Ben Alan Murphey, Et Al. V. Halliburton Company, Et Al. 02-CV-1152

Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 1 of 50

j, C <

UNITED STATES DISTRICT COURT, CV ,U.S.I1ISTRIC I' .JRT

NORTHERN DISTRICT OF TEXAS "y De DALLAS DIVISION

BEN ALAN MURPHEY, On Behalf of Himself § Civil Action No. and All Others Similarly Situated, § Plaintiff, § § FEDERAL SECURITIES VS. § CLASS ACTION COMPLAINT HALLIBURTON COMPANY, DAVID J. § LESAR, DOUGLAS L. FOSHEE, GARY V. § MORRIS, ROBERT C. MUCHMORE, and § ROBERT R. HARL, § Defendants. § JURY TRIAL DEMANDED

CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

This writing/publication is a creative work fully protected by all applicable copyright laws, as well as by misappropriation, trade-secret, unfair-competition and other applicable laws. The authors of this work have added value to the underlying factual materials herein through one or more of the following: unique and original selection, coordination, expression, arrangement, and classification of the information.

No copyright is claimed in the text of statutes, regulations, and any excerpts from analysts' reports or news articles quoted within this work.

All rights reserved — including the right to reproduce in whole or in part in any form. Any reproduction in any form by anyone of the material contained herein without the permission of Neil Rothstein and Scott+Scott, LLC is prohibited. Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 2 of 50

INTRODUCTION AND OVERVIEW OF THE ACTION 1. This is a federal class action on behalf of purchasers of the securities of Halliburton Company ("Halliburton" or the "Company") between September 29, 1998 and December 7, 2001, inclusive (the "Class Period"), seeking remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). 2. This action arises out of an intentionally misleading series of statements and omissions made by Defendants that concealed and affirmatively misrepresented the actual business performance of Halliburton during the Class Period. It also arises out of a series of intentionally misleading statements and omissions made by Defendants that concealed and affirmatively misrepresented until the end of the Class Period the true magnitude to the Company's liability for asbestos claims. 3. The Individual Defendants, all of them experienced Certified Public Accountants, controlled the accounting and disclosures of the Company during the Class Period, under the leadership of Individual Defendant Lesar, the Company's Chairman and Chief Executive Officer, who was also formerly the Company's auditor at the accounting firm Arthur Anderson. Individual Defendants prepared, approved, and/or signed the Company's press releases and filings with the Securities and Exchange Commission ("SEC") as set forth herein. Individual Defendants prepared, approved, and/or signed the Company's disclosures regarding its asbestos exposure as set forth herein. And Individual Defendants communicated with analysts and investors during the Class Period in conference calls and analyst meetings as set forth herein. 4. As of the beginning of the Class Period, the Company had historically enjoyed operating cash flows (e.g., actual net cash receipts) well in excess of reported net income. This is a natural phenomenon at many businesses, because net income is often reduced by expenses for non- cash items such as depreciation and amortization. During the four and one-half years preceding the beginning of the Class Period, Halliburton's reported net income totaled $1.5 billion, and its operating cash flow totaled $2.2 billion. During the three-year Class Period, this pattern dramatically reversed: net income totaled $l billion (excluding one-time gains on the sale of

-1- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 3 of 50

businesses), and operating cash flow totaled only $581 million. In other words, Halliburton's cash flows had historically exceeded net income by almost 47%. But during the Class Period, cash flows were 40% lower than net income. This glaring red-flag-waiving queston is answered herein.

5. Significant questions also arise surrounding the state of Halliburton's balance sheet at the beginning and end of the Class Period. At the beginning of the Class Period, the Company had total debt of $1.8 billion and cash on hand of $228 million. During the Class Period, Halliburton sold various major businesses and assets, resulting in cash receipts of $2.1 billion (net of $243 million spent to acquire certain businesses). During the Class Period, Defendants simultaneously claimed in filings with the SEC that the Company was producing record levels of net income totaling $1 billion (net of gains from the asset sales). Nevertheless, at the end of the Class Period, the Company's balance sheet was in the same condition as it had been at the beginning of the

Class Period: total debt of $1.7 billion and cash-on-hand of $227 million, virtually identical to the Company's position at the beginning of the Class Period.

6. Thus, despite record reported profits of $1 billion and cash receipts from asset sales of $2.1 billion, the Company ended the Class Period in the same cash and debt position as it was when it started. Where the $3.1 billion went missing is also the subject of this complaint.

7. Unfortunately for buyers of Halliburton securities during the Class Period, Plaintiff's investigations have revealed the explanation for these questions: Defendants intentionally engaged in serial accounting fraud during the Class Period. Indeed, as alleged herein, the Company's reported net income during the Class Period was a sham.

8. This fraudulent net income was reported in the following filings with the SEC:

• Halliburton's 10-K for 1998 (" 1998 10-K"), signed by Individual Defendants Morris and Muchmore;

Halliburton's 10-Q for the first quarter of 1999 ("Q1:99 10-Q"), signed by Individual Defendants Morris and Muchmore;

• Halliburton's 10-Q for the second quarter of 1999 ("Q2:99 10-Q"), signed by Individual Defendants Morris and Muchmore;

• Halliburton's 10-Q for the third quarter of 1999 ("Q3:99 10-Q"), signed by Individual Defendants Morris and Muchmore;

-2- Case 3:02-cv-01 1 52 Document 178-1 Filed 03/09/2005 Page 4 of 50

Halliburton's 10-K for 1999 ("199910-K"), signed by Individual Defendants Morris and Muchmore;

Halliburton's 10-Q for the first quarter of 2000 ("Q1:00 10-Q"), signed by Individual Defendants Morris and Muchmore;

• Halliburton's 10-Q for the second quarter of 2000 ("Q2:00 10-Q"), signed by Individual Defendants Morris and Muchmore;

Halliburton's 10-Q for the third quarter of 2000 ("Q3:00 10-Q"), signed by Individual Defendants Morris and Muchmore;

• Halliburton's 10-K for 2000 ("2000 10-K7), signed by Individual Defendants Lesar, Morris and Muchmore;

Halliburton's 10-Q for the first quarter of 2001 ("Q1:01 10-Q"), signed by Individual Defendants Morris and Muchmore;

Halliburton's 10-Q for the second quarter of 2001 ("Q2:01 10-Q"), signed by Individual Defendants Morris and Muchmore;

Halliburton's 10-Q for the third quarter of 2001 ("Q3:01 10-Q"), signed by Individual Defendants Foshee and Muchmore.

9. The long answer to the above questions is, however, necessarily complex. Carrying out accounting fraud of such intensity and duration could not be accomplished without the detection of even a compliant auditor through the use of a single, simplistic scheme. Instead, the fraud at

Halliburton was perpetrated in a sophisticated and multi-faceted manner. Five specific accounting schemes concocted and implemented by the Individual Defendants have been identified, however, and additional schemes will likely be uncovered in discovery. The five schemes are described in detail and linked to the knowing or severely reckless actions of Defendants in the section of this complaint entitled, "Basis of the Accounting Fraud Allegations."

10. Still further, even as they sold off some of the Company's most consistently profitable business units in order to cover up their accounting fraud, the Individual Defendants were faced with yet another challenge in propping up their house of cards -- the need to conceal from investors a looming disaster stemming from Halliburton's massive exposure to liability for asbestos claims.

-3- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 5 of 50

11. Defendants intentionally concealed and affirmatively misrepresented the true significance of the Company's exposure to asbestos liabilities repeatedly up to the very end of the

Class Period in the aforementioned 10-Qs and 10-Ks, press releases and communications with analysts and investors. Defendants made these misrepresentations and omissions despite their actual knowledge, or severely reckless disregard, of the highly material and extremely misleading nature of same.

12. TTo illustrate the nature of these intentional misrepresentations and omissions for the purposes of this introductory section of the complaint, on September 12, 2001, Defendants learned that a jury had returned a $130 million verdict against the Company and a co-Defendant in favor of five asbestos plaintiffs. This equates on average to $26 million per claim. The claims against

Halliburton sprang from the former Dresser subsidiary, Harbison-Walker. The asbestos plaintiff s pleadings named both Harbison-Walker and Dresser as Defendants. Ten weeks later on November

29, 2001, this highly significant jury verdict became a final judgment of the court.

