
                      7.   Inventories                                                                       9
                      8.   Commitments and Contingencies                                                  9-19
                      9.   Income (loss) Per Share                                                          20
                     10.   Comprehensive Income (loss)                                                      20
                     11.   Goodwill and Other Intangible Assets                                             21
                     12.   Accounts Receivable Securitization                                               21
                     13.   Reorganization of Business Operations                                         21-22
                     14.   Impairment of Equity Investment                                                  22
                     15.   Long-Term Debt and Financial Instruments                                         22
                     16.   DII Industries, LLC Financial Information                                     22-28

Item 2.         Management's Discussion and Analysis of Financial Condition and
                Results of Operations                                                                    29-44

Item 3.         Quantitative and Qualitative Disclosures about Market Risk                                  44

PART II.        OTHER INFORMATION                                                                        45-48

Item 4.         Submission of Matters to a Vote of Security Holders                                         45

Item 6.         Listing of Exhibits and Reports on Form 8-K                                              46-48

Signatures                                                                                                  49

Exhibits:       -     Halliburton Elective Deferral Plan as amended and restated
                      effective May 1, 2002
                -     Halliburton Company 2002 Employee Stock Purchase Plan
                -     Employment Agreement
                -     Employment Agreement
                -     Powers of Attorney for Directors
                -     Powers of Attorney for Executive Officers


                                       1


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


                               HALLIBURTON COMPANY
                   Condensed Consolidated Statements of Income
                                   (Unaudited)
             (Millions of dollars and shares except per share data)
                                                                     Three Months                 Six Months
                                                                    Ended June 30                Ended June 30
                                                               ----------------------------------------------------
                                                                  2002         2001            2002         2001
-------------------------------------------------------------------------------------------------------------------
                                                                                              
Revenues:
Services                                                        $   2,750    $   2,812       $   5,279    $   5,455
Product sales                                                         457          498             917          981
Equity in earnings of unconsolidated affiliates                        28           29              46           47
--------------------------------------------------------------------------------------------------------------------
Total revenues                                                  $   3,235    $   3,339       $   6,242    $   6,483
--------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services                                                $   3,075    $   2,512       $   5,605    $   4,945
Cost of sales                                                         407          454             816          876
General and administrative                                             97          101             150          192
Gain on sale of joint venture                                           -            -            (108)           -
Impairment on equity investment                                        61            -              61            -
--------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses                              $   3,640    $   3,067       $   6,524    $   6,013
--------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                              (405)         272            (282)         470
Interest expense                                                      (30)         (34)            (62)         (81)
Interest income                                                        12            6              16           10
Foreign currency losses, net                                           (5)          (1)            (13)          (4)
Other, net                                                             (2)           -               2            -
--------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
     taxes, minority interest, and change in accounting
     method, net                                                     (430)         243            (339)         395
(Provision) benefit for income taxes                                   77          (98)             41         (159)
Minority interest in net income of subsidiaries                        (5)          (2)            (10)          (7)
--------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before change in
     accounting method, net                                          (358)         143            (308)         229
--------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations, net of tax
     benefit of $19, $32, $34, and $17                               (140)         (60)           (168)         (38)
Gain on disposal of discontinued operations, net of tax
     of $0, $199, $0, and $199                                          -          299               -          299
--------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations                           (140)         239            (168)         261
--------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting method, net                   -            -               -            1
--------------------------------------------------------------------------------------------------------------------
Net income (loss)                                               $    (498)   $     382       $    (476)   $     491
====================================================================================================================

Basic income (loss) per share:
Income (loss) from continuing operations before change in
     accounting method, net                                     $   (0.83)   $    0.34       $  (0.71)    $    0.54
Loss from discontinued operations                                   (0.32)       (0.14)         (0.39)        (0.09)
Gain on disposal of discontinued operations                             -         0.70              -          0.70
--------------------------------------------------------------------------------------------------------------------
Net income (loss)                                               $   (1.15)   $    0.90       $  (1.10)    $    1.15
====================================================================================================================

Diluted income (loss) per share:
Income (loss) from continuing operations before change in
     accounting method, net                                     $   (0.83)   $    0.33       $  (0.71)    $    0.53
Loss from discontinued operations                                   (0.32)       (0.14)         (0.39)        (0.09)
Gain on disposal of discontinued operations                             -         0.70              -          0.70
--------------------------------------------------------------------------------------------------------------------
Net income (loss)                                               $   (1.15)   $    0.89       $  (1.10)    $    1.14
====================================================================================================================

Cash dividends per share                                        $   0.125    $   0.125       $   0.25    $     0.25
Basic average common shares outstanding                               432          427            432           427
Diluted average common shares outstanding                             432          430            432           430

  See notes to quarterly financial statements.



                                       2




                               HALLIBURTON COMPANY
                      Condensed Consolidated Balance Sheets
                                   (Unaudited)
             (Millions of dollars and shares except per share data)
                                                                   June 30        December 31
                                                                     2002            2001
------------------------------------------------------------------------------------------------
                            Assets
                                                                            
Current assets:
Cash and equivalents                                              $      383       $     290
Receivables:
Notes and accounts receivable, net                                     2,606           3,015
Unbilled work on uncompleted contracts                                 1,000           1,080
------------------------------------------------------------------------------------------------
Total receivables                                                      3,606           4,095
Inventories                                                              808             787
Current deferred income taxes                                            126             154
Other current assets                                                     253             247
------------------------------------------------------------------------------------------------
Total current assets                                                   5,176           5,573
Property, plant and equipment after accumulated
     depreciation of $3,329 and $3,281                                 2,692           2,669
Equity in and advances to related companies                              568             551
Goodwill, net                                                            725             720
Noncurrent deferred income taxes                                         512             410
Insurance for asbestos litigation claims                               1,594             612
Other assets                                                             720             431
------------------------------------------------------------------------------------------------
Total assets                                                      $   11,987       $  10,966
================================================================================================
             Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable                                          $       66       $      44
Current maturities of long-term debt                                     215              81
Accounts payable                                                       1,140             917
Accrued employee compensation and benefits                               254             357
Advanced billings on uncompleted contracts                               492             611
Deferred revenues                                                         88              99
Income taxes payable                                                      78             194
Reserves on uncompleted contracts                                        193             101
Other current liabilities                                                461             504
------------------------------------------------------------------------------------------------
Total current liabilities                                              2,987           2,908
Long-term debt                                                         1,264           1,403
Employee compensation and benefits                                       562             570
Asbestos litigation claims                                             2,196             737
Minority interest in consolidated subsidiaries                            51              41
Other liabilities                                                        672             555
------------------------------------------------------------------------------------------------
Total liabilities                                                      7,732           6,214
------------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, par value $2.50 per share - authorized
     600 shares, issued 456 and 455 shares                             1,141           1,138
Paid-in capital in excess of par value                                   296             298
Deferred compensation                                                    (88)            (87)
Accumulated other comprehensive income                                  (201)           (236)
Retained earnings                                                      3,742           4,327
------------------------------------------------------------------------------------------------
                                                                       4,890           5,440
Less 20 and 21 shares of treasury stock, at cost                         635             688
------------------------------------------------------------------------------------------------
Total shareholders' equity                                             4,255           4,752
------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                        $   11,987       $  10,966
================================================================================================

  See notes to quarterly financial statements.



                                       3




                               HALLIBURTON COMPANY
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
                              (Millions of dollars)
                                                                              Six Months
                                                                             Ended June 30
                                                                     ------------------------------
                                                                          2002           2001
---------------------------------------------------------------------------------------------------
                                                                                  
Cash flows from operating activities:
Net income (loss)                                                       $   (476)       $    491
Adjustments to reconcile net income (loss) to net cash from
operations:
Loss (income) from discontinued operations                                   168            (261)
Depreciation, depletion and amortization                                     266             258
Provision (benefit) for deferred income taxes                                (73)             50
Distributions from (advances to) related companies, net of
     equity in (earnings) losses                                              14              26
Change in accounting method, net                                               -              (1)
Gain on sale of joint venture                                               (108)              -
Gain on option component of joint venture sale                                (3)              -
Impairment on equity investment                                               61               -
Asbestos reserve, net                                                        477              95
Accrued special charges                                                        -              (6)
Other non-cash items                                                          72              20
Other changes, net of non-cash items:
Receivables and unbilled work on uncompleted contracts                       227            (346)
Sale of receivables                                                          200               -
Inventories                                                                  (24)           (145)
Accounts payable                                                             169              79
Other working capital, net                                                  (239)             42
Other operating activities                                                  (111)             42
---------------------------------------------------------------------------------------------------
Total cash flows from operating activities                                   620             344
---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures                                                        (404)           (344)
Sales of property, plant and equipment                                        54              39
(Acquisitions) dispositions of businesses, net                               134            (139)
Investments - restricted cash                                               (188)              -
Other investing activities                                                   (10)             (8)
---------------------------------------------------------------------------------------------------
Total cash flows from investing activities                                  (414)           (452)
---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on long-term borrowings                                              (4)             (9)
(Repayments) borrowings of short-term debt, net                               14            (854)
Payments of dividends to shareholders                                       (109)           (107)
Proceeds from exercises of stock options                                       -              24
Payments to reacquire common stock                                            (2)             (8)
Other financing activities                                                     -              (3)
---------------------------------------------------------------------------------------------------
Total cash flows from financing activities                                  (101)           (957)
---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash                                      (12)            (12)
Net cash flows from discontinued operations                                    -           1,174
---------------------------------------------------------------------------------------------------
Increase in cash and equivalents                                              93              97
Cash and equivalents at beginning of period                                  290             231
---------------------------------------------------------------------------------------------------
Cash and equivalents at end of period                                   $    383        $    328
===================================================================================================
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest                                                                $     53        $     16
Income taxes                                                            $     98        $    145
Non-cash investing and financing activities:
Liabilities assumed in acquisitions of businesses                       $      -        $     18
Liabilities disposed of in dispositions of businesses                   $      -        $    430

  See notes to quarterly financial statements.



                                       4


                               HALLIBURTON COMPANY
                     Notes to Quarterly Financial Statements
                                   (Unaudited)

Note 1.  Management Representations
         We employ  accounting  policies that are in accordance  with  generally
accepted accounting  principles in the United States of America. The preparation
of financial  statements  in conformity  with  accounting  principles  generally
accepted  in the United  States of America  requires  us to make  estimates  and
assumptions that affect:
         -    the reported  amounts of assets  and liabilities and disclosure of
              contingent assets  and liabilities at  the date  of  the financial
              statements; and
         -    the reported amounts of revenues and expenses during the reporting
              period.
Ultimate results could differ from those estimates.
         The accompanying  unaudited condensed consolidated financial statements
were  prepared  using  generally  accepted  accounting  principles  for  interim
financial  information,  the  instructions to Form 10-Q and applicable  rules of
Regulation  S-X.  Accordingly,  these  financial  statements  do not include all
information or footnotes  required by generally accepted  accounting  principles
for complete  financial  statements  and should be read  together  with our 2001
Annual  Report on Form  10-K.  All  adjustments  which  are,  in the  opinion of
management,  of  a  normal  recurring  nature  and  are  necessary  for  a  fair
presentation  of the interim  financial  statements  have been  included.  Prior
period  amounts  have  been  reclassified  to be  consistent  with  the  current
presentation.
         In our opinion, the condensed consolidated financial statements present
fairly our financial position as of June 30, 2002, the results of our operations
for the three and six months ended June 30, 2002 and 2001 and our cash flows for
the six months  then  ended.  The  results of  operations  for the three and six
months  ended June 30,  2002 and 2001 may not be  indicative  of results for the
full year.

Note 2.  Business Segment Information
         During the first quarter of 2002, we announced plans to restructure our
businesses  into two  wholly-owned  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 which were
previously  shared were moved into the two business groups. We also decided that
the operations of Major  Projects,  Granherne and Production  Services were best
managed by our Kellogg Brown & Root subsidiary,  or KBR, in the current business
environment.  These businesses were moved for management and reporting  purposes
from the Energy Services Group segment to the Engineering and Construction Group
segment during the second  quarter.  All prior period segment  results have been
restated to reflect this change. Major Projects, which currently consists of the
Barracuda-Caratinga  project in Brazil,  is now  reported  through the  Offshore
Operations  product line,  Granherne is now reported in the Onshore product line
and Production  Services is now reported  under the  Operations and  Maintenance
product line.
         The tables  below  present  information  on our  continuing  operations
business segments on a comparable basis.


                                                Three Months                 Six Months
                                               Ended June 30                Ended June 30
                                          -------------------------    ------------------------
Millions of dollars                          2002         2001            2002         2001
-----------------------------------------------------------------------------------------------
                                                                         
Revenues:
Energy Services Group                      $  1,756     $  2,008        $  3,445     $   3,800
Engineering and Construction Group            1,479        1,331           2,797         2,683
-----------------------------------------------------------------------------------------------
Total                                      $  3,235     $  3,339        $  6,242     $   6,483
===============================================================================================

Operating income (loss):
Energy Services Group                      $     70     $    268        $    239     $     457
Engineering and Construction Group             (450)          21            (508)           48
General corporate                               (25)         (17)            (13)          (35)
-----------------------------------------------------------------------------------------------
Total                                      $   (405)    $    272        $   (282)    $     470
===============================================================================================


                                       5


         Energy Services Group.  The Energy Services Group provides a wide range
of discrete services and products and integrated  solutions to customers for the
exploration,  development, and production of oil and gas. The customers for this
segment are major, national and independent oil and gas companies.  This segment
consists of:
         -    Halliburton   Energy  Services   provides  oilfield  services  and
              products  including  discrete products and services and integrated
              solutions for oil and gas exploration,  development and production
              throughout  the world.  Products  and  services  include  pressure
              pumping equipment and services, logging and perforating,  drilling
              systems  and  services,   drilling  fluids  systems,  drill  bits,
              specialized completion and production equipment and services, well
              control, and integrated solutions;
         -    Landmark Graphics provides  integrated  exploration and production
              software   information   systems,    data   management   services,
              professional  services to the  petroleum  industry  and  reservoir
              description; and
         -    Other product service lines provide installation  and servicing of
              subsea facilities and  pipelines, manufacture of flexible pipe for
              offshore  applications, and pipecoating services.  In January 2002
              we  sold  our  interest in  European Marine  Contractors  Ltd.,  a
              50%-owned  joint  venture  that  provided  pipeline  services  for
              offshore customers.  See Note 3.
         Engineering and  Construction  Group.  The Engineering and Construction
Group provides engineering,  procurement,  construction, project management, and
facilities  operation and maintenance  for oil and gas and other  industrial and
governmental  customers.  The Engineering and Construction  Group,  operating as
KBR, includes the following five product lines:
         -    Onshore   operations   comprise   engineering   and   construction
              activities,  including  liquefied natural gas, ammonia,  crude oil
              refineries, and natural gas plants;
         -    Offshore   operations   include   specialty   offshore   deepwater
              engineering  and  marine  technology  and  worldwide   fabrication
              capabilities;
         -    Government   operations   provide   operations,  maintenance   and
              logistics activities for government facilities and  installations;
         -    Operations  and  maintenance  services  include plant  operations,
              maintenance and start up services for both upstream and downstream
              oil,  gas and  petrochemical  facilities  as  well as  operations,
              maintenance and logistics  services for the power,  commercial and
              industrial markets; and
         -    Infrastructure provides civil  engineering, consulting and project
              management services.
         Intersegment revenues included in the revenues of the business segments
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.

Note 3.  Acquisitions and Dispositions
         Subsea 7. In May 2002,  we  contributed  a portion  of our  Halliburton
Subsea assets to a newly formed  company,  Subsea 7, Inc. We contributed  assets
with a carrying value of approximately  $75 million.  We own 50% of Subsea 7 and
account for this investment using the equity method.  The remaining 50% is owned
by DSND Subsea ASA.
         Magic Earth  acquisition.  In November  2001, we acquired  Magic Earth,
Inc., a leading 3-D visualization  and  interpretation  technology  company with
broad  applications  in the area of data  interpretation.  Under the  agreement,
Halliburton issued 4.2 million shares of common stock from treasury stock valued
at $100 million.  Magic Earth became a  wholly-owned  subsidiary and is reported
within our Energy Services Group. We recorded  intangible  assets of $19 million
and goodwill of $71 million, all of which is nondeductible for tax purposes. The
intangible assets will be amortized based on a five year life.
         PES acquisition. In February 2000, we acquired the remaining 74% of the
shares of PES  (International)  Limited  that we did not  already  own.  PES had
developed  technology that complemented  Halliburton Energy Services'  real-time
reservoir solutions.  To acquire the remaining 74% of PES, we issued 1.2 million
shares of  Halliburton  common stock and rights that resulted in the issuance of
2.1 million  additional  shares of  Halliburton  common stock.  We recorded $115
million of goodwill in connection with acquiring the remaining 74%.

                                       6


         During the second quarter of 2001, we contributed  the majority of PES'
assets and technologies,  including $130 million of goodwill associated with the
purchase of PES, to a newly formed joint venture with Shell Technology  Ventures
B.V.,  WellDynamics.  We received $39 million in cash as an equity  equalization
adjustment. The remaining assets and goodwill of PES relating to completions and
well  intervention  products have been  combined  with our existing  completions
product service line. We own 50% of WellDynamics and account for this investment
using the equity method.
         PGS Data  Management  acquisition.  In March 2001,  we acquired the PGS
Data Management  division of Petroleum  Geo-Services ASA (PGS) for $164 million.
The  agreement  also calls for Landmark to provide,  for a fee,  strategic  data
management  and  distribution  services  to PGS for  three  years.  We  recorded
intangible  assets of $14 million and  goodwill of $149  million,  $9 million of
which is nondeductible for tax purposes.
         European Marine Contractors Ltd. disposition.  In January 2002, we sold
our 50% interest in European Marine  Contractors Ltd., an  unconsolidated  joint
venture in the Energy Services Group, to our joint venture partner,  Saipem.  At
the date of sale,  we received  $115  million in cash and a  contingent  payment
option valued at $16 million resulting in a pretax operating income gain of $108
million.  The contingent payment option was based on a formula linked to the Oil
Service Index  performance.  In February 2002, we exercised our option receiving
an additional $19 million and recorded a pretax gain of $3 million in Other, net
in the income statement as a result of the increase in value of this option. The
total  transaction  resulted in an after-tax  gain of $68 million,  or $0.16 per
diluted share.
         Dresser Equipment Group divestiture.  In April 2001, we disposed of the
remaining businesses in the Dresser Equipment Group.  See Note 5.

Note 4.  Restricted Cash
         At June 30, 2002, we had  restricted  cash of $188 million  included in
Other assets.  Restricted cash in Other assets mainly consists of a $106 million
deposit that collateralizes an appeal bond for a patent  infringement  judgement
on appeal and $56 million as collateral  for potential  future  insurance  claim
reimbursements.  Also  included  in  restricted  cash is $26  million  primarily
related to cash  collateral  agreements  for  outstanding  letters of credit for
various  construction  projects.  In the 2002 first quarter, the $26 million was
included as Other  current  assets on the balance  sheet.  As the  projects  are
considered  long-term  in  nature,  we have reclassified  this  amount  to Other
assets on the balance sheet in the second quarter of 2002.

Note 5.  Discontinued Operations
         In late 1999 and early 2000 we sold our interest in two joint  ventures
which were a significant  portion of our Dresser  Equipment  Group.  These sales
prompted a  strategic  review of the  remaining  businesses  within the  Dresser
Equipment Group. As a result of this review,  we determined that these remaining
businesses  did not closely fit with our core  businesses,  long-term  goals and
strategic  objectives.  In April 2000, our Board of Directors  approved plans to
sell all the remaining  businesses  within the Dresser  Equipment Group. We sold
these businesses on April 10, 2001. As part of the terms of the transaction,  we
retained a 5.1% equity interest in the Dresser  Equipment Group,  which has been
renamed Dresser, Inc. In the second quarter of 2001, we recognized a pretax gain
on this sale of $498 million ($299 million after-tax).  The financial results of
the Dresser Equipment Group through March 31, 2001 are presented as discontinued
operations in our financial statements.
         During the second  quarter of 2002,  in  connection  with our  asbestos
econometric  study,  we recorded a pretax expense of $153 million,  $123 million
after-tax,  to  discontinued  operations for existing and future asbestos claims
and defense costs related to previously disposed businesses,  net of anticipated
insurance recoveries.  See Note 8. We also recorded pretax expense of $6 million
associated with the Harbison-Walker  bankruptcy filing. In addition,  based upon
the impact of certain  second  quarter  items,  we adjusted  our 2002  estimated
effective tax rate for  discontinued  operations by recording an $11 million tax
provision in the second quarter of 2002.