13. During this ten-week period, Defendants did not disclose this verdict to investors. They knew that the verdict had not been independently discovered or reported. (Indeed it was not reasonably discoverable by investors or analysts. Halliburton was not a named Defendant, the verdict was not accessible on any database, the verdict was not reported by the press regionally or nationally, and notice of the verdict was available only at the single state district courthouse in which it was rendered — one of hundreds in Texas.) Nevertheless, on October 23, 2001, five weeks after they had learned of the verdict, Individual Defendants Lesar and Foshee, in Dallas, Texas, hosted a conference call with analysts and investors to discuss the third-quarter results that had been released that day. In this call, both Lesar and Foshee stated that the news regarding asbestos in the quarter was "positive." In response to a question specifically regarding asbestos claims relating to

Harbison-Walker (such as the claims leading to the September 12 verdict), they stated as follows:

Individual Defendant Foshee: "...There really is not anything new to report on Harbison- Walker, other than the fact that new claims during the quarter naming Dresser as a Defendant were only1,300."

-4- a% Case 3:02-cv-011 52 Document 178-1 Filed 03/09/2005 Page 6 of 50 -

Individual Defendant Lesar: "... There have been no adverse developments at all with respect to the Harbison-Walker situation... Our view as we said today is that claims are coming down, both at the Harbison and on the rest of the claims that have come in over the last couple of quarters, and, more importantly, our settlement rate continues to be at historical levels [of $200 per claim]. And I think both of those data points- and the third point is that we keep getting paid by our insurers for those that we do settle. And I think those are three really positive data points that people need to start putting into their thinking, because it's clear to me that if you look at performance versus stock price versus P/E, that the discount on our stock is way overdone versus what realistic expectation of liability might be."

These statements to analysts and investors are chilling in light of the Individual Defendants' actual knowledge that a jury, during the very quarter in question, had returned a verdict based on Harbison-

Walker claims against Halliburton for not less than $13 million per claim for just 5 plaintiffs.

14. In the Company's next 3Q:01 10-Q, filed on November 8, 2001, two months after Defendants learned of the verdict, Defendants affirmatively stated that in the third quarter, 12,000 asbestos claims had been resolved by the Company at a gross cost of only $5 million, and a net cost to the Company of just $1 million. The Company also affirmatively stated in this 10-Q that its historical net cost per claim had been a mere $200 per claim. Finally, the 10-Q expressed the Company's belief that the Company's asbestos exposure would have no material adverse effect on its financial condition or results.

15. The September verdict, however, could not have been more material to investors' evaluation of the Company's prospects and risks, especially given the intense concern of investors

regarding the asbestos issue at the time. Defendants themselves later admitted that the September verdict had been "significantly outside their past experience." Indeed, when a Company is facing 145,000 claims: 145,000 claims x $200 per claim = $29 million;

145,000 claims x $13 million per claim = $1.9 trillion.

16. Their actual knowledge of the verdict in question rendered Defendants' affirmative

assurances in 3Q:01 10-Q misleading. The degree of the disparity between Defendant's statements

and their actual knowledge, coupled with the overwhelming materiality of the information in

-5- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 7 of 50

question, render Defendants' affirmative statements and omissions outright lies to innocent investors. Complete discussion of these and other examples of Defendants' fraud with respect to

Halliburton's asbestos liability exposure is contained below in the section, "Basis of the Asbestos

Fraud Allegations."

17. Finally, Defendants' accounting fraud and asbestos fraud were interlinked. Increased disclosure of the the Company's true asbestos liabilities during the Class Period would have forced the Company to set aside additional reserves, reserves that the Company could ill-afford precisely due to Defendants' accounting fraud. Indeed, the Company, in July 2001, had been forced to assume an additional $425 million in medium-term debt in order to bolster its minimal cash position. The maximum amount reserved for the Company's asbestos liabilities at any time during the Class

Period was $125 million. A simple comparison of this $125 million with the $4.3 billion for which the Company ultimately settled its asbestos claims -- $2.3 billion of which will be borne directly by the Company -- sufficiently illustrates the materiality of and facial and intentional nature of Defendants' asbestos liability non-disclosure fraud. 18. The two frauds merged and came to a head on Friday, December 7, 2001, the last day of the Class Period. During that week, three asbestos verdicts or judgments against the Company totaling $131 million -- including the $65 million verdict that Defendants had known about since September -- came to light. On that Friday, investors finally came to the collective realization that the Company had been affirmatively misleading them in its assurances regarding the Company's asbestos exposure, financial performance and future prospects. Coupled with the Company's weak financial position, investors now realized that the Company could be in danger of bankruptcy. Halliburton shares declined from $21 to $12 per share that Friday. Analysts and commentators universally attributed the drop to a collective loss of faith on the part of investors in the veracity of the Company. As TheStreet.com reported on that day, in the article "Halliburton Buried as Investors Stop Believing:" "Halliburton's shares dove to nine-year lows Friday as investors lost faith in the company's claims..."

-6- Case 3:02-cv-01 152 Document 178-1 Filed 03/09/2005 Page 8 of 50

19. On average, innocent buyers of Halliburton shares during the period September 29, 1998, to June 15, 2001, paid approximately $40 per share for Halliburton stock (based on the

average daily closing price during that period). By the end of the Class Period, when the cumulative

effect of Defendant's accounting fraud and associated asset sales on Halliburton's future business

prospects had become evident, and its serial mendacity regarding the true extent of its exposure to asbestos claims had been exposed, Halliburton's shares were trading at $12 per share.

PARTIES

20. As set forth in the attached certification, incorporated by reference into this complaint, Plaintiff purchased the securities of Halliburton at artificially inflated prices during the Class Period and has been damaged thereby.

21. Defendant Halliburton is a Delaware corporation with its executive offices and principal place of business located at 3600 Lincoln Plaza, 500 N. Akard Street, Dallas, Texas.

According to the Company, Halliburton is one of the world's largest diversified energy services,

engineering, maintenance and construction companies, offering a broad range of energy services and products, industrial and marine engineering and construction services.

22. Individual defendant David J. Lesar ("Lesar") was the President and Chief Operating Officer of the Company as of beginning of the Class Period until August 16, 2000. During this period, he was one of three members of Halliburton's Executive Committee, along with CEO

Richard Cheney and Donald Vaughn, former head of Dresser Industries, which was merged with

Halliburton at the beginning of the Class Period. Upon Richard Cheney's resignation in August

2000, Individual Defendant Lesar assumed the roles of Chairman, Chief Executive Officer and

President of Halliburton, in which positions he remained until the end of the Class Period. Prior to the Class Period, he had served from 1995 to 1997 as Halliburton's Chief Financial Officer. In addition, as of the beginning of the Class Period until January 1999, Individual Defendant Lesar was

President and Chief Executive Officer of Halliburton's principal subsidiary, Kellogg Brown and

Root, Inc. ("KBR"), the locus of the majority of the accounting improprieties detailed herein. From

January 1999 to August 2000, his title at KBR shifted from "President and Chief Executive Officer"