                                       7




                                               Three Months                  Six Months
                                               Ended June 30                Ended June 30
Loss from Discontinued                    -------------------------    ------------------------
Operations
Millions of dollars                          2002         2001            2002        2001
-----------------------------------------------------------------------------------------------
                                                                        
Revenues                                   $      -    $     -          $     -     $   359
===============================================================================================
Operating income                           $      -    $     -          $     -     $    37
Asbestos litigation claims, net of
   insurance recoveries                        (159)       (92)            (202)        (92)
Tax benefit                                      19         32               34          17
-----------------------------------------------------------------------------------------------
Net loss                                   $   (140)   $   (60)         $  (168)    $   (38)
===============================================================================================

Note 6.  Receivables and Unapproved Claims
         Our  receivables  are  generally   not  collateralized.  See  Note  12.
With the  exception of claims and change orders that are in the process of being
negotiated  with  customers,  unbilled work on uncompleted  contracts  generally
represents  work  currently  billable or billable upon  achievement  of specific
contractual milestones.
         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.  Losses on contracts are
recorded in full in the period they are  identified.  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
Statement  of  Position  81-1  "Accounting for  Performance of Construction-Type
and Certan Production-Type Contracts".  In most 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
unapproved claims recorded in unbilled work on uncompleted  contracts relates to
forecasted  costs  which  have  not  been  incurred.  The  amounts  included  in
determining  the profit or loss on contracts,  and the amount booked to unbilled
work on uncompleted contracts for each period is as follows:


                                                  June 30           December 31
                                                 ---------        --------------
Millions of dollars                                2002                2001
--------------------------------------------------------------------------------
                                                            
Probable unapproved claims (included
    in determining contract profit or loss)       $   193             $   137
Unapproved claims in unbilled work on
    uncompleted contracts                         $   135             $   102
================================================================================

         The claims at June 30, 2002  listed in the above table  relate to eight
contracts most of which are complete or substantially  complete. We are actively
engaged in claims negotiation with the customer in all but one case, and in that
case we are initiating the arbitration  process.  The probable  unapproved claim
related to the  arbitration  process is $5 million.  The largest claim  included
relates  to  an  offshore  field   development   contract  in  Brazil  which  is
approximately  43%  complete  as of the end of the second  quarter of 2002.  The
probable  unapproved  claims included in  determining this  contract's loss  was
$101 million  at June 30, 2002  and $43 million  at December  31, 2001.  As  the
claim for this contract most likely will not be settled withn  one year, amounts
in unbilled  work on uncompleted  contracts of $44 million at  June 30, 2002 and
$10 million at December 31, 2001 included in the table  above have been recorded
to long-term  unbilled work on uncompleted  contracts which is included in Other
assets on the  balance sheet.  All other claims included in the tabel above have
been  recorded to Unbilled work on  uncompleted contracts included  in the Total
receivables amount on the balance sheet.

                                       8


         In addition,  our  unconsolidated  related  companies  include probable
unapproved claims as revenue to determine the amount of profit or loss for their
contracts.  As we account  for these as equity  investments,  we only record our
equity  percentage  of the net income from the  unapproved  claims.  Amounts for
unapproved  claims  from our  related  companies  are  included in equity in and
advances to related  companies  and totaled $7 million at June 30, 2002 and $0.3
million at December 31, 2001.

Note 7.  Inventories
         Inventories  at June 30, 2002 and December 31, 2001 are composed of the
following:


                                     June 30           December 31
                                    ---------        ---------------
Millions of dollars                   2002                2001
--------------------------------------------------------------------
                                               
Finished products and parts          $  552              $   520
Raw materials and supplies              184                  192
Work in process                          72                   75
--------------------------------------------------------------------
Total                                $  808              $   787
====================================================================

         Included in the table above are  inventories on the last-in,  first-out
method of $50 million at June 30, 2002 and $54 million at December 31, 2001.  If
the average cost method had been used, total  inventories  would have been about
$20 million higher than reported at June 30, 2002 and December 31, 2001.

Note 8.  Commitments and Contingencies
         Asbestos  litigation.  Several of our  subsidiaries,  particularly  DII
Industries,  LLC (See Note 13) and Kellogg Brown & Root, Inc., are defendants in
a large number of asbestos-related  lawsuits.  The plaintiffs allege injury as a
result of  exposure  to  asbestos  in  products  manufactured  or sold by former
divisions  of DII  Industries,  LLC or in  materials  used  in  construction  or
maintenance  projects of Kellogg  Brown & Root,  Inc.  These claims are in three
general categories:
         -    refractory claims;
         -    other DII Industries, LLC claims; and
         -    construction claims.
         Refractory  claims.  Asbestos  was used in a small  number of  products
manufactured  or  sold  by  Harbison-Walker   Refractories  Company,  which  DII
Industries,   LLC  acquired  in  1967.   Harbison-Walker  was  spun-off  by  DII
Industries,  LLC in July, 1992. At that time,  Harbison-Walker assumed liability
for  asbestos  claims  filed  after the  spin-off  and it  agreed to defend  and
indemnify DII Industries,  LLC from liability for those claims.  DII Industries,
LLC retained  responsibility  for all asbestos  claims pending as of the date of
the  spin-off.  After the  spin-off,  DII  Industries,  LLC and  Harbison-Walker
jointly negotiated and entered into  coverage-in-place  agreements with a number
of  insurance  companies.  Those  agreements  provide  DII  Industries,  LLC and
Harbison-Walker  access to the same  insurance  coverage to  reimburse  them for
defense costs,  settlements and court  judgments they pay to resolve  refractory
asbestos claims.
         As of June 30, 2002, there were approximately 7,000 open and unresolved
pre-spin-off refractory claims against DII Industries,  LLC. In addition,  there
were approximately 139,000 post spin-off claims that name DII Industries, LLC as
a defendant.  DII  Industries,  LLC has taken up the defense of  unsettled  post
spin-off  refractory  claims  that name it as a  defendant  in order to  prevent
Harbison-Walker from unnecessarily eroding the insurance coverage both companies
access for these  claims.  These  claims  are now stayed in the  Harbison-Walker
bankruptcy proceeding.
         Other DII  Industries,  LLC  claims.  As of June 30,  2002,  there were
approximately 128,000 open and unresolved claims alleging injuries from asbestos
used in other products  formerly  manufactured by DII  Industries,  LLC. Most of
these  claims  involve  gaskets  and packing  materials  used in pumps and other
industrial products.
         Construction  claims.  Our Engineering and Construction  Group includes
engineering and construction  businesses  formerly  operated by The M.W. Kellogg
Company and Brown & Root, Inc., now combined as Kellogg Brown & Root, Inc. As of

                                       9


June 30,  2002,  there were  approximately  38,000  open and  unresolved  claims
alleging   injuries  from  asbestos  in  materials  used  in  construction   and
maintenance  projects,  most of  which  were  conducted  by  Brown & Root,  Inc.
Approximately  1,000 of  these  claims are  asserted  against  The M.W.  Kellogg
Company.  We believe  that  Kellogg  Brown & Root  has a good  defense  to these
claims, and a prior owner of The M.W. Kellogg Company provides Kellogg  Brown  &
Root a contractual indemnification for claims against The M.W. Kellogg Company.
         Harbison-Walker   Chapter  11   bankruptcy.   On  February   14,  2002,
Harbison-Walker  filed a voluntary petition for reorganization  under Chapter 11
of the United States  Bankruptcy  Code in the  Bankruptcy  Court in  Pittsburgh,
Pennsylvania.  In its bankruptcy-related  filings,  Harbison-Walker said that it
would seek to utilize  Sections 524(g) and 105 of the Bankruptcy Code to propose
and have confirmed a plan of reorganization that would provide for distributions
for all legitimate, pending and future asbestos claims asserted directly against
it or asserted against DII Industries, LLC for which Harbison-Walker is required
to indemnify and defend DII Industries, LLC. If such a plan of reorganization is
confirmed,   all  pending  and  future   refractory   asbestos   claims  against
Harbison-Walker  or  DII  Industries,  LLC  would  be  channeled  to  a  Section
524(g)/105  trust  for  resolution  and  payment.  In  order  for a trust  to be
confirmed,  at least a majority of the equity ownership of Harbison-Walker would
have to be contributed to the trust. We also anticipate a significant  financial
contribution  will also be required to obtain the  necessary  approvals  for the
trust.  Creation  of a trust  would  also  require  the  approval  of 75% of the
asbestos claimant creditors of Harbison-Walker.
         In  connection  with the  Chapter  11  filing by  Harbison-Walker,  the
Bankruptcy  Court  issued a  temporary  restraining  order  staying  all further
litigation of more than 200,000  asbestos claims  currently  pending against DII
Industries,  LLC in numerous  courts  throughout the United States.  A number of
claimants  oppose  that  stay,  and  filed  motions  seeking  to have  the  stay
terminated.  On April 4, 2002,  the  Bankruptcy  Court  heard  argument on these
motions and kept the stay in effect until at least 11 days after the  Bankruptcy
Court rules on the claimants'  motions.  When the Bankruptcy Court rules, it may
issue a preliminary  injunction continuing the stay or it may modify or dissolve
the stay as it applies to DII  Industries,  LLC.  It is also  possible  that the
Bankruptcy Court will schedule future hearings while continuing or modifying the
stay. At present,  there is no assurance that a stay will remain in effect, that
a plan of reorganization will be proposed or confirmed, or that any plan that is
confirmed will provide relief to DII Industries,  LLC. DII  Industries,  LLC may
make a contribution  to a trust in order to achieve a confirmed  plan. If a plan
is not  confirmed  that  provides  relief  to DII  Industries,  LLC,  it will be
required  to defend all open claims in the courts in which they have been filed,
possibly with reduced access to the insurance shared with Harbison-Walker.
         The stayed  asbestos  claims are those  covered by  insurance  that DII
Industries,   LLC  and  Harbison-Walker   each  access  to  pay  defense  costs,
settlements and judgments  attributable  to both  refractory and  non-refractory
asbestos  claims.  The stayed claims  include  approximately  139,000  post-1992
spin-off   refractory   claims,   7,000   pre-spin-off   refractory  claims  and
approximately  110,000  other  types of  asbestos  claims  pending  against  DII
Industries,  LLC.  Approximately  51,000 of the claims in the third category are
claims  made  against  DII  Industries,  LLC based on more than one  ground  for
recovery  and the stay  affects  only the  portion  of the claim  covered by the
shared insurance. The stay prevents litigation from proceeding while the stay is
in effect and also  prohibits  the filing of new claims.  One of the purposes of
the stay is to allow Harbison-Walker and DII Industries, LLC time to develop and
propose a plan of reorganization.
         DII   Industries,   LLC  agreed  to  provide  up  to  $35   million  of
debtor-in-possession  financing  to  Harbison-Walker  during the pendency of the
Chapter 11 proceeding of which $5 million was advanced during the  first quarter
of 2002.  On February 14, 2002, DII Industries, LLC also  paid  $40  million  to
Harbison-Walker's United States parent holding company, RHI Refractories Holding
Company.  This  payment  was made  when  Harbison-Walker  filed  its  bankruptcy
petition and was charged to discontinued  operations in our financial statements
in the first quarter of 2002. Harbison-Walker's failure to fulfill its indemnity
obligations,  and its excessive erosion of the insurance coverage,  required DII
Industries,  LLC to assist Harbison-Walker in its bankruptcy proceeding in order

                                       10


to protect the shared insurance from dissipation.  This insurance will be needed
if a trust is to be worked out with the asbestos  claimants.  The payment to RHI
Refractories  led RHI  Refractories to forgive  intercompany  debt owed to it by
Harbison-Walker,  thus increasing the assets of Harbison-Walker. DII Industries,
LLC will pay another $35 million to RHI Refractories if a plan of reorganization
acceptable to DII Industries,  LLC is proposed in the bankruptcy proceedings.  A
further $85 million will be paid to RHI Refractories if a plan acceptable to DII
Industries,  LLC is approved  by 75% of the  Harbison-Walker  asbestos  claimant
creditors and confirmed by the Bankruptcy Court.
         As a result of DII Industries, LLC's continuing settlement negotiations
with the Asbestos Claimants  Committee,  or ACC, which was formed as part of the
Harbison-Walker  bankruptcy,  and certain law firms that represent a substantial
percentage of the plaintiffs that have asserted  Harbison-Walker-related  claims
against DII Industries,  LLC, the temporary restraining order originally entered
by the  Bankruptcy  Court on February  14, 2002 has been  consensually  extended
until at least  September 18, 2002. On September 18, 2002, DII  Industries,  LLC
and the ACC will present a status report to the Bankruptcy  Court. To the extent
that the settlement negotiations continue to make progress, DII Industries,  LLC
anticipates  that the ACC will consent to have the temporary  restraining  order
extended for an additional period of time.
         DII Industries,  LLC's settlement  negotiations with the law firms that
represent   a   substantial   majority   of   plaintiffs   that  have   asserted
Harbison-Walker-related claims against DII Industries, LLC have not been limited
to Harbison-Walker-related claims. Rather, DII Industries, LLC is exploring with
these law firms the  possibility  of resolving,  on a global  basis,  all of the
refractory asbestos claims, all of the other DII Industries, LLC asbestos claims
(including  claims  related  to  historic  DII  Industries,   LLC  manufacturing
operations   and   Worthington   Corporation)   and  all  of  the   construction
asbestos-related  claims,  including all future  asbestos-related  claims. These
broader negotiations involve difficult and complex issues. At this time there is
no  assurance  that DII  Industries,  LLC  will be able to  reach an  acceptable
agreement.  We expect that these negotiations will continue for some time before
we will even be able to make a  judgment  as to whether a global  settlement  is
reasonably likely.
         Asbestos  insurance  coverage.  DII  Industries,  LLC  has  substantial
insurance  that  reimburses  it for  portions  of the costs  incurred  defending
asbestos  claims,  as well as amounts paid to settle claims and court judgments.
This  coverage is provided by a large  number of insurance  policies  written by
dozens of insurance companies. The insurance companies wrote the coverage over a
period of more than 30 years for DII  Industries,  LLC, its  predecessors or its
subsidiaries  and their  predecessors.  Large  amounts of this  coverage are now
subject to  coverage-in-place  agreements that resolve issues concerning amounts
and terms of coverage. The amount of insurance available to DII Industries,  LLC
and its  subsidiaries  depends on the nature and time of the alleged exposure to
asbestos,  the specific  subsidiary  against which an asbestos claim is asserted
and other factors.
         Refractory claims insurance. DII Industries, LLC has approximately $2.1
billion in  aggregate  limits of  insurance  coverage  for  refractory  asbestos
claims, of which over one-half is with Equitas or other  London-based  insurance
companies.  Most of this insurance is shared with  Harbison-Walker.  Many of the
issues  relating  to the  majority  of  this  coverage  have  been  resolved  by
coverage-in-place  agreements  with dozens of companies,  including  Equitas and
other London-based  insurance companies.  Recently,  however,  Equitas and other
London-based  companies have attempted to impose new  restrictive  documentation
requirements  on DII Industries,  LLC and other insureds.  Equitas and the other
London-based  companies  have  stated that the new  requirements  are part of an
effort to limit payment of  settlements  to claimants who are truly  impaired by
exposure to asbestos and can identify the product or premises  that caused their
exposure.
         On March 21, 2002, Harbison-Walker filed a lawsuit in the United States
Bankruptcy  Court for the  Western  District of  Pennsylvania  in its Chapter 11
bankruptcy proceeding.  This lawsuit is substantially similar to DII Industries,
LLC's lawsuit filed in Texas State Court in 2001 and seeks,  among other relief,
a determination as to the rights of DII Industries,  LLC and  Harbison-Walker to
the shared general liability  insurance.  The lawsuit also seeks damages against
certain  insurers  for  breach of  contract  and bad  faith,  and a  declaratory
judgment  concerning  the  insurers'  obligations  under the  shared  insurance.
Although  DII  Industries,  LLC is  also a  defendant  in this  lawsuit,  it has

                                       11


asserted its own claim to coverage under the shared insurance and is cooperating
with  Harbison-Walker  to secure both companies' rights to the shared insurance.
The  Bankruptcy  Court has  ordered  the  parties  to this  lawsuit to engage in
non-binding mediation. The first mediation session was held on July 26, 2002 and
additional sessions are scheduled to take place, provided the Bankruptcy Court's
mediation  order  remains in effect,  in September,  October and November  2002.
Given the early stages of these negotiations, DII Industries, LLC cannot predict
whether  a  negotiated  resolution  of this  dispute  will  occur  or, if such a
resolution does occur, the precise terms of such a resolution.
         Prior  to the  Harbison-Walker  bankruptcy,  on  August  7,  2001,  DII
Industries,  LLC filed a lawsuit in Dallas  County,  Texas,  against a number of
these insurance companies asserting DII Industries, LLC rights under an existing
coverage-in-place  agreement  and under  insurance  policies  not yet subject to
coverage-in-place   agreements.  The  coverage-in-place   agreements  allow  DII
Industries,  LLC to enter into  settlements for small amounts without  requiring
claimants to produce detailed  documentation  to support their claims,  when DII
Industries,  LLC believes the  settlements  are an effective  claims  management
strategy. DII Industries,  LLC believes that the new documentation  requirements
are  inconsistent  with  the  current   coverage-in-place   agreements  and  are
unenforceable.  The insurance  companies that DII Industries,  LLC has sued have
not refused to pay larger claim settlements  where  documentation is obtained or
where court judgments are entered.  Also, they continue to pay previously agreed
to amounts of defense costs that DII Industries, LLC incurs defending refractory
asbestos  claims.  All of the asbestos claims to which this insurance covers are
currently stayed by the Harbison-Walker  bankruptcy, and consequently the breach
of the  coverage-in-place  agreements  is  currently  having no impact  upon DII
Industries, LLC.
         On May 10, 2002,  the  London-based  insuring  entities  and  companies
removed DII  Industries,  LLC's  Dallas  County State Court Action to the United
States  District Court for the Northern  District of Texas alleging that federal
court  jurisdiction  existed  over  the  case  because  it  is  related  to  the
Harbison-Walker  bankruptcy. DII Industries, LLC has filed an opposition to that
removal  and has asked the  federal  court to remand the case back to the Dallas
County state court.  On June 12, 2002, the  London-based  insuring  entities and
companies  filed  a  motion  to  transfer  the  case  to the  federal  court  in
Pittsburgh,  Pennsylvania.  DII Industries,  LLC has filed an opposition to that
motion to transfer.  The federal court in Dallas has yet to rule on any of these
motions.  Regardless  of the  outcome of these  motions,  because of the similar
insurance   coverage  lawsuit  filed  by   Harbison-Walker   in  its  bankruptcy
proceeding,  it is  unlikely  that  DII  Industries,  LLC's  case  will  proceed
independently of the bankruptcy.
         Other DII Industries,  LLC claims  insurance.  DII Industries,  LLC has
substantial  insurance  to  cover  other  non-refractory  asbestos  claims.  Two
coverage-in-place   agreements  cover  DII  Industries,  LLC  for  companies  or
operations  that DII  Industries,  Inc.,  either  acquired or operated  prior to
November  1, 1957.  Asbestos  claims that are  covered by these  agreements  are
currently stayed by the Harbison-Walker  bankruptcy because the majority of this
coverage also applies to refractory  claims and is shared with  Harbison-Walker.
Other insurance  coverage is provided by a number of different policies that DII
Industries, LLC acquired rights to access when it acquired businesses from other
companies. Three coverage-in-place agreements provide reimbursement for asbestos
claims made against DII Industries,  LLC former Worthington pump division. There
is also other substantial  insurance coverage with approximately $2.0 billion in
aggregate limits that has not yet been reduced to coverage-in-place agreements.
         On August 28, 2001,  DII  Industries,  LLC filed a lawsuit in the 192nd
Judicial District of the District Court for Dallas County, Texas against certain
London-based  insuring  entities  that issued  insurance  policies  that provide
coverage to DII Industries, LLC for asbestos-related  liabilities arising out of
the historical  operations of Worthington  Corporation or its  successors.  This
lawsuit raises  essentially the same issue as to the documentation  requirements
as the  August 7, 2001  Harbison-Walker  lawsuit  filed in the same  court.  The
London-based insuring entities filed a motion in that case seeking to compel the
parties to binding  arbitration.  The trial  court  denied  that  motion and the
London-based  insuring  entities  appealed that decision to the state  appellate
court.  The state  appellate  court  denied the  appeal and the case  should now
proceed to resolution in the trial court.
         A  significant   portion  of  the  insurance  coverage   applicable  to
Worthington claims is alleged by Federal-Mogul  Products, Inc. to be shared with
it. In 2001,  Federal-Mogul  Products, Inc. and a large number of its affiliated
companies filed a voluntary petition for reorganization  under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court in Wilmington, Delaware.

                                       12


         In response to  Federal-Mogul's  allegations,  on December 7, 2001, DII
Industries,  LLC filed a lawsuit in the Delaware  Bankruptcy Court asserting its
rights to insurance coverage under historic general liability policies issued to
Studebaker-Worthington,  Inc. and its successor for asbestos-related liabilities
arising from, among other operations, Worthington's and its successors' historic
operations.  This  lawsuit  also seeks a  judicial  declaration  concerning  the
competing  rights of DII  Industries,  LLC and  Federal-Mogul,  if any,  to this
insurance  coverage.  DII  Industries,  LLC  recently  filed  a  second  amended
complaint  in that  lawsuit  and the  parties are now  beginning  the  discovery
process.
         At the same time,  DII  Industries,  LLC filed its  insurance  coverage
action in the Federal-Mogul bankruptcy,  DII Industries, LLC also filed a second
lawsuit in which it has filed a motion for preliminary injunction seeking a stay
of all Worthington  asbestos-related  lawsuits against DII Industries,  LLC that
are  scheduled  for trial  within  the six  months  following  the filing of the
motion.  The stay that DII Industries,  LLC seeks,  if granted,  would remain in
place until the competing rights of DII Industries, LLC and Federal-Mogul to the
allegedly shared insurance are resolved. The Court has yet to schedule a hearing
on DII Industries, LLC motion for preliminary injunction.
         A number of insurers  who have agreed to  coverage-in-place  agreements
with DII  Industries,  LLC have suspended  payment under the shared  Worthington
policies until the Federal-Mogul Bankruptcy Court resolves the insurance issues.
Consequently,  the effect of the  Federal-Mogul  bankruptcy  on DII  Industries,
LLC's rights to access this shared insurance is uncertain.
         Construction claims insurance.  Nearly all of our construction asbestos
claims relate to Brown & Root,  Inc.  operations  before the 1980s.  Our primary
insurance  coverage for these claims was written by Highlands  Insurance Company
during the time it was one of our  subsidiaries.  Highlands  was spun-off to our
shareholders in 1996. On April 5, 2000,  Highlands filed a lawsuit against us in
the Delaware Chancery Court.  Highlands asserted that the insurance it wrote for
Brown & Root, Inc. that covered  construction  asbestos claims was terminated by
agreements  between  Halliburton and Highlands at the time of the 1996 spin-off.
In March 2001,  the Chancery  Court ruled that a termination  did occur and that
Highlands  was not  obligated  to  provide  coverage  for  Brown & Root,  Inc.'s
asbestos  claims.  This  decision was affirmed by the Delaware  Supreme Court on
March 13, 2002.  As a result of this  ruling,  we  wrote-off  approximately  $35
million in accounts receivable for amounts paid for claims and defense costs and
$45 million of accrued receivables in relation to estimated insurance recoveries
claims  settlements  from  Highlands in the first quarter 2002. In addition,  we
dismissed  the April 24,  2000  lawsuit  we filed  against  Highlands  in Harris
County, Texas.
         As a consequence  of the Delaware  Supreme  Court's  decision,  Kellogg
Brown & Root no  longer  has  primary  insurance  coverage  from  Highlands  for
asbestos claims. However,  Kellogg Brown & Root has significant excess insurance
coverage.  The amount of this  excess  coverage  that will  reimburse  us for an
asbestos claim depends on a variety of factors. On March 20, 2002, Kellogg Brown
& Root filed a lawsuit in the 172nd  Judicial  District of the District Court of
Jefferson County,  Texas,  against Kellogg Brown & Root's historic insurers that
issued these excess  insurance  policies.  In the lawsuit,  Kellogg Brown & Root
seeks to establish the specific terms under which it can seek  reimbursement for
costs it incurs in settling  and  defending  asbestos  claims from its  historic
construction operations. Until this lawsuit is resolved, the scope of the excess
insurance  will  remain  uncertain.  We do not expect the excess  insurers  will
reimburse us for asbestos claims until this lawsuit is resolved.
         Significant  asbestos  judgments  on appeal.  During  2001,  there were
several adverse  judgments in trial court proceedings that are in various stages
of the appeal process.  All of these judgments concern asbestos claims involving
Harbison-Walker  refractory products.  Each of these appeals,  however, has been
stayed by the Bankruptcy Court in the Harbison-Walker Chapter 11 bankruptcy.
         On  November  29,  2001,  the Texas  District  Court in Orange,  Texas,
entered  judgments  against DII  Industries,  LLC on a $65 million  jury verdict
rendered in September 2001 in favor of five  plaintiffs.  The $65 million amount
includes $15 million of a $30 million judgment  against DII Industries,  LLC and
another defendant.  DII Industries,  LLC is jointly and severally liable for $15
million in addition to $65 million if the other defendant does not pay its share
of this judgment.  We believe that during the trial the court committed numerous
errors, including prohibiting DII Industries,  LLC from presenting evidence that
the alleged  illness of the plaintiffs was caused by products of other companies
that had  previously  settled  with the  plaintiffs.  We intend  to appeal  this
judgment and believe that the Texas  appellate  courts will  ultimately  reverse
this judgment.

                                       13


         On November 29, 2001, the same District Court in Orange, Texas, entered
three additional  judgments against DII Industries,  LLC in the aggregate amount
of $35.7  million in favor of 100 other  asbestos  plaintiffs.  These  judgments
relate to an alleged breach of purported  settlement  agreements signed early in
2001 by a New Orleans lawyer hired by Harbison-Walker,  which had been defending
DII  Industries,  LLC  pursuant to the  agreement by which  Harbison-Walker  was
spun-off  by DII  Industries,  LLC in July  1992.  These  settlement  agreements
expressly bind Harbison-Walker  Refractories Company as the obligated party, not
DII Industries, LLC. DII Industries, LLC intends to appeal these three judgments
on the grounds that it was not a party to the  settlement  agreements and it did
not authorize  anyone to settle on its behalf.  We believe that these  judgments
are contrary to applicable law and will be reversed.
         On December 5, 2001, a jury in the Circuit  Court for  Baltimore  City,
Maryland,  returned  verdicts  against DII Industries,  LLC and other defendants
following  a trial  involving  refractory  asbestos  claims.  Each  of the  five
plaintiffs alleges exposure to  Harbison-Walker  products.  DII Industries,  LLC
portion of the  verdicts was  approximately  $30 million.  DII  Industries,  LLC
believes  that the trial  court  committed  numerous  errors  and that the trial
evidence did not support the verdicts.  The trial court has entered  judgment on
these  verdicts.  DII  Industries,  LLC  intends to appeal the  judgment  to the
Maryland  Supreme  Court  where we expect  the  judgment  will be  significantly
reduced, if not totally reversed.
         On  October  25,  2001,  in  the  Circuit   Court  of  Holmes   County,
Mississippi,  a jury  verdict  of $150  million  was  rendered  in  favor of six
plaintiffs against DII Industries,  LLC and two other companies. DII Industries,
LLC share of the  verdict  was  $21.3  million.  The award was for  compensatory
damages.  The jury did not  award any  punitive  damages.  The  trial  court has
entered judgment on the verdict. We believe there were serious errors during the
trial and we intend to appeal this judgment to the Mississippi Supreme Court. We
believe the judgment will ultimately be reversed  because there was a total lack
of evidence that the  plaintiffs  were exposed to a  Harbison-Walker  product or
that they suffered compensatory  damages.  Also, there were procedural errors in
the selection of the jury.
         Asbestos claims history.  Since 1976,  approximately  525,000  asbestos
claims have been filed  against us. Almost all of these claims have been made in
separate  lawsuits in which we are named as a  defendant  along with a number of
other defendants, often exceeding 100 unaffiliated defendant companies in total.
During the second quarter of 2002, we received  approximately  26,000 new claims
and we closed  approximately  7,000  claims.  The number of open claims  pending
against  us at the end of the second  quarter  of 2002,  at the end of the first
quarter of 2002, at the end of each quarter of 2001 and at the end of 2000 is as
follows:


                           Total Open
Period Ending                Claims
-----------------------------------------
                        
June 30, 2002                312,000
March 31, 2002               292,000
December 31, 2001            274,000
September 30, 2001           146,000
June 30, 2001                145,000
March 31, 2001               129,000
December 31, 2000            117,000
=========================================

         The claims include  approximately  139,000 at June 30, 2002, 133,000 at
March 31, 2002 and 125,000 at December 31, 2001 of post spin-off Harbison-Walker
refractory related claims that name DII Industries, LLC as a defendant.
         We manage  asbestos  claims to achieve  settlements of valid claims for
reasonable  amounts.  When  reasonable  settlement is not  possible,  we contest
claims in court. Since 1976, we have closed approximately 214,000 claims through
settlements and court proceedings at a total cost of approximately $173 million.
We have  received or expect to receive from our  insurers all but  approximately
$72 million of this cost,  resulting  in an average net cost per closed claim of
about $336.

                                       14


         Asbestos  study and the  valuation  of  unresolved  current  and future
asbestos claims, and related insurance receivables. DII Industries, LLC 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-related   bodily  injury  claims  asserted   against  DII
Industries,  LLC and its subsidiaries.  Dr. Rabinovitz is a nationally  renowned
expert  in  conducting  such  analyses,   has  been  involved  in  a  number  of
asbestos-related  and other toxic tort-related  valuations of current and future
liabilities,  has  served  as the  expert  for  two  representatives  of  future
claimants  in  asbestos   related   bankruptcies   and  has  had  her  valuation
methodologies accepted by numerous courts.  Further, the methodology utilized by
Dr.  Rabinovitz  is the same  methodology  that is utilized by the expert who is
routinely  retained by the  asbestos  claimants  committee  in  asbestos-related
bankruptcies.  Dr.  Rabinovitz  estimated  the  probable  number  and  value  of
unresolved  current and future  asbestos-related  bodily injury claims  asserted
against  DII  Industries,  LLC  and  its  subsidiaries  over a  50 year  period.


      In the past, we have only provided for known  outstanding  claims as we
did not have  sufficient  information  to make a  reasonable  estimate of future
asbestos  claims liability.  However, as a result of Dr. Rabinovitz's  analysis,
we are now in a position to accrue not only for known open claims, but  also for
the projected costs to resolve  asbestos claims  through  2052.

         The methodology  utilized by Dr.  Rabinovitz to project DII Industries,
LLC's and its  subsidiaries'  asbestos-related  liabilities  and  defense  costs
relied upon and included:
         -    an  analysis  of DII  Industries,  LLC's,  Kellogg,  Brown & Root,
              Inc.'s  and  Harbison-Walker   Refractories  Company's  historical
              asbestos   settlements   and  defense  costs  to  develop  average
              settlement   values  and  average   defense   costs  for  specific
              asbestos-related  diseases and for the specific business operation
              or entity allegedly responsible for the asbestos-related diseases;
         -    an  analysis  of DII  Industries,  LLC's,  Kellogg,  Brown & Root,
              Inc.'s  and   Harbison-Walker   Refractories   Company's   pending
              inventory of asbestos-related claims by specific  asbestos-related
              diseases  and  by  the  specific  business   operation  or  entity
              allegedly responsible for the asbestos-related disease;

      -    an analysis  of the claims  filing  history  for  asbestos-related
              claims against DII Industries,  LLC,  Kellogg,  Brown & Root, Inc.
              and  Harbison-Walker  Refractories  Company   since  January  2000
              (two-year claims  history) and  alternatively  since  January 1997
              (five-year claims history)  by specific  asbestos-related  disease
              and  by business  operation or  entity  allegedly responsible  for
              the asbestos-related disease;

         -    an analysis of the population likely to have been exposed or claim
              exposure to products  manufactured  by DII  Industries,  LLC,  its
              predecessors and  Harbison-Walker  or to Brown & Root construction
              and renovation projects; and
         -    epidemiological studies to estimate the number of people who might
              allege  exposure to products  manufactured  by DII Industries LLC,
              its   predecessors  and   Harbison-Walker   or  to  Brown  &  Root
              construction  and  renovation  projects  that  would be  likely to
              develop asbestos-related diseases.

      Dr.  Rabinovitz's  estimates  are based on historical  data supplied by
DII  Industries,  LLC,  Kellogg,  Brown & Root,  Inc.  and  Harbison-Walker  and
publicly available studies,  including annual surveys by the National Institutes
of Health concerning the incidence of mesothelioma deaths. In her analysis,  Dr.
Rabinovitz  projected that the elevated and historically  unprecedented  rate of
claim filings of the last several years, especially as expressed by the ratio of
nonmalignant  claim filings to malignant claim filings,  would continue into the
future for 5 more years. After that, Dr. Rabinovitz  projected that the ratio of
nonmalignant  claim filings to malignant  claim filings will gradually  decrease
for a 10 year period  ultimately  returning to the historical  claiming rate and
claiming ratio. In making her calculation Dr. Rabinovitz  alternately  assumed a
somewhat lower rate of claim filings, based on an average of the last five years
of claims experience, would continue into the future for five more years and
decrease thereafter.

         Other important  assumptions  utilized in Dr.  Rabinovitz's  estimates,
which we relied upon in making our accrual are:
         -    an assumption that there will be no legislative or other  systemic
              changes to the tort system;

                                       15


         -    that the  Company will  continue to  aggressively  defend  against
              asbestos claims made against the Company; and
         -    an inflation rate of 3% annually for settlement payments and an
              inflation rate of 4% annually for defense costs.

      Based upon her analysis, Dr. Rabinovitz estimated DII Industries, LLC's
total, undiscounted asbestos liabilities, including  defense costs, through 2052
to be within a range from $2.2 billion to $3.5 billion.  As of June 30, 2002, we
do  not  believe  there  is  a  better  amount within  the expert's  range  and,
therefore, we based our estimated accrual for asbestos liability  on the low-end
of the  expert's range, or  $2.2 billion, in accordance with  SFAS 5 and related
interpretations  (which includes  payments related to  the approximately 312,000
claims currently pending).


      If we had adjusted our accrual for asbestos liabilities for current and
future  asbestos claims  up to  the high-end  of  the  expert's  range,  or $3.5
billion,  and adjusted  the  related  probable  insurance recovery  up  to  $2.0
billion, we would  have recorded  an additional  pretax charge  of  $879 million
($753 million after-tax).


      Using Dr.  Rabinovitz's  projections,  we then conducted an analysis to
determine  the amount of  insurance  that we estimate  is probable  that we will
recover in relation to the  projected  claims and defense costs through 2052. In
conducting this analysis, we:


      -    reviewed DII Industries,  LLC's historical course of dealings with
              its insurance companies concerning the payment of asbestos-related
              claims,  including  DII  Industries,  LLC's 15 year litigation and
              settlement history;

         -    reviewed  the terms  of DII  Industries,  LLC's  prior and current
              coverage-in-place settlement agreements;
         -    reviewed the status of DII Industries,  LLC's and Kellogg, Brown &
              Root,  Inc.'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,  LLC's  insurers  to meet  their obligations.


      Based on that review,  analyses  and  discussions,  we made  judgements
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 DII Industries,  LLC's asbestos
liabilities  through  2052.  This analysis  factored in the probable  effects of
self-insurance  features,  such as self-insured  retentions,  policy exclusions,
liability caps,  current and anticipated  insolvencies of DII Industries,  LLC's
insurers, and various judicial determinations relevant to DII Industries,  LLC's
insurance programs.


      Based on Dr. Rabinovitz's  projections and our analysis of the probable
insurance  recoveries,  we established  reserves for the probable and reasonably
estimable  liabilities  and defense costs we believe we will pay through 2052 of
$2.2 billion, and we have also recorded receivables for the insurance recoveries
that are deemed probable through that same date of $1.6 billion.  These reserves
and insurance  receivables are included in noncurrent assets and liabilities due
to the extended time periods involved to settle claims. In the second quarter of
2002, we recorded a pretax charge of $483 million.  Of this pretax charge,  $330
million, $268 million after-tax, was recorded for claims related to Brown & Root
construction and renovation  projects and was recorded under the Engineering and
Construction Group segment. The balance of $153 million, $123 million after-tax,
related  to claims  associated  with  businesses  no longer  owned by us and was
recorded as discontinued operations.  The low effective tax rate on the asbestos
charge is due to the  recording  of a  valuation  allowance  against  the United
States federal  deferred tax asset  associated  with the accrual as the deferred
tax  asset  may  not be  fully  realizable  based  upon  future  taxable  income
projections.


      The total estimated claims through 2052,  including the 312,000 current
open claims,  are approximately one million. A summary of our reserves for these
claims and corresponding insurance recoveries is as follows:


                                       16




                                                        June 30      December 31
                                                     ------------------------------
Millions of dollars                                       2002          2001
-----------------------------------------------------------------------------------
                                                               
Asbestos litigation claims                              $   2,196       $   737
-----------------------------------------------------------------------------------
Estimated insurance recoveries:
     Highlands Insurance Company                                -           (45)
     Other insurance carriers                              (1,594)         (567)
-----------------------------------------------------------------------------------
Insurance for asbestos litigation claims                   (1,594)         (612)
-----------------------------------------------------------------------------------

Net liability for open and future (through 2052)
     asbestos claims                                    $     602       $   125

===================================================================================

         Accounts  receivable  for billings to insurance  companies for payments
made on asbestos  claims were $30 million at June 30,  2002,  and $18 million at
December 31, 200l,  excluding accounts  receivable written off at the conclusion
of the Highlands litigation.

      The insurance  recoveries  we have recorded  do not assume any recovery
from insolvent  insurers or from any state  insurance  guaranty  association and
assume that all but one of our insurance  companies  that are currently  solvent
will continue  to be solvent  throughout the period of the applicable recoveries
in  the projections.  However, there can be no assurances that these assumptions
will be  correct.  The  insurance  receivables  do not  exhaust  the  applicable
insurance coverage for asbestos-related liabilities.