-7- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 9 of 50

to "Chairman of the Board," although according to Halliburton's SEC filings, no one replaced Individual Defendant Lesar as "President and Chief Executive Officer" of KBR until October 2000, implying that he retained principal executive control of KBR until August 2000 despite the change in title. Prior to joining the Company, Individual Defendant Lesar was Halliburton's auditor at Arthur Anderson LLC. His former partners at Anderson continued to audit the Company throughout the Class Period. Statements by former Halliburton executives procured in plaintiff's attorneys' investigations indicate that, throughout the Class Period, Individual Defendant Lesar was the "mastermind" of the accounting schemes detailed herein. He was paid almost $10 million in salary and bonuses by the Company during the Class Period. 23. Individual defendant Douglas L. Foshee ("Foshee") from August 2001 to the end of the Class Period served as Executive Vice President and Chief Financial Officer of the Company. 24. Individual defendant Gary V. Morris ("Morris") served as Chief Financial Officer of the Company from May 1997 to August 2001. From August 2001 to the end of the Class Period, Individual Defendant Morris was Executive Vice President with ultimate executive control of KBR (renamed the "Engineering and Construction Group" for the purposes of segment reporting beginning January 2001), the locus of the majority of the accounting improprieties detailed herein. Previous to the Class Period, Individual Defendant Morris had served as head of Finance for KBR during 1995-1996. He then served as head of Finance for Halliburton as a whole in 1997, after which he became CFO of Halliburton, and then president of KBR in 2001, as described above. 25. Individual defendant Robert Charles Muchmore ("Muchmore") was, throughout the Class Period, the Principal Accounting Officer, Controller and an Executive Vice President of Halliburton, a position that placed him in direct control, along with the other Individual Defendants, of the Company's accounting activities and financial reporting. 26. In this unusual case, all four Individual Defendants were CPAs in direct control of both Halliburton's accounting and the contents of its reports to investors regarding Halliburton's financial performance They crafted and oversaw the implementation of the Company's accounting policies, and the changes thereto. They prepared, approved and/or signed the Company's filings

-8- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 10 of 50

with the SEC and its press releases. They made statements to investors and analysts in conversations, conference calls, and meetings.

27. Individual Defendants, all of them CPAs with unlimited access to the Company's books, had detailed and sophisticated knowledge of the Company's actual performance, prospects

and financial condition. Individual Defendants had access to adverse undisclosed information about

the actual profitability of Company projects, the actual level of revenues that the Company would

likely collect on those projects, the actual level of costs the projects were accruing, the actual use of

Company reserves to offset ordinary operating expenses, the actual reasons for the sales of some of

the Company's most consistently profitable businesses, the actual level of the Company's exposure

to asbestos liability, and the actual net income of the Company under GAAP. Individual

Defendants knew (or severely recklessly disregarded) that these adverse facts rendered the omissions

and affirmative representations that they each made, prepared, signed, and/or approved materially

false and misleading, and in violation of GAAP and the securities laws, as particularized in this

complaint. By virtue of their positions, authority, and duties in the Company, as described above,

the Individual Defendants' knowing or severely reckless state of mind with respect to these

omissions and affirmative misrepresentations is attributable to Defendant Halliburton.

JURISDICTION AND VENUE

28. The claims asserted in this complaint arise under and pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act [ 15 U.S.C. §§78j(b) and 78t(a)] and Rule IOb-5 promulgated

there under by the United States Securities and Exchange Commission ("SEC") [17 C.F.R. §240. I Ob-5].

29. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§1331 and 1337, and Section 27 of the Exchange Act [15 U.S.C. §78aa].

30. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and 28 U.S.C. § 1391(b). Halliburton maintains its principal place of business in this District and many of the acts and practices complained of herein occurred in substantial part in this District.

-9- Case 3:02-cv-011 52 Document 178-1 Filed 03/09/2005 Page 11 of 50

31. In connection with the acts alleged in this complaint, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.

PLAINTIFFS' CLASS ACTION ALLEGATIONS

32. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise acquired the securities of Halliburton between September 29, 1998 and December 7, 2001, inclusive and who were damaged thereby (the "Class"). Excluded from the Class are Defendants, the officers and directors of the Company at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which Defendants have or had a controlling interest.

33. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Halliburton securities were actively traded on the

NYSE. As of September 30, 2001, the Company had 455 million shares issued and outstanding.

While the exact number of Class members is unknown to plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes that there are hundreds or thousands of members in the proposed Class. Record owners and other members of the Class may be identified from records maintained by Halliburton or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.

34. Plaintiffs' claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by Defendants' wrongful conduct in violation of federal law that is complained of in this complaint.

35. Plaintiffs will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation..

-10- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 12 of 50

36. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting Individual members of the Class. Among the questions of law and fact common to the Class are:

• Whether Halliburton's financial statements were falsified in violation of GAAP and the federal securities laws;

• Whether Halliburton's stated net income was materially exaggerated during the Class Period;

• Whether Halliburton's asbestos liability was materially misrepresented during the Class Period;

• Whether such statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;

• Whether particular facts and the total circumstances give rise to a strong inference that at least one of the Individual Defendants acted with actual knowledge or severely reckless disregard of the materially misleading nature of each such statement or omission;

• Whether predictive statements to the investing public during the Class Period were made (1) without being accompanied by meaningful cautionary statements and (ii) with actual knowledge on the part of whomever made or approved the statement that it was misleading;

• The extent of damages sustained by Class members and the appropriate measure of damages.

37. Plaintiffs' claims are typical of those of the Class because Plaintiff and the Class sustained damages from Defendants' wrongful conduct. 38. Plaintiffs will adequately protect the interests of the Class. Plaintiff has retained counsel experienced in class action securities litigation. Plaintiff has no interests that conflict with those of the Class. 39. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by Individual Class members may be relatively small, the expense and burden of Individual litigation make it impossible for members of the Class to Individually redress the wrongs -11- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 13 of 50

done to them. The prosecution of separate actions by Individual Class members would create a risk of inconsistent and varying adjudications.

40. There will be no difficulty in the management of this action as a class action.

BASIS OF THE ACCOUNTING FRAUD ALLEGATIONS

SCHEME I: MANIPULATE PROJECT-LEVEL ACCOUNTING

41. The 3Q:01 10-Q describes Halliburton's business segments as follows:

We have two business segments - Energy Services Group and Engineering and Construction Group. Our segments are organized around the products and services provided to our customers. During the fourth quarter of 2000, we announced restructuring plans to combine engineering, construction, fabrication and project management operations into one company, Kellogg Brown & Root, reporting as our Engineering and Construction Group. This restructuring resulted in some activities moving from the Energy Services Group to the Engineering and Construction Group, effective January 1, 2001.

Thus, KBR was Halliburton's engineering, construction, fabrication and project management subsidiary and reported as the "Engineering and Construction Group" beginning in 2001.

42. The key features of KBR's business were: (1) "the long-term nature of most of its projects" (see 2002 10-K, p.14); and (2) the fact that its projects were "often executed on a lump- sum, turnkey basis" (see 2000 10-K, p. 3).

43. Among numerous additional witnesses interviewed, Plaintiff's investigation included interviews with five accountants currently or formerly employed by the Company at various levels

of seniority. Plaintiff is unwilling to identity these persons at this time in order to avoid potential, if

not inevitable, reprisal by Defendants that have demonstrated a willingness to hold themselves above

the law. (See "Pattern of Illegal Conduct" below.) Plaintiff was able to achieve the cooperation of

these witnesses despite a company-wide email, sent in early 2003 and followed up with employee

meetings, that prohibited employees from speaking with anyone outside of the Company regarding project accounting issues. These particular witnesses will be identified as follows:

-12- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 14 of 50

Confidential Witness 1 ("CW 1 ") - KBR Project Accountant from August 2001 to March 2003.

Confidential Witness 2 ("CW2") - KBR Senior Accountant from August 1989 to June 2002.

Confidential Witness 3 ("CWY) - Shared Services Manager, Halliburton Shared Services Accounting Group, from April 1998 to November 2001.

Confidential Witness 4 ("CW3 ") - Consolidated Halliburton Group Accountant, from 2001 to 2002.

44. According to CW1 and CW2, during the Class Period each of the hundreds of individual projects within KBR was assigned a junior project accountant who would keep track of the revenues and expenses of one or more projects and prepare a monthly profit and loss statement

("P&L") summarizing the financial results of each project. CW 1, CW2 and CW3 also established that KBR used a decades-old accounting information system throughout the Class Period. CW 1 and

CW2 established that, using this antiquated accounting information system, the month-end process of preparing the P&L was uniform across KBR. Specifically, the monthly process of preparing a P&L for a given KBR project proceeded as follows:

(1) the costs actually paid for the project during the month were tallied by the project accountant, who accessed this information from KBR's Mainframe, which captured expenses only as costs were paid;

(2) the project accountant tallied the project's revenues for the month from invoices generated, also accessed from the KBR Mainframe;

(3) the project accountant estimated and posted accruals (unpaid but incurred costs);

(4) the project accountant provided a preliminary P&L to the Finance Director of that business unit, all of whom ultimately reported to the executive in charge of KBR (from the beginning of the Class Period to August 2000, this person was Individual Defendant Lesar, under the title of President/CEO or Chairman of KBR; from October 2000 to August 2001, this Individual was Robert Harl; from August 2001 to the end of the Class Period, this person was Individual Defendant Morris);

- 13 - Case 3:02-cv-011 52 Document 178-1 Filed 03/09/2005 Page 15 of 50

(5) the Finance Director reviewed the P&L and, based on policy directives from the executive in charge of KBR, directed, orally, by email, or via an authorized assistant, that the project accountant make specific changes to the P&L (e.g., "Reduce this accrual to x (amount), " or, "Post a firm JV (journal voucher) for a negative cost accrual at x");

(6) the project accountant made the revisions and resubmitted the P&L to the Finance Director, who, if it met his approval, then authorized the "release" of the P&L into KBR's accounting information system.

45. In order to understand these procedures in context, and by way of background, modern accounting systems such as the SAP accounting system ("SAP") used by Halliburton's Energy Services Division are designed to capture all financial data in one place, limit the "visibility" of Individual users and their ability to manipulate data, and require that all entries and data ultimately "match" or reconcile. According to CW3, in early 2001 executive management of the Company internally informed business unit managers that they would abandon all efforts to convert KBR's accounting to SAP. In SAP and other modern accounting systems, accruals are automatically generated, not manually entered. In SAP, auditors can easily drill down to the sources of any line item to details of the invoices, payments and accruals underlying stated revenue or expense for a given period. Had SAP been used in KBR, all invoices would have been generated centrally; all bills would have been paid centrally; and invoices and payments would have been reconciled with the financial statements. 46. In contrast to SAP, CW1, CW2 and CW3 stated that the accounting systems and

procedures at KBR required that monthly project P&Ls be accepted at face value. There was no

attribution of specific invoices, payments, checks, and deposits to specific P&Ls, much less line

items on the P&Ls (as would be required by any modern accounting system). There was no

reconciliation to a centralized account because individual KBR business units generated invoices

separately, and they recorded accounts receivable and accounts payable separately.

47. The lowest level to which an auditor could "drill down" in attempting to verify

the P&L of a given KBR project was the aforementioned massaged and then "released" monthly

-14- Case 3:02-cv-011 52 Document 178-1 Filed 03/09/2005 Page 16 of 50

P&Ls. The accounting information system of KBR was not linked to the KBR Mainframe.

KBR's accounting procedures did not maintain separate underlying source information for the numbers on project P&Ls. CW 1 stated that testing of the numbers of a given KBR monthly project P&L would entail an almost impossible comparison of numbers generated by the antiquated accounting system with unknown mainframe cost entries, unknown unpaid invoices, and management explanations for variances. Neither access to these sources, nor even their identification, was built into the design of KBR's accounting information system or its accounting procedures, rendering testing of the P&Ls nearly impossible.

48. CW1 directly witnessed an audit of projects for which she prepared the monthly

P&Ls. She stated that the extent of the testing performed by the auditors was to request certain of the already-massaged monthly P&Ls to verify that they reconciled with the unit's balance sheet.

The auditors were unaware of the KBR mainframe. Moreover, prior to the audit, CW 1 was asked to meet with the Finance Director of the business unit and he specifically instructed her not to volunteer cost data from the mainframe or to facilitate any testing of the monthly P&Ls.

49. The Finance Directors of the business units of KBR ultimately reported, whether they liked it or not, to the executive in charge of KBR. From the beginning of the Class Period to August 2000, this executive was Individual Defendant Lesar, under the title of President/CEO or Chairman of KBR. From October 2000 to August 2001, this individual was Robert Harl.

From August 2001 to the end of the Class Period, this person was Individual Defendant Morris.

During the post-class-period events discussed herein, this individual was again Robert Harl.

50. Having established that KBR's accounting systems and procedures provided ample opportunity for fraudulent manipulation of monthly P&Ls, the next step in this inquiry is to determine whether and to what extent fraudulent manipulation of monthly P&Ls actually occurred. Unfortunately for purchasers of Halliburton securities during the Class Period, the interviews further

-15- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 17 of 50

established that the manipulation of monthly P&Ls was systemic and indeed a matter of policy throughout KBR. 51. The witnesses established that, at the beginning of a given project, a "Project Plan" was created based upon contract price and schedule for completion for a given construction or engineering project. This Plan projected costs to be incurred monthly, based on a percentage of completed performance, and a profit margin that the Company expected to achieve. CW I and CW2 established that KBR business unit Finance Directors, through the process described above, were directed as a matter of policy to consistently ensure that all projects were operating "within plan." If a project was proceeding profitably, manipulation of its monthly P&Ls was unnecessary. If it was "overrunning," the Finance Directors were to direct the Project Accountant to make specific changes to the P&L to bring it into plan before that P&L was "released" into KBR's accounting information system. 52. The KBR-wide nature of this practice was underlined by the statements of CW 1 regarding her exposure to extensive volumes of accounting records from across KBR and discussions with dozens of fellow Project Accountants from across KBR during several months during which she had to spend the majority of her time in the Company's "Accounting Vault" (an accounting records repository) on Clinton Drive in Houston, Texas. 53. CW 1 explained that each employee at the facility wore a badge that was color-coded, depending on the employee's function and the type of materials with which the individual was authorized to leave. Within the facility, employees with similar badges were grouped together as a policy. Thus, the witness spent these months at the Accounting Vault with a group largely composed of other KBR Project Accountants working on the same type of task, looking at the same types of records, and lunching together at the cafeteria. 54. CW1's conversations with fellow KBR Project Accountants revealed that all had been directed by their respective Finance Directors to make monthly project P&Ls show profits, in specific ways directed by the Finance Directors, whenever they were losing money. Moreover, these fellow KBR Project Accountants echoed the witness' own experiences in noting that, in fact, most of

-16- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 18 of 50

their projects were losing money. The changes to the monthly P&Ls ordered by the Finance Directors included the following:

1. Reductions in cost accruals. Accruals are expenses incurred during a given month but not paid during that month. For example, if annual payment x is required to rent a given piece of equipment, use of the equipment for a month should cause an expense of x/12 to accrue, even if no actual payment was made in the month. In preparing monthly P&Ls, Project Accountants initially estimated accruals for KBR projects on a reasonable basis. However, when projects were "overrunning," Finance Directors ordered arbitrary reductions in these accruals to bring the "released" P&L to profitability.

2. Negative cost accruals. If no further reduction in accruals was practical, Finance Directors could also order negative cost accruals (normally an oxymoron), where a Project Accountant would enter a negative number as a cost accrual. Thereby, Finance Directors could make even paid expenses disappear from the "released" P&L.

3. Revenue accruals. As noted above, revenues were recorded on the KBR Mainframe whenever an invoice was issued. (The questionable nature of many of these invoices is discussed below under Scheme 2.) Sometimes, "reversing" revenue accruals were reasonably directed when revenue had in fact been earned in a given month, but simply had not yet been invoiced. These accruals would be reversed the next month upon actual invoicing. In other cases, however, the ordered revenue accruals were "firm" or permanent, meaning the Finance Director was fabricating revenue out of thin air. Sometimes, these accruals would be ordered in the form of irregular entries, such as a revenue accrual to a cost account. None of these manipulations would ever be corrected through a reconciliation at the end of a given project, or on the company level (due to what CW2 described as KBR's "decentralized" approach to financial reporting by Individual business units). Under KBR's system, these monthly P&Ls, once they were "released," were set in stone and the well spring from which flowed all of KBR's financial reports. 55. According to the personal experience of CW I (as well as her review of documents from across KBR and her extensive discussions with Project Accountants from across KBR) the total amount of reduced cost accruals, negative cost accruals, and positive revenue accruals ordered by a Finance Directors throughout KBR was based on the "whatever it took to make it [the project] come back to plan," or profitability.