         Given the inherent uncertainty in making future projections, we plan to
have the  projections  periodically  reexamined,  and  update  them based on our
experience and other relevant factors such as changes in the tort system and the
resolution of the bankruptcies of various  asbestos  defendants.  Similarly,  we
will re-evaluate our projections concerning our probable insurance recoveries in
light  of any  updates  to Dr.  Rabinovitz's  projections,  developments  in DII
Industries, LLC's and Kellogg, Brown & Root, Inc.'s various lawsuits against its
insurance  companies  and  other  developments  that  may  impact  the  probable
insurance recoveries.
         Securities  and Exchange  Commission  ("SEC")  Preliminary  Inquiry and
Fortune 500 Review.  In late May 2002,  we received a letter from the Fort Worth
District  Office of the Securities and Exchange  Commission  stating that it was
initiating a preliminary  inquiry into certain of our accounting  practices.  On
June 11, 2002, we received an additional letter requesting information regarding
our accounting  for cost overruns on  construction projects  and requesting  our
voluntary assistance. We responded to that request promptly and met with members
of the SEC staff to discuss  our  response.  We  received a further  request for
voluntary assistance on July 11, 2002, which requested  additional  explanations
and supporting documentation.  We are in the process of collecting the requested
documents  and  preparing  responses  to  specific   inquiries.   We  are  fully
cooperating and actively engaged in assisting in the SEC's review.
         The SEC's  preliminary  inquiry  largely  relates  to our  accruals  of
revenue from  unapproved  claims on engineering and  construction  contracts and
whether we timely  disclosed  our  accrual  practice.  Accrual  of revenue  from
unapproved  claims is an accepted and widely  followed  accounting  practice for
companies in  the engineering  and construction  business.  Although  we accrued
unapproved claims in 1998,  we first  disclosed  the accruals in our 1999 Annual
Report on Form 10-K.  We believe we properly applied the required methodology of
the American  Institute of Certified Public Accountants' Statement  of  Position
81-1,   "Accounting   for   Performance   of   Construction-Type   and   Certain
Production-Type  Contracts",  and  satisfied the relevant  criteria for accruing
this revenue.  The SEC may conclude otherwise.

                                       17


         On  December  21,  2001,  the SEC's  Division  of  Corporation  Finance
announced  that it would review the annual  reports of all Fortune 500 companies
that file periodic reports with the SEC. Accordingly,  our 2001 Annual Report on
Form 10-K is  subject  to  special  review  by the SEC staff and we may  receive
comments from the SEC staff in addition to the matters  described  above. If so,
we will  promptly  respond and attempt to resolve  any  questions  raised by the
Division of Corporation Finance.
         Securities  litigation.  On June 3, 2002,  a class  action  lawsuit was
filed against us in the United States  District Court for the Northern  District
of Texas on behalf of purchasers of our common stock alleging  violations of the
federal  securities  laws.  After that date, in excess of fifteen  similar class
actions were filed against us in that or other federal District Courts.  Several
of those  lawsuits  also  named as  defendants  Arthur  Andersen,  LLP  ("Arthur
Andersen"),  our independent  accountants for the period covered by the lawsuit,
and several of our present or former  officers  and  directors.  Those  lawsuits
allege that we violated federal  securities laws in failing to disclose a change
in the manner in which we accounted for  unapproved  claims on  engineering  and
construction  contracts,   and  that  we  overstated  revenue  by  accruing  the
unapproved claims. One such action has since been dismissed voluntarily, without
prejudice, upon motion by the filing plaintiff.
         In addition to those class actions,  two additional  class actions have
been  filed  against  us and  several  of our  present  or former  officers  and
directors  alleging  different  causes of action based upon essentially the same
facts and circumstances  alleged in the federal  securities fraud class actions.
One such  action,  filed in the United  States  District  Court for the Northern
District of Texas,  alleges  violations  of ERISA  based on the  purchase of our
securities for our 401(k) retirement plan when we allegedly knew, or should have
known, that our financial statements  understated losses on certain construction
contracts  because of our accrual of  revenues  for as yet  unresolved  contract
claims.  The other,  which joins  Arthur  Andersen as an  additional  defendant,
alleges violations of Texas statutory and common law based on the same facts and
circumstances as the other cases.
         The damages in all of these cases are unspecified.  We believe that our
actions in accruing  revenue for  unresolved  construction  contract  claims and
related  disclosures  were  appropriate,  and that  the  various  class  actions
described  above should be resolved in our favor.  Therefore,  we intend to deny
any wrongdoing and to vigorously defend against these lawsuits. However, at this
point all of these lawsuits are in a very  preliminary  stage,  we have not been
called upon to file responsive  pleadings or dispositive  motions, and discovery
has not  commenced.  Although we believe  that our position  ultimately  will be
vindicated,  it is not  possible  to  estimate  the  amount  of loss or range of
possible loss that might result from adverse  judgments or  settlements of these
matters.
         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 the  patent  infringement  lawsuit  brought  by BJ  Services
Company,  or BJ. The lawsuit alleged that a well fracturing fluid system used by
Halliburton  Energy Services 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,  less than
one-quarter  of BJ's claim at the  beginning  of the trial.  The jury also found
that there was no intentional  infringement by Halliburton Energy Services. As a
result of the jury's  determination of  infringement,  the court has enjoined us
from further use of our Phoenix  fracturing  fluid. We have posted a supersedeas
bond in the amount of  approximately  $106  million  to cover the damage  award,
pre-judgment  and  post-judgment  interest,  and awardable costs. We have timely
appealed  this  verdict to the Court of Appeals for the Federal  Circuit,  which
hears all appeals of patent  cases.  We believe  that BJ's patent is invalid and
unenforceable  on a number of  grounds,  and  intend to  pursue  vigorously  our
appeal. We have alternative products to use in our fracturing operations, and do
not  expect  the  loss  of the use of the  Phoenix  fracturing  fluid  to have a
material adverse impact on our overall energy services business.
         Improper payments  reported to the Securities and Exchange  Commission.
We have  reported to the  Securities  and  Exchange  Commission  that one of our
foreign   subsidiaries   operating   in  Nigeria  made   improper   payments  of
approximately  $2.4 million to 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

                                       18


discovered  during an audit of the  foreign  subsidiary.  We have  conducted  an
investigation  assisted by outside legal  counsel.  Based on the findings of the
investigation we have terminated several employees.  None of our senior officers
were involved. We are cooperating with the Securities and Exchange Commission in
its review of the  matter.  We plan to take  further  action to ensure  that our
foreign  subsidiary  pays all taxes owed in Nigeria,  which may be as much as an
additional  $3 million and this amount was fully  accrued as of March 31,  2002.
The  integrity  of our  Code  of  Business  Conduct  and  our  internal  control
procedures are essential to the way we conduct business.
         Environmental.  We are  subject  to  numerous  environmental  legal and
regulatory requirements related to our operations worldwide. We take a proactive
approach  to  evaluating  and  addressing  the   environmental   impact  of  our
operations.  Each year we assess and remediate contaminated  properties in order
to avoid future  liabilities and comply with legal and regulatory  requirements.
On occasion we are  involved in specific  environmental  litigation  and claims,
including  the clean-up of properties we own or have operated as well as efforts
to meet or correct compliance-related matters.
         We  also  incur  costs   related  to  compliance   with   ever-changing
environmental,  legal and regulatory  requirements in the jurisdictions where we
operate. It is very difficult to quantify the potential  liabilities.  We do not
expect these  expenditures to have a material adverse effect on our consolidated
financial  position or our results of operations.  Our accrued  liabilities  for
environmental matters were $48 million as of June 30, 2002 and $49 million as of
December 31, 2001.
         Letters of credit. In the normal course of business, we have agreements
with banks under which  approximately  $1.3 billion of letters of credit or bank
guarantees  were  issued,  including  $220  million  which  relate  to our joint
ventures'  operations.  Of these  financial  instruments,  $260 million  include
provisions that  allow the banks to require cash  collateralization  if our debt
ratings fall below the investment  grade ratings of BBB- by Standard & Poor's or
Baa3 by Moody's  Investors' Services.  If our debt ratings fall below investment
grade, we  would  also  be in  technical  breach  of  a bank  agreement covering
another $127 million of letters of credit at June 30, 2002,  which might entitle
the bank to set-off rights. In addition,  a $151 million letter  of credit line,
of which $85 million has been issued, includes provisions that allow the bank to
require  cash  collateralization  for  the full  line if  debt ratings of either
rating agency  fall  below the  rating of  BBB by  Standard & Poor's  or Baa2 by
Moody's  Investors'  Services.  These  letters of  credit  and  bank  guarantees
generally relate to our guaranteed  performance or retention  payments under our
long-term contracts and self-insurance.  In the past, no significant claims have
been made against these  financial  instruments.  We do not anticipate  material
losses to occur as a result of these financial instruments.
         Liquidated  damages.  We have not accrued $280 million at June 30, 2002
and  $97  million  at  December  31,  2001  of   contractual   obligations   for
schedule-related liquidated damages as we do not believe payment is probable. We
believe we have valid claims for schedule extensions against the customers which
would counter these liquidated damages.  Of the total liquidated  damages,  $260
million  at June 30,  2002 and $77  million  at  December  31,  2001  relate  to
unasserted  liquidated damages for one project in Brazil. The estimated schedule
impact  of  change  orders  requested  by the  customer  is  expected  to  cover
approximately  one-half of the $260 million exposure at June 30, 2002 and claims
for schedule extension are expected to cover the remaining exposure.
         Other.  We are a party to various other legal  proceedings.  We expense
the cost of legal fees related to these proceedings.  We believe any liabilities
we  may  have  arising  from  these  proceedings  will  not be  material  to our
consolidated financial position or results of operations.

                                       19


Note 9.  Income (loss) Per Share


                                                             Three Months                     Six Months
                                                             Ended June 30                   Ended June 30
Millions of dollars and shares except                 ----------------------------    ----------------------------
per share data                                            2002           2001             2002          2001
------------------------------------------------------------------------------------------------------------------
                                                                                         
Income (loss) from continuing operations before
     change in accounting method, net                  $   (358)      $    143         $   (308)     $    229
==================================================================================================================
Basic weighted average shares                               432            427              432           427
Effect of common stock equivalents                            -              3                -             3
------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares                             432            430              432           430
==================================================================================================================

Income (loss) per common share from continuing
     operations before change in accounting
     method, net:
Basic                                                  $  (0.83)      $   0.34         $  (0.71)     $   0.54
==================================================================================================================
Diluted                                                $  (0.83)      $   0.33         $  (0.71)     $   0.53
==================================================================================================================

         Basic income (loss)  per share is based  on the weighted average number
of common shares outstanding during the period.  Diluted income (loss) per share
includes additional  common shares that would have been outstanding if potential
common shares  with a dilutive effect  had been issued.  For the  second quarter
2002 and the six months  ended June 30,  2002,  we have used the basic  weighted
average shares in the calculation as the  effect of the common stock equivalents
would  be  anti-dilutive  based  upon the  net loss from continuing  operations.
Included in the  computation  of  diluted income  per share at June 30, 2001 are
rights we issued  in connection with the  PES acquisition for 0.7 million shares
of Halliburton common stock. Excluded from the computation of diluted income per
share are options to  purchase  1.9  million  shares of common  stock which were
outstanding  during the three months ended June 30, 2001 and options to purchase
2.1 million shares of common stock which were outstanding  during the six months
ended June 30,  2001.  These  options  were  outstanding  during the  applicable
period, but were excluded because the option exercise price was greater than the
average market price of the common shares.

Note 10.  Comprehensive Income (loss)
         The components of other comprehensive  income adjustments to net income
(loss)  include the  cumulative  translation  adjustment  of some of our foreign
entities,   minimum  pension  liability  adjustments  and  unrealized  gains  on
investments and derivatives.


                                                             Three Months                     Six Months
                                                             Ended June 30                   Ended June 30
                                                      ----------------------------    ----------------------------
Millions of dollars                                       2002           2001             2002          2001
------------------------------------------------------------------------------------------------------------------
                                                                                          
Net income (loss)                                       $   (498)      $    382         $   (476)     $    491
Cumulative translation adjustment, net of tax                 32             (4)              35           (46)
Less reclassification adjustment for gains
     included in net income                                    -            102                -           102
Net cumulative translation adjustment, net of tax             32             98               35            56
Adjustment to minimum pension liability                        -             12                -            12
Unrealized gains on investments and derivatives                -              4                -             2
------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss)                       $   (466)      $    496         $   (441)     $    561
==================================================================================================================

         Accumulated  other  comprehensive  income at June 30, 2002 and December
31, 2001 consisted of the following:


                                                               June 30            December 31
                                                              ---------          --------------
    Millions of dollars                                         2002                 2001
    -------------------------------------------------------------------------------------------
                                                                           
    Cumulative translation adjustment                          $   (170)           $   (205)
    Pension liability adjustments                                   (27)                (27)
    Unrealized losses on investments and derivatives                 (4)                 (4)
    -------------------------------------------------------------------------------------------
    Total accumulated other comprehensive income               $   (201)           $   (236)
    ===========================================================================================


                                       20


Note 11.  Goodwill and Other Intangible Assets
         Effective  January  1,  2002,  we  adopted  the  Financial   Accounting
Standards  Board SFAS No. 142 "Goodwill  and Other  Intangible  Assets",  and in
accordance with the statement,  amortization of goodwill has been  discontinued.
We have reviewed this new statement and determined  that our reporting  units as
defined  under  SFAS  No.  142  will  be the  same as our  reportable  operating
segments:  Energy Services Group and Engineering and Construction Group. We have
completed the impairment  tests of goodwill as of January 1, 2002 and determined
that our goodwill for each reporting unit is not impaired.  We also  reevaluated
our  intangible  assets and  determined  that  their  remaining  useful  life is
appropriate.
         Had we been  accounting  for our  goodwill  under  SFAS No. 142 for all
periods  presented,  our net income  (loss) and earnings  (loss) per share would
have been as follows.


                                                Three Months                 Six Months
                                               Ended June 30                Ended June 30
                                          -------------------------    ------------------------
Millions of dollars                          2002         2001            2002        2001
-----------------------------------------------------------------------------------------------
                                                                        
Reported net income (loss)                 $   (498)   $   382          $  (476)    $   491
Goodwill amortization, net of tax                 -         10                -          19
-----------------------------------------------------------------------------------------------
Adjusted net income (loss)                 $   (498)   $   392          $  (476)    $   510
===============================================================================================

Basic earnings (loss) per share:
    Reported net income (loss)             $  (1.15)   $  0.90          $ (1.10)    $  1.15
    Goodwill amortization, net of tax             -       0.02                -        0.04
-----------------------------------------------------------------------------------------------
    Adjusted net income (loss)             $  (1.15)   $  0.92          $ (1.10)    $  1.19
===============================================================================================

Diluted earnings (loss) per share:
    Reported net income (loss)             $  (1.15)   $  0.89          $ (1.10)    $  1.14
    Goodwill amortization, net of tax             -       0.02                -        0.04
-----------------------------------------------------------------------------------------------
    Adjusted net income (loss)             $  (1.15)   $  0.91          $ (1.10)    $  1.18
===============================================================================================

Note 12.  Accounts Receivable Securitization
         On April 15,  2002,  we  entered  into an  agreement  to sell  accounts
receivable to a bankruptcy-remote  limited-purpose funding subsidiary. Under the
terms of the agreement,  new receivables are added on a continuous  basis to the
pool of receivables, and collections reduce previously sold accounts receivable.
This funding  subsidiary sells an undivided  ownership  interest in this pool of
receivables to entities  managed by unaffiliated  financial  institutions  under
another agreement. Sales to the funding subsidiary have been structured as "true
sales"  under  applicable  bankruptcy  laws,  and  the  assets  of  the  funding
subsidiary  are not  available  to pay any  creditors of  Halliburton  or of its
subsidiaries  or  affiliates,   until  such  time  as  the  agreement  with  the
unaffiliated   companies  is  terminated  following  sufficient  collections  to
liquidate all outstanding undivided ownership interests.  The funding subsidiary
retains  the  interest  in the  pool of  receivables  that  are not  sold to the
unaffiliated companies,  and is fully consolidated and reported in our financial
statements.
         The amount of undivided interests, which can be sold under the program,
varies based on the amount of eligible receivables in the pool at any given time
and other  factors.  As of June 30,  2002,  the funding  subsidiary  sold a $200
million undivided ownership interest to the unaffiliated companies, and may from
time to time sell  additional  undivided  ownership  interests.  We  continue to
service,  administer and collect the receivables on behalf of the purchaser. The
amount of undivided  ownership  interest in the pool of receivables  sold to the
unaffiliated companies is reflected as a reduction of accounts receivable in our
consolidated  balance  sheet and as an  increase  in cash flows  from  operating
activities in our consolidated statement of cash flows.

Note 13.  Reorganization of Business Operations
         On March 18, 2002 we announced plans to restructure our businesses into
two wholly owned operating  subsidiary groups, the Energy Services Group and the
Engineering  and  Construction  Group.  As part of this  reorganization,  we are

                                       21


separating and  consolidating the entities in our Energy Services Group together
as direct and indirect subsidiaries of Halliburton Energy Services,  Inc. We are
also  separating  and   consolidating   the  entities  in  our  Engineering  and
Construction  Group together as direct and indirect  subsidiaries  of the former
Dresser  Industries  Inc., which became a limited  liability  company during the
quarter and was renamed DII  Industries,  LLC.  The  reorganization  of business
operations will facilitate the separation,  organizationally,  financially,  and
operationally, of our two business segments, which we believe will significantly
improve operating efficiencies in both, while streamlining management and easing
manpower requirements. In addition, many support functions which were previously
shared were moved into the two business groups.  As a result, we took actions in
the first and second  quarter of 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 the
2002 second quarter, we incurred  approximately $56 million,  for a total of $67
million for the year, of personnel reduction costs and asset related write-offs.
Of this amount, $15 million remains in accruals for severance  arrangements.  We
expect  these  remaining  payments  will be made during the second half of 2002.
Reorganization  charges  for the year  consisted  of $44  million  in  personnel
related  expense,  $13  million  of asset  related  write-downs,  $7  million in
professional  fees  related  to the  restructuring,  and $3  million  related to
contract  terminations.  Although  we  have no  specific  plans  currently,  the
reorganization  would  facilitate   separation  of  the  ownership  of  the  two
businesses in the future if we identify an  opportunity  that  produces  greater
value for our shareholders than continuing to own both businesses.

Note 14.  Impairment of Equity Investment
         On July 22, 2002, we signed a letter of intent to sell our 50% interest
in the Bredero-Shaw joint venture to our partner, ShawCor Ltd. (SCL.A/TSE).  The
purchase price of $150 million will be paid $50 million in cash and $100 million
in stock and notes. The transaction is subject to approval by each of our Boards
of Directors,  execution of definitive  agreements,  and  regulatory  approvals.
During the second quarter of 2002 we recorded a pretax charge of $61 million, or
$0.14 per diluted share  after-tax in our Energy  Services Group, to reflect the
impairment  of our  investment  in  Bredero-Shaw  as a  result  of  the  pending
transaction.

Note 15.  Long-Term Debt and Financial Instruments
         On June 26, 2002 we terminated  our interest rate swap agreement on our
8% senior note. The notional amount of the swap agreement was $139 million. This
interest rate swap was designated as a fair value hedge under SFAS No. 133. Upon
termination,  the fair  value of  the interest  rate swap  was $0.5 million, and
had previously  been  classified in Other assets on the balance sheet.  The fair
value adjustment  to the  debt instrument  that was  hedged will  remain  and be
amortized as a reduction in interest expense using the "Effective  Yield Method"
over the remaining life of the note.

Note 16.  DII Industries, LLC Financial Information
         Dresser  Industries,   Inc.  was  converted  into  a  Delaware  limited
liability  company during the second quarter of 2002  and its name  was  changed
to  DII  Industries,  LLC.   Since becoming  a  wholly   owned  subsidiary,  DII
Industries, LLC has ceased  filing  periodic  reports  with the  Securities  and
Exchange Commission.  DII Industries, LLC's 8%  guaranteed  senior  notes, which
were  initially issued  by Baroid  Corporation, remain outstanding and are fully
and unconditionally  guaranteed by  Halliburton.  In  January 1999, as part of a
legal reorganization associated with the  merger,  Halliburton  Delaware,  Inc.,
our first tier holding company subsidiary, was merged into DII  Industries, LLC.
The majority of our operating assets and activities  are  now  included  in  DII
Industries,  LLC  and  its  subsidiaries.  In  August  2000,  the Securities and
Exchange Commission released revised rules governing the financial statements of
guarantors and issuers of  guaranteed  registered   securities.   The  following
condensed  consolidating  financial  information  presents  Halliburton  and our
subsidiaries on a stand-alone basis  using  the  equity  method  of   accounting
for our interest in our subsidiaries.