-17- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 19 of 50

56. According to the personal experience of CW1 and her discussions with Project Accountants from across KBR, it was well-understood by virtually all of them that the ultimate reason for these efforts on the part of their superiors was Defendants' desire to meet targets for Wall Street. 57. Finally, CW 1 stated that it was evident that her business unit was losing money. She estimated that the business unit was losing money in inverse proportion to the amount that it appeared to be making in the manipulated P&Ls of the business unit's various projects. She noted that there were constant complaints from the business unit's vendors regarding payment for their bills. Some waited over six months to get paid, and delays of 3-4 months were standard procedure.

According to the witness, as of 2002 (shortly after the end of the Class Period) Halliburton was on

"credit hold" with 50 transportation vendors alone.

58. CW 1 stated that the reason for these delays was to maintain at least some cash flow, and to create a larger pool of accounts payable that could be drawn on as needed using reductions in cost accruals and negative cost accruals (both of which would have the effect of reducing accounts payable in the balance sheet, reducing operating expenses, and increasing operating and net income).

The witness noted that KBR's accounting systems did not age accounts payable, which, again, facilitated these manipulations and avoided their detection.

59. According to CW 1, when KBR accountants disputed any of these practices, they were fired or transferred. For example, one accountant (who took issue with management regarding the arbitrary reduction of expenses experiencing cost overruns) was transferred to China for two years. Similarly, a project accountant who took issue with false billing at KBR was summarily terminated, as described below. Another project accountant who refused to assist in illegally submitting false visa applications for

Halliburton was also terminated.

-18- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 20 of 50

60. The hundreds of monthly P&Ls for Individual KBR projects collectively comprised the financial results for K13R as a whole for a given month. Over a three-month period, these monthly P&Ls, in combination with the results of the energy services division and corporate-level expenses, in turn comprised the results of Halliburton. To the extent that the KBR monthly P&Ls were fraudulent, the net income reported in the corresponding Halliburton 10-Qs and 10-Ks was fraudulent. 61. The manipulations described by the witnesses involved either arbitrary reductions of accounts payable (through reductions in cost accruals and negative cost accruals) or arbitrary increases in revenues (through revenue accruals). Therefore, the total extent of such manipulations in a given quarter is indicated by changes in Halliburton's reported accounts payable and revenues from quarter to quarter. The ratio of Halliburton's revenues to its accounts payable should have remained fairly constant. Dramatic movement of revenues and accounts payables in opposite directions in a given quarter would be corroborative evidence of manipulation occurring in the monthly P&Ls of KBR. As the witnesses stated, accounts payable were increasing during the Class Period as the Company was having increasing cash flow problems and was delaying payment of bills. CW 1 noted that there were constant complaints from the business unit's vendors regarding payment for their bills. Some waited over six months to get paid, and delays of 3-4 months were standard procedure. According to the witness, as of 2002 (shortly after the end of the Class Period) Halliburton was on "credit hold" with 50 transportation vendors alone. 62. Neverthless, the following table shows that during the Class Period the Company's reported accounts payable were dropping dramatically, even as reported revenues increased:

Quarter Change in A/P Change in Revenues Net Income

4Q:98 -$114 million +$65 million $66 million

3Q:99 -$140 million -$137 million $58 million

4Q:99 -$107 million +$238 million $76 million

2Q:00 -$16 million +$9 million $75 million

-19- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 21 of 50

3Q:00 -$65 million +$156 million $109 million

1Q:01 -$45 million -$49 million $109 million

There is no possible explanation, other than the one provided by the witnesses, for these massive

decreases in accounts payable during quarters in which the Company was reportedly doing hundreds

of millions in additional business. The reality is that accounts payable were being arbitrarily reduced accross KBR through arbitrary reductions in cost accruals and arbitrary "negative cost

accruals" in monthly P&Ls. In other words, the Company was massively understating its operating expenses in order to prop up its net income, and the means by which it achieved this was to lie about its accounts payable. If even 50% of the noted decreases in Accounts Payable in quarters such as

4Q:98 or 4Q:99 resulted from arbitrary reductions in cost accruals and arbitrary negative cost accruals at KBR, then the actual net income in those quarters was in fact close to zero. In other quarters, profits appear to have been manipulated less extremely but still on the order of 20-30%.

63. During the Class Period, Halliburton's aggregate reported net income was a sham.

The way that this net income was fabricated, and the degree of fabrication, varied from quarter-to- quarter. Defendants' fabrication encompassed at least five accounting schemes. More will likely be exposed during discovery. All five of the accounting schemes materially affected reported net income during the Class Period. In total, they account for virtually all of Halliburton's reported profits during the Class Period.

64. On information and belief, Individual Defendant Lesar had actual knowledge of the manipulation of monthly P&Ls that was occurring at KBR during the Class Period. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Lesar is a Certified Public Accountant with sophisticated knowledge of cost accounting, financial accounting and auditing.

-20- Case 3:02-cv-01 1 52 Document 178-1 Filed 03/09/2005 Page 22 of 50

2. Prior to the Class Period, Individual Defendant Lesar was Halliburton's auditor at Arthur Anderson, and had developed extensive knowledge of testing and audit procedures in general, and a particular knowledge of Halliburton and its subsidiaries' businesses, their accounting systems and procedures, and the ways in which they could be tested in an audit.

3. Prior to the Class Period, Individual Defendant Lesar was Halliburton's Chief Financial Officer from 1995 to 1997, when he developed an even more comprehensive knowledge of Halliburton and its subsidiaries' businesses, and their accounting systems and procedures.

4. Individual Defendant Lesar was, as of the beginning of the Class Period until January 1999, President and Chief Executive Officer of KBR.

5. Individual Defendant Lesar was, from January 1999 to August 2000, "Chairman of the Board" of KBR. According to Halliburton's SEC filings, however, no one succeeded him as President of KBR until October 2000, implying that this was merely a change in titles and that he retained principal executive control of KBR until August 2000.

6. The Finance Directors of the various business units of KBR reported, via KBR's Finance Director, to Individual Defendant Lesar from the beginning of the Class Period to August 2000. During this time, he developed particularized knowledge of the actual performance of KBR projects, the way they were being accounted for, and the company-wide policy of showing projects as operating "to plan" in monthly project P&Ls through the use of various techniques to manipulate those P&Ls.

7. Individual Defendant Lesar was, from August 2000 to the end of the Class Period, President, Chief Executive Officer and Chairman and of Halliburton, during which time he continued to monitor KBR and the actual performance of its projects closely, especially since various problematic KBR projects were sources of intense concern and attention amongst Halliburton executives. As an accountant and CEO of Halliburton, Individual Defendant Lesar reviewed the claimed perfoiliiance of KBR's projects in full knowledge of serious problems at KBR (such as the Brazil project discussed below, and KBR's major problems with cash-flows and vendors) and the financial manipulations that took place in KBR as a matter of company policy. He nevertheless approved and failed to prevent the consolidation of these false and misleading KBR results into Halliburton's results.

65. On information and belief, Individual Defendant Morris had actual knowledge of the manipulation of monthly P&Ls that was occurring at KBR during the Class Period. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Morris is a Certified Public Accountant with sophisticated knowledge of cost accounting, financial accounting and auditing.

-21- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 23 of 50

3. Beginning in 1997 until August 2001, Individual Defendant Morris was Halliburton's Chief Financial Officer, when he developed an even more comprehensive knowledge of Halliburton and its subsidiaries' businesses, and their accounting systems and procedures, including further particularized knowledge of the actual performance of KBR projects, the way they were being accounted for, and the company-wide policy of showing projects as operating "to plan" in monthly project P&Ls through the use of various techniques to manipulate those P&Ls. He also knew that nothing neither Halliburton's accounting procedures or audits prevented or policed such manipulation.

4. Individual Defendant Morris, as CFO, as an accountant and CFO of Halliburton, reviewed the claimed performance of KBR's projects in full knowledge of serious problems at KBR (such as the Brazil project discussed below, and KBR's major problems with cash-flows and vendors) and the financial manipulations that took place in KBR as a matter of company policy. He nevertheless consolidated these false and misleading KBR results into Halliburton's results.

5. From August 2001 to the end of the Class Period, Individual Defendant Morris was the chief executive of KBR to whom the Finance Directors of the various business units of KBR reported via the Finance Director of KBR.

66. On information and belief, Individual Defendant Muchmore had actual knowledge of the manipulation of monthly P&Ls that was occurring at KBR during the Class Period. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Muchmore is a Certified Public Accountant with sophisticated knowledge of cost accounting, financial accounting and auditing.

2. Throughout the Class Period, Individual Defendant Muchmore was Halliburton's Principal Accounting Officer and Controller, and as such had an extremely detailed knowledge of Halliburton and its subsidiaries' accounting systems and procedures.

3. Throughout the Class Period, Individual Defendant Muchmore had actual knowledge of the deficiencies of Halliburton's accounting systems and the need to migrate Halliburton to a modern accounting system. He indeed led the "SAP project" that did so, but only in the energy services division. He therefore had actual knowledge of the deficiencies of KBR's accounting systems, and actual knowledge (and participation in) the decision, communicated in a company-wide email in early 2001, not to even attempt to migrate KBR to SAP. He knew that there was widespread

-22- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 24 of 50

manipulation of KBR's monthly project P&Ls and that nothing prevented or policed such manipulation in KBR's accounting procedures and audits.

4. Individual Defendant Muchmore, as Halliburton's Principal Accounting Officer and Controller, reviewed the claimed performance of KBR's projects in full knowledge of serious problems at KBR (such as the Brazil project discussed below, and KBR's major problems with cash-flows and vendors) and the financial manipulations that took place in KBR as a matter of company policy. He nevertheless consolidated these false and misleading KBR results into Halliburton's results.

SCHEME Il: REPORT FALSE REVENUES

67. While the first scheme largely involved the under-reporting of expenses at Halliburton during the Class Period, the second scheme involves the over-reporting of revenues. (Revenues — Total Expenses = Net Income.) Revenues are composed of actual cash received for services plus "accounts receivable" owed by customers but not yet paid. Generally, the issuance of an invoice is sufficient to create accounts receivable and revenue. The invoice announces that a service has been rendered and payment is due. Thus, revenues are composed of actual cash revenues as well as "paper" or "owed" revenues, otherwise known as accounts receivable. 68. The ratio of Halliburton's accounts receivable relative to total quarterly revenues during the Class Period indicates how much of Halliburton's revenues were based on cash payments, versus how much were based on "paper." During the first quarter of the Class Period, average accounts receivable equaled 92% of the revenues recognized during the quarter. That is, the bills for which Halliburton was still waiting to be paid (and which had been counted as revenue in either that quarter or a preceding quarter) were equal to 92% of the revenues for services that Halliburton had rendered in that quarter. 69. By the quarter following the Class Period, after rising throughout the Class Period, average accounts receivable equaled 131% of the revenues recognized during the quarter. That is, the bills for which Halliburton was still waiting to be paid (and which had been counted as revenue in either that quarter or preceding quarters) were equal to 131% of the revenues for services that Halliburton had rendered in that quarter.

-23- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 25 of 50

70. During the Class Period, Halliburton's accounts receivable relative to revenues therefore increased by a stunning 39 percentage points, from 92% to 131%. During the same period, the accounts receivable relative to revenues of its six principal competitors remained roughly the same, increasing by 3 percentage points from 98% to 101%.

71. In dollar terms, the 39-percentage-point shift provided Halliburton $1.1 billion in additional revenue during the Class Period (based on Halliburton's average quarterly revenues during the Class Period of $3.4 billion). Much of this was "found" revenue unassociated with any additional costs (as later admitted by Individual Defendant Foshee). If one assumes, conservatively, that half of this $1.1 billion in additional "paper" revenue found its way to pre-tax income, then this dramatic surge in accounts receivable during the Class Period produced approximately $370 million in net income during the Class Period, or 37% of the total net income reported by Halliburton during the period.

72. One method of accomplishing such manipulations was simply the issuance of sham invoices, or overbilling with no expectation of actually getting paid. Another was Halliburton's undisclosed change in accounting policy during the Class Period to allow it to recognize expected future claims on KBR construction projects as immediate revenues, and, even after it was

"disclosed," its aggressive use of this change to recognize as revenue "claims" that it never expected to collect and never subsequently collected.

Overbilling and overbilling with no expectation of getting paid

73. CW 1 stated that KBR often significantly overcharged customers when a particular project was falling out of plan. If the customers actually paid, then so much the better. If they did not, the revenues and accounts receivable remained on the books indefinitely and the Project

Accountant (who also took care of collections) was directed not to attempt to collect on the invoice.

-24- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 26 of 50

74. In addition to the KBR-wide practice of overbilling, sometimes with no expectation of getting paid but merely to increase reported revenues, according to CW 1 and CW2 balance sheet accountants at the business unit, KBR, and Halliburton level were also directed not to add to reserves for doubtful accounts, an action required under GAAP whenever one has information that an invoice is unlikely to be paid. A reserve for doubtful accounts is a contra account of accounts receivable. Increasing the reserve reduces accounts receivable and revenue. Thus, the orders to the balance sheet accountants to not add to reserves for doubtful accounts again had the effect of artificially increasing revenues. The common-sense concept underlying reserve accounts is that when one becomes aware that an invoice has a good chance of being uncollectible, one should reserve for it. When one knows that a lump-sum project is generating unexpected costs, one should reserve for it. Financial reporting should be reliable in that it represents what it purports to represent. FASB Statement of Concepts No. 2, ¶¶58-59. Financial reporting should be complete, leaving nothing out that may be necessary to insure that it validly represents the actual knowledge of the authors. FASB Statement of Concepts No. 2, ¶79. Most important, financial reporting, in the face of uncertainty, should be conservative. FASB Statement of Concepts No. 2, ¶¶95, 97.

75. According to a balance sheet accountant, as of shortly after the end of the Class

Period, Halliburton accounts receivable aged over 180 days totaled approximately $180 million.

This accountant was specifically instructed not to increase the Halliburton's "miniscule" reserve for doubtful accounts despite this staggering amount of invoices that had not been paid for over six months.

76. Similarly, CW 1 reported that her business unit's accounts receivable aged over 180 days totaled $20 million, and yet the unit's reserve for doubtful accounts was a "ridiculously low"

$700,000.

-25- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 27 of 50

77. Another example further illustrates the pervasiveness of this overbilling and the knowing complicity of high-level Halliburton executives in both the practice and covering it up. A program manager for several KBR "time and materials" projects discovered that Halliburton clients were between them being billed for a total of 80-90 hours per week for his time, despite the fact that he worked only 40 hours per week. When the program manager disputed this, he was flown to

Halliburton's headquarters for a "dispute resolution" session. He was met at the airport, taken to

Halliburton's employee dispute resolution office, given a check for $20,000, and fired. Apparently, the reason for the $20,000 pay-off was that Halliburton had gotten "caught" by the program manager's discovery and his superiors were attempting to purchase his silence.

78. In some cases, the clients to which KBR sent false invoices were entities created and controlled by Halliburton. Witnesses spoke of "MMM," a Mexican company formed by

Halliburton. Invoices sent to MMM were treated as third-party revenues and maintained indefinitely as accounts receivable in KBR's books. However, the witnesses explained, these invoices were never paid because MMM was "actually Halliburton."

79. On information and belief, Individual Defendant Lesar had actual knowledge of the false invoicing, and the false recognition of these invoices as revenues despite the lack of likelihood that they would be paid, that was occurring pervasively at KBR during the Class Period. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Lesar is a Certified Public Accountant with sophisticated knowledge of cost accounting, financial accounting and auditing.

3. Prior to the Class Period, Individual Defendant Lesar was Halliburton's Chief Financial Officer from 1995 to 1997, when he developed an even more

-26- Case 3:02-cv-01 1 52 Document 178-1 Filed 03/09/2005 Page 28 of 50

comprehensive knowledge of Halliburton and its subsidiaries' businesses, and their accounting systems and procedures.