                                       22




                  Condensed Consolidating Statements of Income
                           Quarter ended June 30, 2002
                                                                 DII
                                            Non-issuer/      Industries,    Halliburton                   Consolidated
                                           Non-guarantor         LLC          Company    Consolidating    Halliburton
Millions of dollars                         Subsidiaries       (Issuer)     (Guarantor)   Adjustments       Company
-----------------------------------------------------------------------------------------------------------------------
                                                                                           
Total revenues                              $   3,235            $(483)       $ (487)        $   970         $ 3,235
Cost of revenues                               (3,543)               -             -                          (3,543)
General and administrative                        (97)               -             -               -             (97)
Interest expense                                  (10)              (8)          (12)                            (30)
Interest income                                    11                4            15             (18)             12
Other, net                                         (4)              (3)            -               -              (7)
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
    before taxes and minority interest           (408)            (490)         (484)            952            (430)
Provision for income taxes                         70                3             4               -              77
Minority interest in net income of
    subsidiaries                                   (5)               -             -               -              (5)
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations                (343)            (487)         (480)            952            (358)
Income from discontinued operations              (140)               -             -               -            (140)
-----------------------------------------------------------------------------------------------------------------------
Net income                                  $    (483)           $(487)       $ (480)        $   952         $  (498)
=======================================================================================================================












                  Condensed Consolidating Statements of Income
                           Quarter ended June 30, 2001
                                                                 DII
                                            Non-issuer/      Industries,    Halliburton                   Consolidated
                                           Non-guarantor         LLC          Company    Consolidating    Halliburton
Millions of dollars                         Subsidiaries       (Issuer)     (Guarantor)   Adjustments       Company
-----------------------------------------------------------------------------------------------------------------------
                                                                                           
Total revenues                              $   3,339            $ 170        $  525         $  (695)        $ 3,339
Cost of revenues                               (2,966)               -             -               -          (2,966)
General and administrative                       (101)               -             -               -            (101)
Interest expense                                  (16)              (8)          (10)              -             (34)
Interest income                                     5                3            29             (31)              6
Other, net                                         10              125           (17)           (119)             (1)
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
    before taxes and minority interest            271              290           527            (845)            243
Provision for income taxes                        (99)              (4)            5               -             (98)
Minority interest in net income of
    subsidiaries                                   (2)               -             -               -              (2)
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations                 170              286           532            (845)            143
Income from discontinued operations                 -              239             -               -             239
-----------------------------------------------------------------------------------------------------------------------
Net income                                  $     170            $ 525        $  532         $  (845)        $   382
=======================================================================================================================


                                       23



                                      Condensed Consolidating Statements of Income
                                             Six Months ended June 30, 2002
                                                                 DII
                                            Non-issuer/      Industries,    Halliburton                   Consolidated
                                           Non-guarantor         LLC          Company    Consolidating    Halliburton
Millions of dollars                         Subsidiaries       (Issuer)     (Guarantor)   Adjustments       Company
-----------------------------------------------------------------------------------------------------------------------
                                                                                           
Total revenues                                $  6,242            $ (447)      $   (457)        $  904       $  6,242
Cost of revenues                                (6,374)                -              -              -         (6,374)
General and administrative                        (150)                -              -              -           (150)
Interest expense                                   (22)              (16)           (24)             -            (62)
Interest income                                     15                 4             28            (31)            16
Other, net                                          (8)               (3)             -              -            (11)
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
    before taxes, minority interest and
    accounting change                             (297)             (462)          (453)           873           (339)
Provision for income taxes                          28                 5              8              -             41
Minority interest in net income of
    subsidiaries                                   (10)                -              -              -            (10)
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
    before accounting change                      (279)             (457)          (445)           873           (308)
Income from discontinued operations               (168)                -              -              -           (168)
Cumulative effect of accounting change,              -                 -              -              -              -
net
-------------------------------------------------------------------------------------------------------------------------
Net income                                    $   (447)           $ (457)      $   (445)        $  873       $   (476)
=========================================================================================================================












                                      Condensed Consolidating Statements of Income
                                             Six Months ended June 30, 2001
                                                                 DII
                                            Non-issuer/      Industries,    Halliburton                   Consolidated
                                           Non-guarantor         LLC          Company    Consolidating    Halliburton
Millions of dollars                         Subsidiaries       (Issuer)     (Guarantor)   Adjustments       Company
-----------------------------------------------------------------------------------------------------------------------
                                                                                           
Total revenues                                $   6,483            $ 306        $  673          $  (979)       $ 6,483
Cost of revenues                                 (5,821)               -             -                -         (5,821)
General and administrative                         (192)               -             -                -           (192)
Interest expense                                    (21)             (17)          (44)               1            (81)
Interest income                                       9                6            29              (34)            10
Other, net                                           (1)             146            (4)            (145)            (4)
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
    before taxes and minority interest              457              441           654           (1,157)           395
Provision for income taxes                         (167)              (7)           15                -           (159)
Minority interest in net income of
    subsidiaries                                     (7)               -             -                -             (7)
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
    before accounting change                        283              434           669           (1,157)           229
Income from discontinued operations                  22              239             -                -            261
Cumulative effect of accounting change,               1                -             -                -              1
net
-------------------------------------------------------------------------------------------------------------------------
Net income                                    $     306            $ 673        $  669          $(1,157)       $   491
=========================================================================================================================


                                       24




                     Condensed Consolidating Balance Sheets
                                  June 30, 2002
                                                                 DII
                                            Non-issuer/      Industries,    Halliburton                   Consolidated
                                           Non-guarantor         LLC          Company    Consolidating    Halliburton
Millions of dollars                         Subsidiaries       (Issuer)     (Guarantor)   Adjustments       Company
-----------------------------------------------------------------------------------------------------------------------
                                                                                           
                 Assets
Current assets:
Cash and equivalents                        $     232           $     -       $   151       $      -         $   383
Receivables:
Notes and accounts receivable, net              2,604                 2             -              -           2,606
Unbilled work on uncompleted contracts            999                 -             1              -           1,000
-----------------------------------------------------------------------------------------------------------------------
Total receivables                               3,603                 2             1              -           3,606
Inventories                                       808                 -             -              -             808
Other current assets                              366                 1            12              -             379
-----------------------------------------------------------------------------------------------------------------------
Total current assets                            5,009                 3           164              -           5,176
Property, plant and equipment, net              2,692                 -             -              -           2,692
Equity in and advances to
    unconsolidated affiliates                     568                 -             -              -             568
Intercompany receivable from
    consolidated affiliates                         -                 -         1,983         (1,983)              -
Equity in and advances to
    consolidated affiliates                         -             5,657         3,614         (9,271)              -
Goodwill, net                                     641                84             -              -             725
Insurance for asbestos litigation claims        1,594                 -             -              -           1,594
Other assets                                    1,178                29            25              -           1,232
-----------------------------------------------------------------------------------------------------------------------
Total assets                                $  11,682           $ 5,773       $ 5,786       $(11,254)        $11,987
=======================================================================================================================

  Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable                  $   1,192           $   154       $    75       $      -         $ 1,421
Other current liabilities                       1,511                13            42              -           1,566
-----------------------------------------------------------------------------------------------------------------------
Total current liabilities                       2,703               167           117              -           2,987
Long-term debt                                    206               300           758              -           1,264
Intercompany payable to
    consolidated affiliates                        31             1,682             -         (1,713)              -
Asbestos litigation claims                      2,196                 -             -              -           2,196
Other liabilities                               1,127                10            97              -           1,234
Minority interest in consolidated
    subsidiaries                                   51                 -             -              -              51
-----------------------------------------------------------------------------------------------------------------------
Total liabilities                               6,314             2,159           972         (1,713)          7,732
Shareholders' equity:
Common shares                                     175                 -         1,141           (175)          1,141
Other shareholders' equity                      5,193             3,614         3,673         (9,366)          3,114
-----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity                      5,368             3,614         4,814         (9,541)          4,255
-----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity  $  11,682           $ 5,773       $ 5,786       $(11,254)        $11,987
=======================================================================================================================


                                       25




                     Condensed Consolidating Balance Sheets
                                December 31, 2001
                                                                 DII
                                            Non-issuer/      Industries,    Halliburton                   Consolidated
                                           Non-guarantor         LLC          Company    Consolidating    Halliburton
Millions of dollars                         Subsidiaries       (Issuer)     (Guarantor)   Adjustments       Company
-----------------------------------------------------------------------------------------------------------------------
                                                                                           
                 Assets
Current assets:
Cash and equivalents                        $     213           $     -       $    77       $      -         $   290
Receivables:
Notes and accounts receivable, net              3,002                13             -              -           3,015
Unbilled work on uncompleted contracts          1,080                 -             -              -           1,080
-----------------------------------------------------------------------------------------------------------------------
Total receivables                               4,082                13             -              -           4,095
Inventories                                       787                 -             -              -             787
Other current assets                              323                71             7              -             401
-----------------------------------------------------------------------------------------------------------------------
Total current assets                            5,405                84            84              -           5,573
Property, plant and equipment, net              2,669                 -             -              -           2,669
Equity in and advances to
    unconsolidated affiliates                     551                 -             -              -             551
Intercompany receivable from
    consolidated affiliates                       198                -          1,805         (2,003)              -
Equity in and advances to
    consolidated affiliates                         -             6,583         4,409        (10,992)              -
Goodwill, net                                     636                84             -              -             720
Insurance for asbestos litigation claims          612                 -             -              -             612
Other assets                                      793                27            21              -             841
-----------------------------------------------------------------------------------------------------------------------
Total assets                                $  10,864           $ 6,778       $ 6,319       $(12,995)        $10,966
=======================================================================================================================

  Liabilities and Shareholders' Equity
Current liabilities:
Accounts and notes payable                  $     808           $   129       $   105       $      -         $ 1,042
Other current liabilities                       1,791                20            55              -           1,866
-----------------------------------------------------------------------------------------------------------------------
Total current liabilities                       2,599               149           160              -           2,908
Long-term debt                                    211               439           753              -           1,403
Intercompany payable to
    consolidated affiliates                         -             1,765             -         (1,765)              -
Asbestos litigation claims                        737                 -             -              -             737
Other liabilities                               1,016                16            93              -           1,125
Minority interest in consolidated
    subsidiaries                                   41                 -             -              -              41
-----------------------------------------------------------------------------------------------------------------------
Total liabilities                               4,604             2,369         1,006         (1,765)          6,214
Shareholders' equity:
Common shares                                     175                 -         1,138           (175)          1,138
Other shareholders' equity                      6,085             4,409         4,175        (11,055)          3,614
-----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity                      6,260             4,409         5,313        (11,230)          4,752
-----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity  $  10,864           $ 6,778       $ 6,319       $(12,995)        $10,966
=======================================================================================================================


                                       26




                Condensed Consolidating Statements of Cash Flows
                         Six Months ended June 30, 2002
                                                                 DII
                                            Non-issuer/      Industries,    Halliburton                   Consolidated
                                           Non-guarantor         LLC          Company    Consolidating    Halliburton
Millions of dollars                         Subsidiaries       (Issuer)     (Guarantor)   Adjustments       Company
-----------------------------------------------------------------------------------------------------------------------
                                                                                           
Net cash flows from operating activities     $     607          $   (15)      $    28       $      -          $   620
Capital expenditures                              (404)               -             -              -             (404)
Sales of property, plant and equipment              54                -             -              -               54
Other investing activities                         (64)               -           192           (192)             (64)
Payments on long-term borrowings                    (4)               -             -              -               (4)
Borrowings (repayments) of
    short-term debt, net                            39                -           (25)             -               14
Payments of dividends to shareholders                -                -          (109)             -             (109)
Proceeds from exercises of stock options             -                -             -              -                -
Payments to reacquire common stock                   -                -            (2)             -               (2)
Other financing activities                        (197)              15           (10)           192                -
Effect of exchange rate on cash                    (12)               -             -              -              (12)
Net cash flows from discontinued
    operations                                       -                -             -              -                -
------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents  $      19          $     -       $    74       $      -          $    93
========================================================================================================================












                Condensed Consolidating Statements of Cash Flows
                         Six Months ended June 30, 2001
                                                                 DII
                                            Non-issuer/      Industries,    Halliburton                    Consolidated
                                           Non-guarantor         LLC          Company    Consolidating    Halliburton
Millions of dollars                         Subsidiaries       (Issuer)     (Guarantor)   Adjustments       Company
-----------------------------------------------------------------------------------------------------------------------
                                                                                           
Net cash flows from operating activities    $     251          $    46       $    47       $      -          $   344
Capital expenditures                             (344)               -             -              -             (344)
Sales of property, plant and equipment             39                -             -              -               39
Other investing activities                       (147)               -         1,032         (1,032)            (147)
Payments on long-term borrowings                   (4)              (5)            -              -               (9)
Borrowings (repayments) of
    short-term debt, net                          (18)               -          (836)             -             (854)
Payments of dividends to shareholders               -                -          (107)             -             (107)
Proceeds from exercises of stock options            -                -            24              -               24
Payments to reacquire common stock                  -                -            (8)             -               (8)
Other financing activities                        185           (1,220)            -          1,032               (3)
Effect of exchange rate on cash                   (12)               -             -              -              (12)
Net cash flows from discontinued
    operations                                      -            1,174             -              -            1,174
-----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents $     (50)         $    (5)      $   152       $      -          $    97
=======================================================================================================================


                                       27


         During the second quarter 2002, we identified an error contained in the
information  set forth in the  December 31, 2001 Condensed Consolidating Balance
Sheets  which were previously  disclosed in our  periodic reports filed with the
SEC.  The  error  has  been  corrected  in   the  December  31,  2001  Condensed
Consolidating Balance  Sheets presented  in this  footnote.  The line  items and
amounts as originally reported and as corrected are as follows:


                                     Non-issuer/                                     Halliburton
Asset (Liability)                   Non-guarantor        DII Industries, LLC           Company
                                     Subsidiaries              (Issuer)              (Guarantor)
-------------------------------------------------------------------------------------------------------
                                Originally  Corrected   Originally  Corrected   Originally  Corrected
                                 Reported    Amounts     Reported    Amounts     Reported    Amounts
-------------------------------------------------------------------------------------------------------
                                                                          
Intercompany receivable
   from consolidated affiliates  $       0    $   198     $    0      $     0     $2,854      $ 1,805
-------------------------------------------------------------------------------------------------------
Intercompany payable to
   consolidated affiliates          (1,089)         0     (1,765)      (1,765)         0            0
-------------------------------------------------------------------------------------------------------
Equity in and advances to
   consolidated affiliates               0          0      5,296        6,583      3,122        4,409
-------------------------------------------------------------------------------------------------------
Other shareholders' equity          (4,798)    (6,085)    (3,122)      (4,409)    (3,937)      (4,175)
-------------------------------------------------------------------------------------------------------
   Net                              (5,887)    (5,887)       409          409      2,039        2,039
-------------------------------------------------------------------------------------------------------

         The  error  had  no   impact  on  the  information  in   the  Condensed
Consolidating Statements of Income or the  Condensed Consolidating Statements of
Cash Flow for the year ending December 31, 2001. The error also had no impact on
the Condensed  Consolidated Financial  Statements of  Halliburton Company or any
other footnote disclosures.

                                       28


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

         In this section, we discuss the operating results and general financial
condition of Halliburton Company and its subsidiaries. We explain:
         -    factors and risks that impact our business;
         -    results of our quarterly and year-to-date operating results;
         -    factors that impacted our cash flows and our liquidity; and
         -    other items  that materially  affect  our  financial  condition or
              earnings.

BUSINESS ENVIRONMENT
         Our business is organized around two business segments:
         -    Energy Services Group; and
         -    Engineering and Construction Group.
         The results of Dresser  Equipment  Group are  reported as  discontinued
         operations through March 31, 2001.
         We  currently  operate  in  over  100  countries  throughout the world,
providing a comprehensive range of discrete and integrated products and services
to the energy industry, and to other industrial and governmental customers.  The
majority of our consolidated revenues are derived from the sale of services  and
products, including engineering and construction activities, to large integrated
oil and gas  companies as well as national  oil  companies.  These  services and
products are used  throughout the energy  industry,  from the earliest phases of
exploration,  development,  and  production  of  oil and gas  resources  through
refining and processing.
         The industries we serve are highly  competitive  with many  substantial
competitors within each segment.  No country other than the United States or the
United Kingdom accounts for more than 10% of our operations. Unsettled political
conditions,  acts of terrorism,  expropriation  or other  governmental  actions,
exchange controls or currency  devaluation may result in increased business risk
in any one country.  We believe the geographic  diversification  of our business
activities  reduces the risk that loss of  business in any one country  would be
material to our consolidated results of operations.
         Halliburton Company
         Activity  levels  within our two business  segments  are  significantly
impacted by the spending of large  integrated oil and gas companies and national
oil companies on  exploration,  development,  and production  programs,  capital
expenditures for refining and processing  facilities and the level of government
spending. Also impacting our activity is the status of the global economy, which
indirectly  impacts  oil and  gas  consumption,  demand  for  petrochemical  and
investment  in  infrastructure  projects.  High  levels  of  worldwide  drilling
activity,  particularly  in the United States for gas drilling,  occurred in the
first half of 2001,  but began to decline in the latter  part of that year.  The
decline  was  partially  due to  general  business  conditions  caused by global
economic unrest and uncertainty  which was accelerated by the terrorist  attacks
on September  11,  2001.  The energy  industry in the United  States was further
impacted by consecutive  unseasonably warm winters in 2000 and 2001 which caused
higher than normal gas storage levels and resultant  excess supply as previously
reported by the American Gas Association and currently by the Energy Information
Administration.  The increased gas storage  levels  contributed to the declining
natural gas prices  during the second  half of 2001 and reduced  spending on gas
drilling activities. Quarterly average natural gas prices (Henry Hub - expressed
in United  States  dollars  per MCF)  decreased  from  $4.48 in the 2001  second
quarter, to $2.47 in the 2002 first quarter,  then increased to $3.40 during the
2002 second  quarter.  We expect that the current surplus of gas in storage will
keep downward  pressure on natural gas prices until well into the winter heating
season.  We expect  natural gas prices to decline  during the third  quarter and
then to firm up as we move into the peak winter demand season in the 2002 fourth
quarter  and 2003 first  quarter  assuming  an average  or colder  than  average
winter.
         During the 2002  second  quarter  and despite  weak  demand,  crude oil
prices (West Texas Intermediate - expressed in U.S. dollars per barrel) remained
above  anticipated  levels of less than  $20.00  per  barrel,  due to actions to
control  production by OPEC.  Quarterly average oil prices decreased from $27.93
in the 2001 second quarter,  to $21.36 in the 2002 first quarter,  and increased
to $25.75 during the 2002 second quarter.  For the remainder of 2002, oil prices

                                       29


are  expected  to remain  at  current  levels,  but may be  volatile  due to the
political  tension in the Middle East, the ability of OPEC to manage member OPEC
country production quota levels, and increased production by non-OPEC countries,
namely, Norway, Russia and the former Soviet Union countries of the Commonwealth
of Independent States.
         Energy Services Group
         Lower natural gas and crude oil drilling  activity since the 2001 third
quarter resulted in decreased  demand for the services and products  provided by
the Energy Services Group.  The quarterly  average  worldwide rig count based on
published  rig  count  information,  decreased  from  2,240 in the  2001  second
quarter,  to 1,932 in the 2002 first  quarter,  and further  decreased  to 1,678
during the 2002 second  quarter.  These rig count  decreases  were  attributable
primarily to North  America due to lower gas prices  brought on by decreased gas
drilling  demand  resulting  from a weaker United States economy and higher than
normal  levels of gas in  storage  due to an  unseasonably  warmer  winter.  The
Canadian rig count averaged 147 during the 2002 second  quarter  compared to 252
in the 2001 second quarter and 383 in the 2002 first quarter. The decrease was a
result of a longer than normal spring thaw season preventing  drilling activity.
The international rig count was relatively flat for the comparable periods.  The
rig count for the  remainder  of this  year  will be  predicated  on oil and gas
prices and demand which will be driven by the United States and world  economies
and in  particular  gas demand and gas available in  underground  storage in the
United States to meet winter seasonal requirements.
         In  addition,  the  decreased  rig  activity  in the United  States has
increased  pressure on the oilfield  services  product service lines to discount
prices.  The price increases we implemented  last year and our efforts to manage
costs in particular  through our 2002  restructuring  efforts  should  partially
offset the  impacts of lower  activity  levels and  additional  discounting.  As
predicted,  our pressure  pumping  product  service line has been  significantly
impacted by the current economic slowdown due to its dependence on United States
gas  drilling.  Deepwater  activity has not been as  adversely  impacted as land
activity by the downturn in the industry, due to the level of investment and the
long term nature of contracts.  Our drilling systems product service line, which
has a large  percentage of its business outside the United States and is heavily
involved in  deepwater  oil and gas  exploration  and  development  drilling and
longer term  contracts,  has remained  strong despite the overall decline in the
energy industry.
         Drilling  activity  in the  United  States and  Canada is  expected  to
gradually  improve in the second  half of the year as compared to the first half
of the year.  International  drilling activity during the second half of 2002 is
expected to be flat to down  slightly.  In the longer term, we expect  increased
global demand for oil and natural gas products,  additional customer spending to
replace depleting reserves and our continued  technological  advances to provide
growth opportunities for us.
         Engineering and Construction Group
         Our engineering and construction projects are longer term in nature and
are not as impacted by short-term fluctuations in oil and gas prices. The global
economic slowdown continued through the first half of 2002,  however, we may see
a turnaround during the second half of 2002. Manufacturing activity has recently
improved  and  has  led  to   increased   demand  for  ethylene  and  for  other
petrochemical products.  However,  project awards will continue to be delayed or
their scope reduced due to excess capacity in petrochemical  supplies.  A number
of large-scale  gas and liquefied  natural gas,  gas-to-liquids,  government and
infrastructure  projects  are  being  awarded  or  actively  considered.  Growth
opportunities also exist to provide  additional  security and defense support to
government agencies in the United States and other countries.  Demands for these
services are expected to grow as governmental agencies seek to control costs and
efficiencies  by outsourcing  these  functions and due to new demands created by
increased efforts to combat terrorism.
         After careful  consideration,  we have decided to no longer pursue lump
sum engineering,  procurement,  installation and commissioning  (EPIC) contracts
for the offshore oil and gas industry. An important aspect of our reorganization
process was to look  closely at each of our  businesses  to insure that they are
self-sufficient  including their use of capital and liquidity.  In that process,
we found that the EPIC offshore business was using a  disproportionate  share of
our bonding and letter of credit capacity  relative to its profit  contribution.
The risk/reward  relationship in that segment is no longer  attractive to us. We
provide a range of engineering,  fabrication and project management  services to

                                       30


the offshore  industry  which we will  continue to service  through a variety of
other  contracting  forms.  We have seven  fixed  price EPIC  offshore  projects
underway and we are fully committed to successful  completion of these projects,
most of which  are  substantially  complete.  We plan to  retain  our  excellent
offshore engineering and services capabilities.
         Backlog
         Our total backlog at June 30, 2002, was $9.8 billion, comprised of $9.4
billion for the  Engineering  and  Construction  Group and $0.4  billion for the
Energy  Services  Group.  As a result of the 2002 corporate  reorganization  and
movement of our Major Projects,  Production Services and Granherne businesses to
the  Engineering  and  Construction   Group  from  the  Energy  Services  Group,
approximately  $1.7 billion of backlog is now reported under the Engineering and
Construction Group that was previously reported under the Energy Services Group.
         Reorganization of Business Operations
         Based on our review,  we announced  plans to restructure our businesses
into two wholly owned operating subsidiary groups, the Energy Services Group and
the Engineering and Construction Group. As part of this  reorganization,  we are
separating and  consolidating the entities in our Energy Services Group together
as direct and indirect subsidiaries of Halliburton Energy Services,  Inc. We are
also  separating  and   consolidating   the  entities  in  our  Engineering  and
Construction  Group together as direct and indirect  subsidiaries  of the former
Dresser  Industries  Inc., which became a limited  liability  company during the
quarter and was renamed DII  Industries,  LLC.  The  reorganization  of business
operations will facilitate the separation,  organizationally,  financially,  and
operationally, of our two business segments, which we believe will significantly
improve operating efficiencies in both, while streamlining management and easing
manpower requirements. In addition, many support functions which were previously
shared  were moved into the two  business  groups.  Although we have no specific
plans currently, the reorganization would facilitate separation of the ownership
of the two businesses in the future if we identify an opportunity  that produces
greater value for our shareholders than continuing to own both businesses.
         The corporate  reorganization is largely complete and is expected to be
concluded by the end of the year. In the second quarter of 2002 we have incurred
pretax  restructuring  charges of $56  million,  which  brings the  year-to-date
restructuring cost to $67 million.  The year-to-date charges include $44 million
in personnel  related  costs,  $13 million in asset  write-downs,  $7 million in
professional  fees  related to the  restructuring  and $3  million  in  contract
terminations.  We expect to incur additional  charges in the second half of this
year totaling  approximately $20  million.  We anticipate  that the cost savings
will  increase so that  in 2003 they  will result in  annualized cost savings of
$200 million compared to costs prior to the corporate reorganization.
         As a part of the  reorganization,  we decided  that the  operations  of
Major  Projects,  Granherne and Production  Services were best managed by KBR in
the current business environment and these businesses were moved from the Energy
Services  Group to the  Engineering  and  Construction  Group  during the second
quarter.  All prior period  segment  results have been  restated to reflect this
change.  Major  Projects,  which currently  consists of the  Barracuda-Caratinga
project in Brazil, is now reported through the Offshore Operations product line,
Granherne is now reported in the Onshore product line and Production Services is
now reported under the Operations and Maintenance product line.
         Asbestos

      During the  quarter,  we received an asbestos  econometric  report from
Hamilton,  Rabinovitz  &  Alschuler,  Inc.  Based upon this report we accrued an
additional asbestos pretax charge of $483 million and increased our net asbestos
liability  to $602  million.  Of this pretax  charge,  $330 million was recorded
under the  Engineering  and  Construction  Group  segment  and $153  million was
recorded as  discontinued  operations.  At June 30, 2002 our gross liability for
asbestos  litigation  claims  increased  by $1.5  billion to $2.2  billion,  and
estimated  insurance  recoveries  increased  by $1  billion  to a total  of $1.6
billion. These amounts include a reserve for estimated incurred but not reported
claims to be filed through 2052,  as well as all  existing  claims.  See Note 8.


                                       31


RESULTS OF OPERATIONS IN 2002 COMPARED TO 2001

Second Quarter of 2002 Compared with the Second Quarter of 2001


                                              Second Quarter
REVENUES                                  -----------------------      Increase
Millions of dollars                          2002        2001         (decrease)
----------------------------------------------------------------------------------
                                                             
Energy Services Group                      $  1,756    $  2,008         $ (252)
Engineering and Construction Group            1,479       1,331            148
----------------------------------------------------------------------------------
Total revenues                             $  3,235    $  3,339         $ (104)
==================================================================================

         Consolidated  revenues  in the  2002  second  quarter  of $3.2  billion
decreased  $104  million  compared  to the 2001  second  quarter.  International
revenues were 67% of total  revenues for the 2002 second  quarter and 60% in the
2001 second quarter, highlighting the reduction in business levels in the United
States.
         Energy  Services  Group  revenues were $1.8 billion for the 2002 second
quarter, a decrease of 13% from the 2001 second quarter.  International revenues
were 60% of total  revenues  in the 2002 second  quarter  compared to 52% in the
2001 second  quarter due to  decreased  United  States  drilling  activity.  Our
oilfield services product service line revenues of over $1.5 billion in the 2002
second  quarter  declined  13% from the 2001 second  quarter,  primarily  due to
reduced  rig  activity,   particularly  in  the  United  States,  and  increased
discounts. Revenues from logging, completion products, drilling fluids and drill
bit  product  service  lines  declined  between  10% and 13% in the 2002  second
quarter from the 2001 second quarter.  Pressure pumping revenues were down about
18% from the same period.  Drilling  systems  revenues  increased 2% in the 2002
second quarter as compared to the 2001 second quarter due to introduction of new
technologies and increased capacity. International revenues were slightly higher
in the 2002 second  quarter,  with a 3% increase  over the 2001 second  quarter.
Geographically,   oilfield  services  North  America  revenues   decreased  29%,
reflecting  market  conditions  and weak rig  activity in the United  States and
Canada.  Europe/Africa  revenues  increased 8%. Asia Pacific  revenues increased
almost 21%.  Middle East  revenues  were up over 12%.  Revenues were 4% lower in
Latin  America  due  to  political  instability  and an oil  workers  strike  in
Venezuela, and the impact of the Argentina economic crisis.
         Revenues for the balance of the segment  decreased  $26 million for the
2002 second quarter as compared to the 2001 second quarter, primarily due to the
formation of Subsea 7 on May 23, 2002. We are  accounting  for our 50% ownership
interest  in  Subsea  7  on  the  equity  method  of   accounting   versus  full
consolidation of the Halliburton Subsea revenue in the 2001 second quarter.  Had
it not  been  for the  change  in  accounting  method  in  connection  with  the
transaction,  revenues  for the  balance of the  segment  would  have  increased
slightly for the 2002 second  quarter.  Integrated  exploration  and  production
information  systems  revenues  experienced  growth  of  7%,  primarily  due  to
increased professional services as a result of the Magic Earth acquisition.
         Engineering and Construction Group revenues of $1.5 billion in the 2002
second  quarter  were 11% higher  than the 2001 second  quarter.  Revenue in our
offshore  operations  increased 49% in the 2002 second  quarter  versus the 2001
second  quarter,  primarily  due to progress on a major project in Latin America
during 2002. In addition, we had a 10% increase in onshore operations due to the
progress  on  several  large  projects.   Infrastructure  revenue  increased  8%
primarily due to additional  revenue from an Australian  rail line project which
started during second quarter of 2001. Government operations revenue declined 9%
in the 2002  second  quarter as  compared  to the 2001  second  quarter,  as the
logistical support contract in the Balkans experienced lower task order volumes.
Operations  and  maintenance  revenue  declined  5%  due to  decreased  domestic
maintenance revenues.  International revenues were 76% for the second quarter of
2002 and 73% for the second quarter of 2001. Revenue increased in all geographic
regions  with the largest  increase in Latin  America due to progress on a major
project.


                                               Second Quarter
OPERATING INCOME                          --------------------------      Increase
Millions of dollars                          2002          2001          (decrease)
-------------------------------------------------------------------------------------
                                                                
Energy Services Group                       $    70      $   268          $  (198)
Engineering and Construction Group             (450)          21             (471)
General corporate                               (25)         (17)              (8)
-------------------------------------------------------------------------------------
Total operating income                      $  (405)     $   272          $  (677)
=====================================================================================


                                       32


         We had a consolidated operating loss of $405 million in the 2002 second
quarter compared to $272 million of operating income in the 2001 second quarter.
In the 2002 second quarter, we incurred certain charges, which included:
         -    $56 million in pretax expense related to restructuring charges, of
              which $37  million  related  to the  Energy  Services  Group,  $10
              million related to the Engineering and  Construction  Group and $9
              million related to General corporate;
         -    $119 million pretax loss in the Engineering and Construction Group
              on a lump sum fixed price offshore EPIC project in Brazil;
         -    $330 million pretax loss in the Engineering and Construction Group
              related to asbestos exposures; and
         -    $61  million pretax  loss  in  the  Energy  Services  Group on the
              impairment of our  50% equity investment in the Bredero-Shaw joint
              venture.
         In the 2001  second  quarter,  we  incurred  $12  million  in  goodwill
amortization  of which $7 million  related to the Energy  Services  Group and $5
million related to the Engineering and Construction Group.
         Energy  Services  Group  operating  income for the 2002 second  quarter
decreased  $198  million,  or 74%, from the 2001 second  quarter.  Excluding the
impairment of our 50% investment in  Bredero-Shaw,  restructuring  charges,  and
goodwill amortized in the second quarter of 2001,  operating income decreased by
39%.  The  results  were  significantly  impacted  by the slower  United  States
economy,  lower gas drilling  activity  primarily in the United  States  onshore
operations  and increased  discount rates for our services in the United States.
Operating  income for our oilfield  services  product service line decreased 52%
for the 2002 second  quarter as compared to the 2001 second  quarter.  Excluding
the noted items,  the decline was  approximately  41%.  Operating income for the
pressure pumping product service line declined by approximately  37%, logging by
50%, and drilling fluids decreased by just under 41% in the 2002 second quarter,
as  compared to the 2001 second  quarter.  Our  drilling  systems  product  line
continue to do well with a 10%  increase in  operating  income due mainly to the
new SlickBore (TM) and Geo-Pilot (TM) tools.  Geographically,  all international
regions experienced  significant  improvements except for Asia Pacific, with the
largest  increase  in the Middle  East.  Increased  activity  in the Middle East
contributed  to higher  operating  income  for the  pressure  pumping,  drilling
systems,  logging and drilling bit product service lines for that region. Middle
East pressure  pumping  operating  income nearly  tripled due to this  increased
activity while drilling  systems was up 50%.  Operating  income in Latin America
benefited from retroactive  price  adjustments in Brazil and Argentina  totaling
$10 million.  Asia Pacific operating income declined  primarily related to a $27
million loss on an integrated  solutions  project in Indonesia and the impact of
mobilization of equipment and start-up costs on a project on Sakhalin Island.
         Excluding the impairment of our 50% interest in the Bredero-Shaw  joint
venture, 2002 restructuring charges and goodwill amortization in the 2001 second
quarter,  operating  income for the remainder of the segment  increased about $4
million.  Increased  income at integrated  exploration  and product  information
systems and  Bredero-Shaw  offset lower results  within Subsea and the impact of
selling EMC earlier this year.
         Engineering  and  Construction  Group operating  income  decreased $471
million,  from the 2001  second  quarter to the 2002 second  quarter.  Operating
income  declined $17  million,  excluding  the impact of the 2002  restructuring
costs, the loss on a major Brazilian  project,  accrued  liabilities  associated
with asbestos  exposure,  and goodwill  amortization in the 2001 second quarter.
This decline  occurred  primarily in offshore  operations where operating income
decreased due to a loss on a project in the  Philippines  of $17 million.  As we
noted  above,  we  have  recorded  a $119  million job loss  related  to a major
Brazilian project.  In calculating the loss to accrue on this job,  we used $101
million in  unapproved claims  as we  believe  collection  of  those  claims  is
probable.  This compares to  $66 million  in unapproved  claims used in the 2002
first quarter calculation for this project.  In addition, we used $92 million in
unapproved claims  in calculating the  accrued loss  on other jobs in the second
quarter  2002 and $134  million in  unapproved claims used  for the accrued loss
calculation for several projects in the  second quarter 2001.  Operating  income
in onshore  operations declined  due to  several jobs  being  at or  near  their
completion stages.  These decreases were  partially offset  by higher  operating
income in government operations, infrastructure and operations and maintenance.

                                       33


         General corporate expenses for the 2002 second quarter were $25 million
compared  to  $17  million  for  the  2001  second   quarter.   Excluding   2002
restructuring  costs,  general corporate expenses were $16 million or a decrease
of 6% compared to the 2001 second quarter.

NONOPERATING ITEMS
         Interest expense of $30 million for the 2002 second quarter,  decreased
$4 million  compared to the 2001 second  quarter.  The  decrease is due to lower
average borrowings in 2002.
         Interest  income was $12  million in the second  quarter of 2002 and $6
million in the second  quarter of 2001.  The  increased  interest  income is for
interest on a note  receivable  from a customer  which had been  deferred  until
collection.
         Foreign  exchange  losses,  net were $5  million  in the  current  year
quarter  compared to $1 million in the second quarter of last year. The increase
is due to the continuing economic and financial crisis in Argentina.
         Other,  net had a $2 million loss in the 2002 second quarter related to
financing  activities.
         Benefit  for income  taxes  of $77  million in  the 2002 second quarter
resulted  in an  effective  tax benefit  of 18%, versus  a provision  for income
taxes  in the 2001  second quarter  rate of 40%.   Excluding  the impact of  the
impairment loss  on Bredero-Shaw   and  charges  associated  with  our  asbestos
exposure, our effective tax benefit was  39%. The  asbestos accrual  generates a
United States Federal deferred tax asset which may not be fully realizable based
upon  future taxable  income projections  and thus  we have  recorded a  partial
valuation allowance.  The Bredero-Shaw loss created a capital loss for which  we
have no capital gains to offset and therefore no tax benefit was booked  for the
loss as future realization of the benefit was questionable.
         Loss from  continuing  operations  was $358  million in the 2002 second
quarter,  compared to income from  continuing  operations of $143 million in the
2001 second quarter.
         Income (loss) from  discontinued  operations was a $159  million pretax
loss, $140  million  after-tax or  $0.32 per diluted share,  for the 2002 second
quarter compared to a pretax loss of $92 million, $60 million after-tax or $0.14
per  diluted  share,  for  the  2001  second  quarter.  The loss in 2002 was due
primarily to charges of $153 million pretax,  $123 million  after-tax booked  on
asbestos  exposures.  We also recorded  pretax  expense of $6 million associated
with the Harbison-Walker  bankruptcy filing. In addition,  based upon the impact
of certain second  quarter items, we adjusted  our 2002  estimated effective tax
rate for discontinued  operations by  recording an $11 million tax  provision in
the  second  quarter  of  2002.  The loss  in 2001 was due to asbestos exposures
primarily from Harbison-Walker.
         Net loss for the 2002  second  quarter was $498  million,  or $1.15 per
diluted share.  Net income was $382 million,  or $0.89 per diluted share for the
2001 second quarter.

First Six Months of 2002 Compared with the First Six Months of 2001


                                                 First Six Months
REVENUES                                    --------------------------            Increase
Millions of dollars                            2002             2001             (decrease)
----------------------------------------------------------------------------------------------
                                                                         
Energy Services Group                       $  3,445         $  3,800             $   (355)
Engineering and Construction Group             2,797            2,683                  114
----------------------------------------------------------------------------------------------
Total revenues                              $  6,242         $  6,483             $   (241)
==============================================================================================

         Consolidated  revenues in the first six months of 2002 of $6.2  billion
decreased  4% compared to the first six months of 2001.  International  revenues
were 67% of total  revenues for the first half of 2002 and 61% in the first half
of 2001 as activity  levels remained more stable  internationally  versus in the
United  States  where rig  activity  declined  putting  pressure  on pricing and
discounting.
         Energy  Services Group revenues were lower by $355 million in the first
half of 2002,  a  decrease  of 9% from  the  first  half of 2001.  International
revenues were 60% of total revenues for the first six months of 2002 as compared
to 52% for the first six months of 2001.  Revenues decreased  primarily in North
America as well as a slight  decrease  in Latin  America,  while  Europe/Africa,
Middle East and Asia Pacific had increases between 8% and 14% as compared to the

                                       34


first six months of 2001.  Revenues from our oilfield  services  product service
lines  were  $3.0  billion  for the first six  months of 2002  compared  to $3.4
billion  for the  first  six  months  of 2001.  Our  pressure  pumping  business
experienced a year-over-year  decline of 13% while other  businesses  within the
oilfield  services  product  service lines had  decreased  revenues of 8% to 10%
except for  drilling  systems  which  increased by 8%. The decline in revenue is
attributable to lower levels of activity primarily in North America,  which also
put  pressure  on  pricing  and  discounting  of  work  in  the  United  States.
Geographically,  our oilfield  services  product  service lines  declined 25% in
North  America due to lower rig  activity and 3% in Latin  America  primarily in
Argentina due to currency  devaluation  and in Venezuela  due to lower  activity
brought on by  uncertain  market  conditions.  Offsetting  these  declines  were
increased  revenues in Europe/Africa,  Middle East and Asia Pacific primarily in
Russia,  the  Commonwealth  of Independent  States,  West Africa,  Saudi Arabia,
Egypt,  Indonesia and China. Revenues for the remainder of the segment decreased
$48 million year-over-year  primarily in our Surface/Subsea  business reflecting
lower  vessel  utilization  and a change  in  accounting  for an  unconsolidated
investment. On May 23, 2002 Halliburton Subsea and DSND Subsea ASA concluded the
formation  of Subsea 7 with  Halliburton  accounting  for  their  50%  ownership
interest   prospectively  on  the  equity  method  of  accounting   versus  full
consolidation  of the results of operations in the first half of 2001.  This was
partially  offset by a 10% increase in revenues in  integrated  exploration  and
production information systems compared to the first half of 2001.
         Engineering and Construction Group revenues increased $114 million,  or
4%, in the first six  months of 2002  compared  to the first six months of 2001.
Year-over-year  revenues  were 5% lower in North  America  while  increasing  7%
outside North America.  The increase in all other regions is mainly attributable
to a large  offshore  project in Brazil  attaining 43%  completion and increased
offshore engineering activity. Infrastructure revenues were higher by 11% due to
increased  progress  on the  Alice  Springs  to  Darwin  Rail  Line  project  in
Australia.  Government operations product line revenues were 5% lower due to the
contract in the Balkans  experiencing lower task order volumes.  Operations and
maintenance revenue declined 9% primarily  due to reduced downstream maintenance
activity.