4. Individual Defendant Lesar was, as of the beginning of the Class Period until January 1999, President and Chief Executive Officer of KBR.

8. As CEO of Halliburton, Individual Defendant Lesar reviewed its financial statements closely and, as an accountant, was necessarily well-aware of the dramatic increases in accounts receivable during the Class Period. As CEO, he also reviewed the aging of these accounts receivable (information that was not available to investors). As an accountant, he was therefore necessarily aware of the outrageous inadequacy of Halliburton's reserves for doubtful accounts and the dubious quality of Halliburton's reported revenues during the Class Period. He nevertheless approved and failed to prevent the reporting of these revenues if they were bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable collectibility of Halliburton's accounts receivable.

80. On information and belief, Individual Defendant Morris had actual knowledge of the false invoicing, and the false recognition of these invoices as revenues despite the lack of likelihood that they would be paid, that was occurring pervasively at KBR during the Class Period. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Morris is a Certified Public Accountant with sophisticated knowledge of cost accounting, financial accounting and auditing.

-27- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 29 of 50

3. Beginning in 1997 until August 2001, Individual Defendant Morris was Halliburton's Chief Financial Officer, when he developed an even more comprehensive knowledge of Halliburton and its subsidiaries' businesses, and their accounting systems and procedures, including further particularized knowledge of the actual performance of KBR projects, the way they were being accounted for, and the false billing that was common at KBR. He also knew that nothing neither Halliburton's accounting procedures or audits prevented or policed such manipulation.

5. As CFO of Halliburton, Individual Defendant Morris reviewed its financial statements closely and, as an accountant, was necessarily well-aware of the dramatic increases in accounts receivable during the Class Period. As CFO, he also reviewed the aging of these accounts receivable (information that was not available to investors). As an accountant, he was therefore necessarily aware of the outrageous inadequacy of Halliburton's reserves for doubtful accounts and the dubious quality of Halliburton's reported revenues during the Class Period. He nevertheless approved and failed to prevent the reporting of these revenues if they were bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable collectibility of Halliburton's accounts receivable.

6. From August 2001 to the end of the Class Period, Individual Defendant Morris was moreover the chief executive of KBR to whom the Finance Directors of the various business units of KBR reported via the Finance Director of KBR.

81. On information and belief, Individual Defendant Muchmore had actual knowledge of the false invoicing, and the false recognition of these invoices as revenues despite the lack of likelihood that they would be paid, that was occurring pervasively at KBR during the Class Period.

The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Muchmore is a Certified Public Accountant with sophisticated knowledge of cost accounting, financial accounting and auditing.

-28- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 30 of 50

5. As Halliburton's Principal Accounting Officer and Controller, Individual Defendant Muchmore reviewed its financial statements closely and, as an accountant, was necessarily well-aware of the dramatic increases in accounts receivable during the Class Period. As Principal Accounting Officer and Controller, he also reviewed the aging of these accounts receivable (information that was not available to investors). As an accountant, he was therefore necessarily aware of the outrageous inadequacy of Halliburton's reserves for doubtful accounts and the dubious quality of Halliburton's reported revenues during the Class Period. He nevertheless approved and failed to prevent the reporting of these revenues if they were bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable collectibility of Halliburton's accounts receivable.

Halliburton's aggressive use of an undisclosed change in its revenue recognition policy

82. Halliburton also artificially boosted earnings during the Class Period with an undisclosed change in the Company's revenue recognition policies. This change allowed the

Company to begin recognizing (as revenue and pre-tax income) claims the Company purportedly had against customers for project cost overruns and change orders related to specific projects. Prior to the change, the Company had recognized revenue for such claims as unexpected costs only when payment was received. The accounting change secretly adopted by Defendants, however, allowed

Defendants to "estimate" what they deemed collectible and recognize this amount immediately, even though such claims had yet to be billed to the Company's clients. Because no additional costs were associated with the added revenues, their full amount flowed directly to pre-tax income.

83. In theory, there was nothing inherently wrong with the new, more aggressive accounting approach adopted by Defendants. Instead, what made their actions fraudulent was: (1)

-29- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 31 of 50

their deliberate failure to adequately disclose the change during the Class Period; and (2) their misuse of the new approach to include claims that were not likely to be collected, and indeed have not been collected several years hence. 84. Investors were only given actual or constructive notice of the change after the end of the Class Period with the announcement in 2002 of an SEC investigation into the policy change. In the wake of the SEC investigation, on July 24, 2002, Individual Defendants Lesar and Foshee hosted a conference call with investors in which they disclosed that the change had been adopted in 4Q:98, and that the majority of the claims that had been included in revenues over the preceding four years had yet to be collected. Specifically, they disclosed that of the $89 million in claims that had provided virtually all of Halliburton's net income in Q4:98, only $39 million had yet been collected. According to one of the aforementioned witnesses, a member of Halliburton's corporate finance team from 1989 to 2002, such a high-level accounting policy change could only have been enacted and approved at the highest levels by the executive committee (which at the time consisted of Individual Defendant Lesar, Richard Cheney, and the former head of Dresser), the Controller/Principal Accounting Officer (Individual Defendant Much more) and "especially" the Chief Financial Officer (Individual Defendant Morris). 85. Despite the fact that the change was adopted in Q4:98, the Company's 1998 10-K, filed on March 23, 1999, affirmatively stated that the Company continued its long-standing policy of not including such claims in revenues. In Halliburton's 1998 Form 10-K, under the heading "Receivables" in Footnote 1 of the accompanying financial statements, Defendants defined "Unbilled Receivables" (the balance sheet account into which the fraudulent additional revenues were placed) as follows: "Unbilled work on uncompleted contracts generally represents work currently billable and such work is usually billed during normal billing processes in the next month." This sentence, which is identical to the corresponding sentences of the Company's 1993-1997 Forms 10-K, was false and misleading. In reality, Defendants had significantly expanded their treatment of unbilled receivables in a manner that provided virtually all of the Company's net income in 4Q:98.

-30- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 32 of 50

86. Individual Defendants Morris, Muchmore and Lesar also deleted a sentence from the 1998 Form 10-K that had appeared in Footnote 1 for many years: "Claims for additional compensation are recognized during the period such claims are resolved." The deletion of this sentence corroborates the Individual Defendants' sensitivity to the issue of revenue recognition at that point in time, even as they signed (in the case of Individual Defendants Morris and Muchmore) or approved (in the case of Individual Defendant Lesar) affirmative statements in the 1998 10-K that no change had taken place. These actions demonstrate not only wrongdoing, but also knowledge of the wrongdoing and an intention to cover it up. 87. The Company's only subsequent (and wholly inadequate) "indication" of the change was buried in Halliburton's 1999 and 2000 Form 10-Ks, filed on March 14, 2000, and March 27, 2001, respectively. The 1999 10-K (signed by Individual Defendants Morris and Muchmore) included the following language under the heading "Revenues and Income Recognition," in Footnote 1 to the financial statements: "Claims and change orders which are in the process of being negotiated with customers, for extra work or changes in the scope of work are included in revenue when collection is deemed probable." Five paragraphs later, under the heading "Receivables," the Individual Defendants included the following language: "With the exception of claims and change orders which are in the process of being negotiated with customers, unbilled work on uncompleted contracts generally represents work currently billable and this work is usually billed during normal billing processes in the next month. These claims and change orders, included in unbilled receivables, amounted to $98 million and $89 million at December 31, 1999 and 1998, respectively and are generally expected to be collected in the following year." 88. The 2000 10-K (signed by Individual Defendants Lesar, Morris and Muchmore), included the following language under the heading "Revenues and Income Recognition," in Footnote 1 to the financial statements: "Claims and change orders which are in the process of being negotiated with customers, for extra work or changes in the scope of work are included in revenue when collection is deemed probable." Five paragraphs later, under the heading "Receivables," the Individual Defendants included the following language: " With the exception of claims and change