                                                 First Six Months
OPERATING INCOME                            ---------------------------           Increase
Millions of dollars                            2002             2001             (decrease)
----------------------------------------------------------------------------------------------
                                                                          
Energy Services Group                       $   239          $    457              $  (218)
Engineering and Construction Group             (508)               48                 (556)
General corporate                              (13)               (35)                  22
----------------------------------------------------------------------------------------------
Total operating income                      $  (282)         $    470              $  (752)
==============================================================================================

         The first half of 2002  resulted in a  consolidated  operating  loss of
$282 million  compared to $470 million of operating  income in the first half of
2001.  In the 2002 first half, we incurred gains and losses, which included:
         -    $67 million in pretax expense related to restructuring, charges of
              which $42  million  related  to the  Energy  Services  Group,  $14
              million related to the Engineering and Construction  Group and $11
              million related to General corporate;
         -    $119 million pretax loss in the Engineering and Construction Group
              on a lump sum fixed price Brazil project;
         -    $330 million pretax loss in the Engineering and Construction Group
              related to asbestos exposures;
         -    $61 million  pretax loss  in the  Energy  Services  Group  on  the
              impairment of our 50% equity investment in  the Bredero-Shaw joint
              venture;
         -    $108 million pretax gain in the  Energy Services Group on the sale
              of our 50% interest in European Marine Contractors;
         -    $98 million pretax expense in the Energy Services Group related to
              the judgment in a patent infringement case;
         -    $80 million  pretax  write-off  of billed and accrued  receivables
              related  to the  Highlands  Insurance  Company  litigation  in the
              Engineering and Construction  Group,  formerly reported in General
              corporate; and
         -    $28 million  pretax gain for the value of stock  received from the
              demutualization of an insurance provider in General corporate.

                                       35


         In the  first  half  of  2001  we  incurred  $23  million  in  goodwill
amortization  of which $13 million  related to the Energy Services Group and $10
million related to the Engineering and Construction Group.
         Energy  Services  Group  operating  income  for the first  half of 2002
declined $218 million, or 48%, as compared to the first half of 2001.  Excluding
$61 million  impairment of our 50% interest in the  Bredero-Shaw  joint venture,
$108 million gain on the sale of our  interest in European  Marine  Contractors,
$98 million related to the BJ Services  judgment,  $42 million in  restructuring
charges,  and  2001  goodwill  amortization,   operating  income  declined  29%.
Operating  income in our oilfield  services  product  service line declined $278
million  or 60%  reflecting  lower  rig  activity  primarily  in North  America.
Pressure pumping  operating  income  decreased 33%, being adversely  impacted by
reduced gas drilling in North America.  Our logging and drilling  fluids product
services lines were also affected by the rig count decline with operating income
declining  61% in logging and 37% in drilling  fluids.  Offsetting  the declines
were  significantly  improved  results in the drilling  systems product services
line with operating income  increasing 61% in the first half of 2002 compared to
the first half of 2001  benefiting from improved  international  market activity
and the  introduction  of our new SlickBore (TM) and Geo-Pilot  (TM) tools.  Our
completion  products  and  services  product  service line had a 37% increase in
operating  income in the first half of 2002  compared to the first half of 2001.
International  oilfield services  operating income remained strong despite lower
international  rig  activity.  All  international  regions  registered  over 40%
increase in operating  income except for Asia Pacific.  Operating income for the
remainder of the segment increased $60 million.  Excluding the impairment of our
50% interest in the Bredero-Shaw joint venture, $108 million gain on the sale of
our  interest  in  European  Marine  Contractors,  $7 million  in  restructuring
charges, and 2001 second quarter goodwill amortization, operating income for the
remainder  of the  segment  increased  $12  million  in the  first  half of 2002
compared to the first half of 2001.
         Engineering and  Construction  Group operating  income declined by $556
million  compared to the first half of 2001.  Excluding the $119 million loss on
unapproved  claims for a major project in Latin  America,  $410 million  accrued
expenses related to net asbestos liability,  $14 million in restructuring costs,
and goodwill amortization in the 2001 second quarter,  operating income declined
$23  million.  This decline  occurred  primarily  in Offshore  operations  where
operating  income  decreased  $33  million  due to a loss on a  project  in  the
Philippines.  This was partially offset by higher margin technology sales in our
Onshore operations.  As we noted above, we have recorded a $119 million job loss
related to a major  Brazilian  project.  In calculating  the loss to  accrue for
this project, we used $101 million in unapproved claims as we believe collection
of those claims is  probable.  In  addition, we used $92  million in  unapproved
claims  in calculating the accrued  loss on other jobs in 2002 and $134  million
in unapproved claims used for  the accrued loss calculation for several projects
in the second quarter of 2001.
         General corporate  expenses for the first half of 2002 were $13 million
compared  to $35  million  in the first  half of 2001.  Excluding  restructuring
charges  and gain from the value of stock  received  from  demutualization of an
insurance provider, expenses would have been $30 million.

NONOPERATING ITEMS
         Interest  expense  of $62  million  for the  first  six  months of 2002
decreased $19 million  compared to the first six months of 2001. The decrease is
due to lower average  borrowings in 2002,  partially offset by the $4 million in
interest related to the patent infringement litigation.
         Interest  income  was $16  million  in the  first  six  months  of 2002
compared to $10 million in the first six months of 2001. The increased  interest
income is for  interest  on a note  receivable  from a  customer  which had been
deferred until collection.
         Foreign exchange  losses,  net were $13 million in the first six months
of 2002 compared to $4 million in the first six months of 2001.  The increase is
due to the continuing economic and financial crisis in Argentina.
         Other,  net of $2 million in the first six months of 2002,  includes $3
million pretax gain associated with the increase on the option  component of the
European Marine Contractors Ltd. sale.
         Benefit  for  income  taxes was  $41 million in the first  half of 2002
compared to a provision  for income  taxes of $159  million in the first half of
2001  reflecting  an effective  tax rate of 12% for the first six months of 2002

                                       36


compared  to 40% for the  first  six  months of 2001.  Excluding  the  impact of
impairment  loss on  Bredero-Shaw  and  charges  associated  with  our  asbestos
exposure,  our  effective  tax rate was 39%.  The asbestos  accrual  generates a
United States Federal deferred tax asset which may not be fully realizable based
upon future taxable income  projections.  As a result we have recorded a partial
valuation  allowance.  The Bredero-Shaw loss created a capital loss for which we
have no capital  gains to offset and therefore no tax benefit was booked for the
loss.
         Loss  from  continuing  operations  was $308  million  in the first six
months of 2002 compared to income from continuing  operations of $229 million in
the first six months of 2001.
         Loss from discontinued operations was $202 million pretax, $168 million
after-tax or $0.39 per  diluted share in the first six months  of 2002  compared
to a  loss of $55  million  pretax, $38 million after-tax or  $0.09 per  diluted
share.  The  loss in  2002 was  due primarily to charges  recorded for  asbestos
exposures.  We also  recorded pretax expense  of $6 million associated  with the
Harbison-Walker bankruptcy filing. In addition, based upon the impact of certain
second  quarter items,  we adjusted  our 2002  estimated  effective tax rate for
discontinued  operations by recording an $11 million tax provision in the second
quarter  of  2002.  The  net loss  for  2001 represents  the  results of Dresser
Equipment Group through March 31, 2001 and an 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  Standard
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 the first six  months of 2002 was $476  million,  or $1.10
per diluted share. Net income for the first six months of 2001 was $491 million,
or $1.14 per diluted share.

LIQUIDITY AND CAPITAL RESOURCES
         We ended the second  quarter of 2002 with cash and  equivalents of $383
million, an increase of $93 million from the end of 2001.
         Cash flows from operating activities provided $620 million in the first
six months of 2002  compared to $344 million in the first half of 2001.  Working
capital items,  which include  receivables,  sales of receivables,  inventories,
accounts payable and other working capital,  net,  provided $333 million of cash
in the first six  months of 2002  compared  to using  $370  million  in the same
period of 2001. Included in changes to other operating  activities for the first
half of 2002 is a $40 million payment related to the Harbison-Walker  bankruptcy
filing.  The 2002  change in sales of  receivables  relates to the sales of $200
million of undivided ownership interest to unaffiliated companies by the funding
subsidiary  under the account receivable  securitization  agreement. See Note 12
for further discussion.
         Cash flows from investing activities were $414 million in the first six
months of 2002 and $452 million in the first half of 2001. Capital  expenditures
in the first six months of 2002 were $404  million as compared  to $344  million
for the first six  months of 2001.  Capital  spending  in the first half of 2002
continued  to  be  primarily  directed  to  Halliburton  Energy  Services,   for
fracturing  equipment  and  directional  and  logging-while-drilling  tools.  We
invested  $60  million  in an  integrated  solutions  project.  Dispositions  of
businesses  in the first half of 2002 include $134  million  collected  from the
sale of our European  Marine  Contractors  Ltd. joint  venture.  Included in the
change in restricted  cash for the first half of 2002 is a $106 million  deposit
that collateralizes an appeal bond for a patent infringement judgment  on appeal
and  $56  million  as  collateral   for   potential   future   insurance   claim
reimbursements.  Also  included  in changes in  restricted  cash is $26  million
primarily  related  to cash  collateral  agreements  for  letters  of  credit we
currently  have  outstanding  for various  construction  projects.  In the first
quarter  the $26 million was  included  as Other  current  assets on the balance
sheet and as an operating cash outflow. As the projects are considered long term
in nature and we receive the interest on this cash,  we have  reclassified  this
amount to Other assets on the balance sheet and investing activities on the cash
flow.  In March 2001,  we acquired  PGS Data  Management  division of  Petroleum
Geo-Services ASA for $164 million cash.

                                       37


         Cash flows from financing activities used $101 million in the first six
months of 2002 as compared to $957 million for the first six months of 2001.  We
paid  dividends of $109 million to our  shareholders  in the first six months of
2002  compared to $107  million in the first six months of 2001.  Proceeds  from
exercises  of stock  options  provided  cash  flows of $24  million in the first
quarter of 2001. With the proceeds from the sale of the Dresser  Equipment Group
in April 2001 we repaid our short-term debt in 2001.
         Cash flows from  discontinued  operations  provided $1.2 billion in the
first six months of 2001.  Discontinued  operations  cash flows for 2001 include
the proceeds from the sale of the Dresser Equipment Group.
         Capital resources from internally generated funds and access to capital
markets are sufficient to fund our working  capital  requirements  and investing
activities.  Our combined short-term notes payable and long-term debt was 27% of
total  capitalization at June 30, 2002 and 24% at December 31, 2001. At June 30,
2002, we have $188 million in restricted cash included in Other assets. See Note
5. In addition, on April 15, 2002, we entered into an agreement to sell accounts
receivable to provide additional liquidity. See Note 12.
         Late in 2001 and early in 2002, Moody's Investors' Services lowered its
ratings of our long-term senior unsecured debt to Baa2 and our short-term credit
and commercial paper ratings to P-2. In addition,  Standard & Poor's lowered its
ratings of our long-term senior  unsecured debt to A- and our short-term  credit
and  commercial  paper  ratings to A-2.  The  ratings  were  lowered  due to the
agencies'  concerns about asbestos  litigation and the general  weakening in the
oilfield services sector.  Although our long-term ratings continue at investment
grade  levels  the cost of new  borrowing  is higher  and our access to the debt
markets is more volatile at the new rating levels.  Reduced ratings and concerns
about  asbestos  litigation,  along  with  recent  changes  in the  banking  and
insurance  markets,  will also result in higher cost and more limited  access to
markets for other credit products  including letters of credit and surety bonds.
Investment  grade  ratings are BBB- or higher for  Standard & Poor's and Baa3 or
higher for Moody's  Investors'  Services.  Our current  ratings are three levels
above BBB- on Standard & Poor's and one level  above Baa3 on Moody's  Investors'
Services.
         We have $700 million of  committed  lines of credit from banks that are
available if we maintain an investment grade rating. In August 2002 $350 million
of our $700  million in unused and  undrawn  bank lines will  expire.  We do not
expect to replace  the  expiring  bank lines at this time.  The  remaining  $350
million  facility  expires on August 16, 2006.  As of June 30, 2002,  no amounts
have been borrowed under these lines.
         In the normal course of business,  we have  agreements with banks under
which  approximately  $1.3 billion of letters of credit or bank  guarantees were
issued,  including $220 million which relate to our joint ventures'  operations.
Of these financial  instruments, $260 million include  provisions that allow the
banks to  require cash  collateralization if  our debt  ratings  fall below  the
investment  grade  ratings of  BBB- by  Standard &  Poor's  or Baa3  by  Moody's
Investors'  Services.  If  our  debt ratings  fall  below investment  grade,  we
would also be  in technical breach  of a  bank agreement  covering another  $127
million of letters  of credit at June 30, 2002,  which might entitle the bank to
set-off rights.  In addition, a $151 million letter of credit line, of which $85
million has  been issued,  includes provisions that  allow the banks to  require
cash collateralization for the full line if debt ratings of either rating agency
fall below the  rating of BBB  by Standard  & Poor's,  three downgrades from our
current  rating or Baa2 by Moody's Investors'  Services,  one downgrade from our
current rating.  In the event the ratings  of our  debt by either  agency falls,
we may  have to issue additional debt  or equity securities or obtain additional
credit facilities  in order to satisfy the cash  collateralization  requirements
under the instruments referred to above and meet our other liquidity  needs.  We
anticipate that  any such  new financing would  not be on terms as attractive as
those we have currently and that we would also be subject to increased borrowing
costs and interest rates.  These letters of credit and bank guarantees relate to
our guaranteed performance or retention payments  under our  long-term contracts
and  self-insurance.  In the past, no significant claims  have been made against
these financial instruments.  We do not anticipate material losses to occur as a
result of these financial instruments.
         Our  Halliburton Elective  Deferral Plan  has a provision  that  if the
Standard  &  Poor's  rating  falls  below  BBB  the   amounts  credited  to  the
participants accounts will be paid to the participants  in a lump-sum  within 45
days.  At June 30, 2002 this was approximately $50 million.

                                       38


         On  July  12,  2001  we  issued  $425  million  of two  and  five  year
medium-term notes under our medium-term note program.  The notes consist of $275
million of 6% fixed rate notes due August 1, 2006 and $150  million of  floating
rate  notes  due July 16,  2003.  Net  proceeds  from the two  medium-term  note
offerings were used to reduce  short-term  debt in 2001. In addition,  we have a
$75 million  medium-term  note due August  2002.  Currently  we do not expect to
issue new debt to replace the medium-term note.

CRITICAL ACCOUNTING POLICIES
         The preparation of financial  statements  requires the use of judgments
and  estimates.  During the quarter,  we  reevaluated  our  critical  accounting
policies and related disclosures.  Based upon this review and certain changes in
our business,  the following critical  accounting  policies have been updated or
added:
         -    forecasting  our effective  tax  rate  including,  our  ability to
              utilize foreign  tax credits and the realizability of deferred tax
              assets; and
         -    loss contingencies, related to asbestos litigation.
         This  discussion and analysis  should be read in  conjunction  with our
condensed consolidated financial statements and related notes included elsewhere
in this report and our Form 10-K for the year ended December 31, 2001 filed with
the SEC.
         Tax Accounting
          We account  for our  income  taxes in  accordance  with  Statement  of
Financial  Accounting  Standards No. 109  "Accounting  for Income Taxes",  which
requires the  recognition  of the amount of taxes payable or refundable  for the
current year; and an asset and liability  approach in recognizing  the amount of
deferred tax  liabilities  and assets for the future tax  consequences of events
that have been recognized in our financial  statements or tax returns.  We apply
the following basic principles in accounting for our income taxes at the date of
the financial statements:
         -    a current tax liability or asset  is recognized for the  estimated
              taxes payable or refundable on tax returns for the current year;
         -    a deferred tax liability or  asset is recognized for the estimated
              future  tax  effects  attributable  to  temporary  differences and
              carryforwards;
         -    the measurement of current and deferred tax liabilities and assets
              is based on  provisions  of the  enacted  tax law;  the effects of
              future changes in tax laws or rates are not anticipated; and
         -    the value of  deferred tax assets is reduced, if necessary, by the
              amount of any tax benefits  that, based on available evidence, are
              not expected to be realized.
         We determine  deferred taxes  separately for each tax-paying  component
(an entity or a group of entities that is consolidated for tax purposes) in each
tax jurisdiction. That determination includes the following procedures:
         -    identify the types and amounts of existing temporary differences;
         -    measure  the total  deferred tax  liability for taxable  temporary
              differences using the applicable tax rate;
         -    measure  the total  deferred  tax asset for  deductible  temporary
              differences and operating loss carryforwards  using the applicable
              tax rate;
         -    measure  the deferred  tax  assets  for each  type  of tax  credit
              carryforward; and
         -    reduce the deferred tax assets by a  valuation allowance if, based
              on the  weight of available  evidence,  it is more likely than not
              that some  portion or all of the  deferred  tax assets will not be
              realized due to  expiration before we are  able to  realize  their
              benefit, or that future deductibility is uncertain.
         This methodology  requires a significant  amount of judgment  regarding
assumptions  and the use of estimates,  which can create  significant  variances
between actual results and estimates.  Examples  include the  forecasting of our
effective tax rate and the potential  realization  of deferred tax assets in the
future, such as utilization of foreign tax credits. This process involves making
forecasts of current and future  years' United States  taxable  income,  foreign
taxable  income and related  taxes in order to estimate the foreign tax credits.
Unforeseen  events,  such as the timing of asbestos  settlements,  and other tax
timing issues may significantly affect these estimates. These factors can affect
the  accuracy  of our tax  account  balances  and  impact  our  future  reported
earnings.

                                       39


         Loss Contingencies

      Asbestos.  In the past,  we have only  provided  for known  outstanding
claims as we did not have sufficient  information to make a reasonable  estimate
of future asbestos claims liability.  DII Industries,  LLC 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-related  bodily injury claims asserted against DII Industries,  LLC and
its  subsidiaries.  As a result  of Dr.  Rabinovitz's analysis,  we were able to
accrue not  only for known  open  claims,  but also for the  projected  costs to
resolve asbestos claims through 2052 during the second quarter of 2002.

         The methodology  utilized by Dr.  Rabinovitz to project DII Industries,
LLC's and its  subsidiaries'  asbestos-related  liabilities  and  defense  costs
relied upon and included:
         -    an analysis of historical asbestos settlements and defense costs;
         -    an analysis of the pending inventory of asbestos-related;

      -    an  analysis  of  the claims filing  history for  asbestos-related
              claims   since  January   2000  (two-year   claims  history)   and
              alternatively since January 1997 (five-year claims history);

         -    an analysis of the population likely to have been exposed or claim
              exposure  to  certain  products  or  construction  and  renovation
              projects; and
         -    epidemiological studies to estimate the number of people who might
              allege exposure to products.

      Dr. Rabinovitz's  estimates  are  based on  historical data supplied by
DII  Industries,  LLC,  Kellogg,  Brown  & Root, Inc.  and  Harbison-Walker  and
publicly available studies, including annual surveys by the National  Institutes
of Health concerning the incidence of  mesothelioma deaths. In her analysis, Dr.
Rabinovitz projected that  the elevated and historically  unprecedented  rate of
claim  filings of  the last several  years  (particularly  in  2000  and  2001),
especially as expressed by the ratio of nonmalignant  claim filings to malignant
claim filings,  would continue into the future for 5 more years. After that, Dr.
Rabinovitz  projected that the ratio of nonmalignant  claim filings to malignant
claim filings will gradually decrease for a 10 year period ultimately  returning
to the historical  claiming rate and claiming  ratio.  In making her calculation
Dr. Rabinovitz alternately assumed a somewhat lower rate of claim filings, based
on an average of the last five years of claims  experience,  would continue into
the  future  for five  more  years  and  decrease  thereafter.

         Other  important assumptions  utilized  in Dr. Rabinovitz's  estimates,
which we relied upon in making our accrual are:
         -    an assumption that there will be no legislative or other  systemic
              changes to the  tort system;
         -    that the  Company  will  continue  to aggressively defend  against
              asbestos claims made against the Company; and
         -    an inflation  rate of 3% annually for  settlement payments  and an
              inflation rate of 4% annually for defense costs.

      Based upon her analysis, Dr. Rabinovitz estimated DII Industries, LLC's
total, undiscounted asbestos liabilities, including  defense costs, through 2052
to be within a range from $2.2 billion to $3.5 billion.  As of June 30, 2002, we
do not  believe  there  is a  better  amount  within  the  expert's  range  and,
therefore,  we based our estimated accrual for asbestos liability on the low-end
of the expert's  range,  or $2.2 billion,  in accordance with SFAS 5 and related
interpretations  (which includes payments related to the  approximately  312,000
claims currently pending).


      If we had adjusted our accrual for asbestos liabilities for current and
future  asbestos  claims  up to the  high-end  of the  expert's  range,  or $3.5
billion,  and  adjusted  the  related  probable  insurance  recovery  up to $2.0
billion,  we would have  recorded an  additional  pretax  charge of $879 million
($753 million after-tax).


      Using Dr.  Rabinovitz's  projections,  we then conducted an analysis to
determine  the amount of  insurance  that we estimate  is probable  that we will
recover in relation to the  projected  claims and defense costs through 2052. In
conducting this analysis, we:


      -    reviewed DII Industries,  LLC's historical course of dealings with
              its insurance companies concerning the payment of asbestos-related
              claims,  including  DII  Industries,  LLC's 15 year litigation and
              settlement history;


                                       40


         -    reviewed  the  terms  of  DII  Industries, LLC's prior and current
              coverage-in-place settlement agreements;
         -    reviewed the status of DII Industries, LLC's and Kellogg,  Brown &
              Root,  Inc.'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,  LLC's  insurers  to meet  their  obligations.


      Based on that review,  analyses  and  discussions,  we  made  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 DII Industries,  LLC's asbestos
liabilities  through  2052.  This analysis  factored in the probable  effects of
self-insurance  features,  such as self-insured  retentions,  policy exclusions,
liability caps, current and anticipated financial status of applicable insurers,
and various judicial determinations relevant to applicable insurance programs.


      Based on Dr. Rabinovitz's  projections and our analysis of the probable
insurance  recoveries,  we established  reserves for the probable and reasonably
estimable  liabilities  and defense costs we believe we will pay through 2052 of
$2.2 billion, and we have also recorded receivables for the insurance recoveries
that are deemed probable through that same date of $1.6 billion.


      The insurance  receivables  we have recorded do not assume any recovery
from insolvent  insurers or from any state  insurance  guaranty  association and
assume that all but one of our insurance  companies  that are currently  solvent
will continue to be solvent  throughout the period of the applicable  recoveries
in the projections.  However,  there can be no assurances that these assumptions
will be  correct.  The  insurance  receivables  do not  exhaust  the  applicable
insurance coverage for asbestos-related liabilities.

         Projecting future events, such as the number of future asbestos-related
lawsuits to be filed  against DII  Industries,  LLC and  Kellogg,  Brown & Root,
Inc., the average cost to resolve such future  lawsuits,  coverage  issues among
layers of insurers issuing different  policies to different  policyholders  over
extended  periods of time, the impact on the amount of insurance  recoverable in
light of the Harbison-Walker and Federal-Mogul bankruptcies,  and the continuing
solvency of various insurance  companies is subject to many  uncertainties  that
could cause the  asbestos-related  liabilities  and  insurance  recoveries to be
higher or lower than those projected and booked.
         Given the inherent uncertainty in making future projections, we plan to
have the  projections  periodically  reexamined,  and  update  them based on our
experience and other relevant factors such as changes in the tort system and the
resolution of the bankruptcies of various  asbestos  defendants.  Similarly,  we
will re-evaluate our projections concerning our probable insurance recoveries in
light  of any  updates  to Dr.  Rabinovitz's  projections,  developments  in DII
Industries, LLC's and Kellogg, Brown & Root, Inc.'s various lawsuits against its
insurance  companies  and  other  developments  that  may  impact  the  probable
insurance recoveries.

ENVIRONMENTAL MATTERS
         We  are  subject  to  numerous  environmental,   legal  and  regulatory
requirements  related  to  our  operations  worldwide.  As  a  result  of  those
obligations,  we are  involved  in  environmental  litigation  and  claims,  the
clean-up of properties we own or have  operated,  and efforts to meet or correct
compliance-related matters.

ACCOUNTING CHANGES
         In August 2001, the Financial  Accounting  Standards  Board issued SFAS
No. 143  "Accounting  for Asset  Retirement  Obligations"  which  addresses  the
financial   accounting  and  reporting  for  obligations   associated  with  the
retirement of tangible  long-lived assets and the associated  assets' retirement
costs. The new standard will be effective for us beginning  January 1, 2003, and
we are currently reviewing and evaluating the effects this standard will have on
our future financial condition,  results of operations,  and accounting policies
and practices.

                                       41


         In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission  of  FASB  Statements  No. 4, 44,  and 64,  Amendment  of  FASB
Statement No. 13, and Technical Corrections".   This Statement rescinds SFAS No.
4, "Reporting  Gains and Losses  from Extinguishment  of Debt", the amendment to
SFAS  No.  4,  and  SFAS   No. 64, "Extinguishments  of  Debt  Made  to  Satisfy
Sinking-Fund  Requirements".  SFAS No. 145  also amends paragraph  14(a) of SFAS
No. 13,  "Accounting  for Leases", to  eliminate  an  inconsistency  between the
accounting for  sale-leaseback transactions and certain lease modifications that
have economic effects  that are similar  to sale-leaseback  transactions.  We do
not believe the effects of this new standard will have a material  effect on our
future financial condition or operations.

FORWARD-LOOKING INFORMATION
         The Private  Securities  Litigation  Reform Act of 1995  provides  safe
harbor provisions for forward-looking  information.  Forward-looking information
is  based  on  projections  and  estimates,  not  historical  information.  Some
statements in this Form 10-Q are  forward-looking and use words like "may," "may
not,"  "believes,"  "do  not  believe,"  "expects,"  "do  not  expect,"  "do not
anticipate,"  and  similar  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.
         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 including:
         Legal
              -    asbestos  litigation  including  the  judgments against us in
                   late 2001 and their related appeals;
              -    the ability of our insurers for our asbestos exposures to pay
                   claims in the future;
              -    future asbestos claims settlement and defense costs;
              -    number of future asbestos claims;
              -    other litigation,   including,   for  example,  class  action
                   shareholder lawsuits, contract disputes, patent infringements
                   and environmental matters;
              -    trade  restrictions  and  economic  embargoes  imposed by the
                   United States and other countries;
              -    changes in governmental regulations in the numerous countries
                   in which we operate including, for example, regulations that:
                        -    encourage   or  mandate   the   hiring   of   local
                             contractors; and
                        -    require foreign  contractors to employ citizens of,
                             or    purchase   supplies   from,    a   particular
                             jurisdiction;
              -    potentially  adverse customer  reaction, and time and expense
                   responding to the increased  scrutiny of  Halliburton by  the
                   media and others;
              -    environmental  laws and regulations,  including, for example,
                   those that:
                        -    require   emission    performance   standards   for
                             facilities; and
                        -    the potential regulation of hydraulic fracturing as
                             underground injection;
              -    any unexpected adverse outcome of the SEC's current inquiries
                   into Halliburton's   accounting   policies,   practices   and
                   procedures; and
              -    adverse results   of  increased   review   and   scrutiny  of
                   Halliburton by regulatory authorities, media and others;
         Geopolitical
              -    unsettled  political   conditions,  war,   the   effects   of
                   terrorism, civil unrest,  currency  controls and governmental
                   actions in the numerous countries in which we operate;
              -    operations in countries with significant amounts of political
                   risk,  including, for example,  Algeria,  Angola,  Argentina,
                   Colombia, Indonesia,  Libya, Nigeria,  Russia, and Venezuela;
                   and
              -    changes in foreign exchange  rates and  exchange  controls as
                   were experienced in Argentina in late 2001 and early 2002;

                                       42


         Liquidity
              -    reductions in debt ratings by rating agencies  including, for
                   example, our  recent  reductions  by  Standard  & Poor's  and
                   Moody's Investors' Services in late 2001 and early 2002;
              -    access to lines of  credit,  credit markets  and  credit from
                   suppliers under acceptable terms;
              -    availability   of   financing    from   the   United   States
                   Export/Import Bank;
              -    borrowing costs in the future;
              -    ability to issue letters of credit and surety bonds; and
              -    ability to raise capital via the sale of stock;
         Weather related
              -    the effects  of  severe  weather conditions,  including,  for
                   example, hurricanes  and typhoons, on offshore operations and
                   facilities; and
              -    the impact of  prolonged severe or mild weather conditions on
                   the demand for and price of oil and natural gas;
         Customers
              -    the magnitude of governmental  spending and  outsourcing  for
                   military and logistical  support of the type that we provide,
                   including, for example, support services in Bosnia;
              -    changes in capital spending by  customers  in the oil and gas
                   industry   for    exploration,    development,    production,
                   processing, refining, and pipeline delivery networks;
              -    changes in capital spending by governments for infrastructure
                   projects of the sort that we perform;
              -    consolidation  of  customers  in  the  oil  and  gas industry
                   including, for  example, the  proposed  merger of  Conoco and
                   Phillips Petroleum; and
              -    claim negotiations with engineering and construction
                   customers  on cost  variances  and  change  orders  on  major
                   projects,  including,  for example,  the  Barracuda-Caratinga
                   project in Brazil;
              -    ability of our customers to timely pay the amounts due us;
         Industry
              -    technological and  structural changes  in the industries that
                   we serve;
              -    changes that impact the demand for oil and gas including, for
                   example,  the slowdown in the global  economy  following  the
                   terrorist attacks on the United States on September 11, 2001;
              -    changes in the price of oil and natural gas, resulting from:
                        -    OPEC's  ability  to  set  and  maintain  production
                             levels and prices for oil;
                        -    the level of oil production by non-OPEC countries;
                        -    the policies  of governments  regarding exploration
                             for and production and development of their oil and
                             natural gas reserves; and
                        -    the  level of  demand  for oil  and  natural   gas,
                             especially natural gas in the United  States  where
                            demand is currently below last years' usage; and
              -    changes in the price or the availability of commodities that
                   we use or of key insurance coverages;
              -    risks  that result  from entering into  fixed  fee  projects,
                   where  failure  to   meet   schedules,   cost  estimates   or
                   performance  targets could  result in non-reimbursable  costs
                   which cause  the project  not  to meet  our  expected  profit
                   margins or incur a loss;
              -    risks  that result  from  entering   into  complex   business
                   arrangements for technically demanding projects where failure
                   by  one   or  more   parties   could   result   in   monetary
                   penalties; and
              -    the risk inherent in the use of derivative instruments of the
                   sort  that we use which could  cause a change in value of the
                   derivative instruments as a result of:
                        -    adverse   movements  in  foreign   exchange  rates,
                             interest rates, or commodity prices; or
                        -    the value and time period of the  derivative  being
                             different  than the  exposures  or cash flows being
                             hedged;

                                       43


         Systems
              -    the  successful deployment  of  SAP  throughout our remaining
                   Energy  Services  Group  businesses,  principally  Baroid and
                   Sperry Sun; and
              -    the successful  identification, procurement  and installation
                   of a  new financial system to replace the current  system for
                   the Engineering and Construction Group;
         Personnel and mergers/reorganizations/dispositions
              -    increased  competition   in  the   hiring  and  retention  of
                   employees in specific areas,  including, for example,  energy
                   services operations, accounting and finance;
              -    integration   of   acquired   businesses   into  Halliburton,
                   including, for example, our 2001 acquisitions of Magic Earth,
                   Inc. and PGS Data Management, including:
                        -    standardizing  information  systems  or integrating
                             data from multiple systems;
                        -    maintaining uniform standards, controls, procedures
                             and policies; and
                        -    combining  operations  and  personnel  of  acquired
                             businesses with ours;
              -    effectively  restructuring operations  and  personnel  within
                   Halliburton including, for example, the reorganization of our
                   engineering  and construction  business in early 2001 and the
                   recent segregation of our business into two separate entities
                   under Halliburton;
              -    ensuring acquisitions and new products and services add value
                   and complement our core businesses; and
              -    successful completion of planned dispositions.
         In  addition,   future  trends  for  pricing,   margins,  revenues  and
profitability  remain difficult to predict in the industries we serve. We do not
assume  any  responsibility  to  publicly  update  any  of  our  forward-looking
statements  regardless of whether factors change as a result of new information,
future  events  or for any  other  reason.  You  should  review  any  additional
disclosures  we make in our press  releases and Forms 10-Q,  8-K and 10-K to the
United  States  Securities  and  Exchange  Commission.  We also suggest that you
listen  to our  quarterly  earnings  release  conference  calls  with  financial
analysts.

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

         We are exposed to  financial  instrument  market  risk from  changes in
foreign  currency  exchange  rates,  interest  rates  and to a  limited  extent,
commodity  prices.  We  selectively  manage these  exposures  through the use of
derivative  instruments  to mitigate our market risk from these  exposures.  The
objective of our risk  management  is to protect our cash flows related to sales
or purchases of goods or services from market  fluctuations  in currency  rates.
Our use of derivative instruments includes the following types of market risk:
         -    volatility of the currency rates and commodity prices;
         -    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.

                                       44


PART II.  OTHER INFORMATION

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

         At  our  Annual  Meeting  of   Stockholders   held  on  May  15,  2002,
stockholders were asked to consider and act upon:

         (1)    the election of Directors for the ensuing year,
         (2)    a proposal  to approve  the  Halliburton Company  2002  Employee
                Stock Purchase Plan; and
         (3)    a stockholder proposal on auditor services.

         The  following  table sets out, for each matter where  applicable,  the
number  of votes  cast  for,  against  or  withheld,  as well as the  number  of
abstentions and broker non-votes.


         (1)    Election of Directors:

                                                                             
                Name of Nominee                           Votes For                   Votes Withheld

                Robert L. Crandall                        357,240,074                   9,002,829
                Kenneth T. Derr                           357,667,297                   8,575,606
                Charles J. DiBona                         359,038,088                   7,204,815
                Lawrence S. Eagleburger                   312,919,052                  53,323,851
                William R. Howell                         357,412,938                   8,829,965
                Ray L. Hunt                               357,694,176                   8,548,727
                David J. Lesar                            359,140,702                   7,102,201
                Aylwin B. Lewis                           359,290,693                   6,952,210
                J. Landis Martin                          358,721,972                   7,520,931
                Jay A. Precourt                           359,435,705                   6,807,098
                Debra L. Reed                             359,355,282                   6,887,621
                C. J. Silas                               357,542,983                   8,699,920

         (2)    Proposal to approve the 2002 Employee Stock Purchase Plan:

                Number of Votes For                        334,839,586
                Number of Votes Against                     28,255,615
                Number of Votes Abstain                      3,147,702
                Number of Broker Non-Votes                           0

         (3)    Shareholder proposal on auditor services:

                Number of Votes For                         31,871,260
                Number of Votes Against                    227,511,245
                Number of Votes Abstain                      5,204,576
                Number of Broker Non-Votes                 101,655,822


                                       45


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

         (a)    Exhibits

   *  10.1      Halliburton Elective  Deferral  Plan  as  amended  and  restated
                effective May 1, 2002.

   *  10.2      Halliburton Company 2002 Employee Stock Purchase Plan.

   *  10.3      Employment Agreement (Albert O. Cornelison).

   *  10.4      Employment Agreement (Weldon J. Mire).

   *  24.1      Powers of attorney for the following directors:

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

   *  24.2      Powers of attorney for the following executive officers:

                Jerry H. Blurton
                Lester L. Coleman
                Albert O. Cornelison
                Douglas L. Foshee
                Robert R. Harl
                Arthur D. Huffman
                Weldon J. Mire
                R. Charles Muchmore, Jr.
                Edgar Ortiz
                David R. Smith


                *     Filed with this Form 10-Q.

         (b)    Reports on Form 8-K

                                       46




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

April 15, 2002                 April 12, 2002              Item 5. Other Events for a press release announcing a
                                                           Federal court has rendered a verdict in a patent
                                                           infringement case.

April 18, 2002                 April 17, 2002              Item 4. Changes in Registrant's Certifying Accountant
                                                           for a press release announcing the dismissal of Arthur
                                                           Andersen LLP as independent auditors and the appointment
                                                           of KPMG LLP.

May 8, 2002                    May 7, 2002                 Item 5. Other Events for a press release announcing 2002
                                                           first quarter earnings.

May 13, 2002                   May 9, 2002                 Item 5. Other Events for a press release announcing the
                                                           annual meeting of shareholders.

May 15, 2002                   May 15, 2002                Item 5. Other Events for a press release announcing 2002
                                                           second quarter dividend.

May 21, 2002                   May 20, 2002                Item 5. Other Events for a press release announcing
                                                           asbestos plaintiffs agree to extend current stay on
                                                           asbestos claims until June 4, 2002.

May 29, 2002                   May 28, 2002                Item 5. Other Events for a press release announcing the
                                                           settlement of thirty asbestos claims.

May 29, 2002                   May 28, 2002                Item 5. Other Events for a press release announcing that
                                                           the Securities and Exchange Commission has initiated a
                                                           preliminary investigation of accounting treatment of
                                                           cost overruns on construction jobs.

June 4, 2002                   June 4, 2002                Item 5. Other Events for a press release announcing
                                                           asbestos plaintiffs agree to extend current stay on
                                                           asbestos claims until July 16, 2002.

During the third quarter of 2002:

July 11, 2002                  July 10, 2002               Item 5. Other Events for a press release announcing the
                                                           response to the news of Judicial Watch Lawsuit.

July 24, 2002                  July 16, 2002               Item 5. Other Events for a press release announcing that
                                                           an agreement has been reached with Harbison-Walker
                                                           Refractories Company and the Official Committee of
                                                           Asbestos Creditors to consensually extend the period of
                                                           the stay contained in the Bankruptcy Court's temporary
                                                           restraining order until September 18, 2002.

                                       47


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

During the third quarter of 2002 (cont'd):

July 24, 2002                  July 22, 2002               Item 5. Other Events for a press release announcing
                                                           second quarter asbestos charges.

July 29, 2002                  July 22, 2002               Item 5. Other Events for a press release announcing that
                                                           a letter of intent has been signed to sell 50% interest
                                                           in Bredero-Shaw to ShawCor Ltd.

July 30, 2002                  July 24, 2002               Item 5. Other Events for a press release announcing
                                                           second quarter results.

August 7, 2002                 August 1, 2002              Item 5. Other Events for a press release announcing
                                                           response to a false statement by Citizensworks.


                                       48


                                   SIGNATURES


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


                                       HALLIBURTON COMPANY




Date:  March 28, 2003                  By: /s/  Douglas L. Foshee
     ------------------                   ----------------------------------
                                                Douglas L. Foshee
                                           Executive Vice President and
                                              Chief Financial Officer






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

                                       49