-31- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 33 of 50

orders which are in the process of being negotiated with customers, unbilled work on uncompleted contracts generally represents work currently billable, and this work is usually billed during normal billing processes in the next month. These claims and change orders, included in unbilled receivables, amounted to $113 million and $98 million at December 31, 2000 and 1999, respectively, and are generally expected to be collected in the following year." 89. In both the 1999 10-K and the 200010-K, these three sentences, one of which related to the Income Statement and two of which related to the Balance Sheet, were separated by five paragraphs and buried in a 40,000-word document. They were the extent of the Company's indication that it had instituted an accounting change that provided $170 million in pre-tax income, and $115 in net income, to Halliburton during the Class Period. 90. For any investor to become aware that these three sentences were meant to disclose a change in accounting policy, he or she would have been required to compare and contrast the footnotes to the financial statements of the 2000, 1999, 1998 and 1997 10-Ks on a sentence-by- sentence basis. Even then, these sentences do not even imply- much less disclose -that all new "unbilled receivables" being added to the balance sheet were also revenues flowing directly to pre- tax income. Indeed, it would be far from clear to a reasonable investor that the confusing language related to unbilled receivables under the heading "Receivables" was in any way related to the sentence regarding claims and change orders under the heading "Revenues and Income Recognition." Thus, even when the accounting change was purportedly "disclosed" — 18 and 30 months after the change was instituted — the language of the "disclosure" was deliberately hid the impact of the change on the Company's financial performance. 91. On July 24, 2002, Robert Bryce, an Austin-based journalist who covers the accounting industry, commented on the inadequacy of this disclosure while appearing on "The News Hour with Jim Lehrer." Bryce noted: "[p]articularly if we're talking about small investors and now they're the ones who would have been really hit hard by a lot of these nondisclosure issues, [the point is that] when the change was finally disclosed in the 1999 annual report that was published in March of 2000, the report was over 40,000 words long and this change, this -- the disclosure of the

-32- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 34 of 50

accounting method change only amounted to about 80 words. So you had to be a very sharp-eyed investor to even notice the change because it is also -- it's not in plain English, or not in plain English for me, perhaps for the accounting professors, but certainly not for me." Regarding the accounting issues complained of herein, Bryce also stated: a. "The issue with their accounting involves some cost overruns or discrepancies or disagreements rather between Halliburton and some of its clients. And rather than waiting until the discrepancies or the disagreements over those costs were resolved, Halliburton went ahead and booked those revenues as though ... as receivables. In other words, they counted those revenues on their financial statements immediately. That's very similar to the type of accounting that Enron used. It's called mark-to-market accounting. What's interesting about it is that Halliburton, up until `98, had been using accrual accounting, which is the standard cost-accounting method, but in this one segment of their business they used mark-to-market and that's what raised all the red flags;" and b. "Well, it's important because in `98 the world oil industry was in a world of hurt. They were ... oil prices were depressed. Drilling activity was very low. And Halliburton had also just completed a merger with Dresser Industries. So the company was eager to show any revenue that it could and by using mark-to-market on this one small segment of their business, they were able to add $90 million or $89 million in `98. And then in `99, it was $98 million. And then in 2000, it was $113 million. So again, that's a relatively small figure compared to the tens of billions or over $10 billion that they were counting in revenue but it still counted significantly in terms of their profit statement." 92. In the same program, Vincent Love, a certified public accountant and fraud examiner, stated: "There was no disclosure in 1999 of the change. All they simply stated was what the new policy was. They didn't say, `and this is a change from 1997.' And they didn't disclose the impact on the financial statements. And it's true that you had to read those financial statements very carefully to see that one line ... and where management discussed the changes from one year to the other, they never mentioned in the 1998 SEC filing that part of the increase in revenue was related to this change." Regarding the accounting issues complained of herein, Love also stated:

-33- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 35 of 50

a. "Well, there certainly was a failure to disclose in 1998. And I think it was a material failure to disclose, but it's going to be up ... the SEC is going to complete their investigation. They've got competent attorneys and lawyers. They'll get to the bottom of this if we give them the time to do it;" and b. "I think I just want to go back to the beginning. In 1997, in the notes to the financial statements, they disclosed that these claims and disputed change orders were not recorded in revenue until the settlement was final. In 1998, they dropped out that line, and they didn't disclose that. In 1999, in their annual report, they then disclosed that they accounted for these claims and on an accrual basis and they looked at the probability of collection. And if it was probable that they would collect based upon their past experience that they were going to record the revenue in that year. That was what was wrong here. They did not disclose what had happened in 1998. And the amount was material when you looked at the bottom line in `98 and what else was going on." 93. In the same program, Harvey Pitt, then current SEC Chairman, stated: "Halliburton has said it is being investigated, and I will tell you as I have said before: No one in this country gets a pass. I don't care what their status is, I don't care what their prestige is; anyone who violated the law has to be held accountable."

94. In a clear violation of GAAP rules for Accounting Changes, the Company waited 18 months to alert investors to any change of its accounting policies. APB Opinion No. 20, states that the nature and justification for a change in accounting principles for long-term construction-type contracts "should be disclosed in the financial statements of the period in which the change is made." Moreover, even after Defendants purportedly "disclosed" this accounting change, at no time during the Class Period did Defendants ever disclose the effect of this change on reported income or revenues.

95. The second, and more troubling, aspect of this scheme is the fact that many of the claims that Individual Defendants included as revenues pursuant to the new policy were claims

-34- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 36 of 50

whose collection was never probable. Prima facie evidence of this is the astounding fact that, as of

July 24, 2002, the Company had collected only $39 million of the $89 million in claims counted as revenue four years earlier. Additional evidence demonstrates that difficulty of collecting such claims was a pressing concern at Halliburton throughout the Class Period. Individual Defendant

Lesar has stated in subsequent interviews that one of Ruchard Cheney's chief responsibilities during

1999 and 2000 was to act as the Company's chief bill collector in trips abroad. The 2000 10-K itself states: "The environment for negotiations with customers on claims and change orders has become more difficult in the past few years." 2000 10-K, p. 15. Similarly, a December 28, 1998,

Halliburton press release states: "Customers have restricted their capital spending and they have recently placed extraordinary pressure on the project claims resolution process and are now rejecting some of the company's claims for additional cost incurred by the company .... These pressures have become more acute in the 1998 fourth quarter." Ironically, this was the very quarter in which the accounting policy change was adopted.

96. On information and belief, Individual Defendant Lesar had, throughout the Class

Period, actual knowledge of the change in accounting policy that allowed Halliburton to count unbilled claims as pre-tax income, the lack of adequate disclosure thereof, and the lack of likelihood that the claims would ever be paid. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Lesar is a Certified Public Accountant with sophisticated knowledge of GAAP, cost accounting, financial accounting, and auditing.

2. Prior to the Class Period, Individual Defendant Lesar was Halliburton's auditor at Arthur Anderson, and had developed extensive and particular knowledge of Halliburton and its subsidiaries' businesses, and their accounting systems and procedures.

-35- Case 3:02-cv-01 1 52 Document 178-1 Filed 03/09/2005 Page 37 of 50

4. Individual Defendant Lesar was, as of the beginning of the Class Period until January 1999, President and Chief Executive Officer of KBR, the locus of most of Halliburton's long-term construction projects that were the source of the claims and change orders.

5. Individual Defendant Lesar was, from January 1999 to August 2000, "Chairman of the Board" of KBR, the locus of most of Halliburton's long-term construction projects that were the source of the claims and change orders. According to Halliburton's SEC filings, however, no one succeeded him as President of KBR until October 2000, implying that this was merely a change in titles and that he retained principal executive control of KBR until August 2000.

6. The Finance Directors of the various business units of KBR reported, via KBR's Finance Director, to Individual Defendant Lesar from the beginning of the Class Period to August 2000. During this time, he developed particularized knowledge of the actual performance of KBR projects, the actual stance of KBR customers with respect to claims and change orders, and the actual collectibility of such claims.

8. As CEO of Halliburton, Individual Defendant Lesar reviewed its financial statements closely and, as an accountant, was necessarily well-aware of the dramatic increases in unbilled receivables during the Class Period. He was also well-aware that there were no additional expenses associated with these new revenues, and that they therefore directly boosted Halliburton's earnings. As CEO, he also reviewed the aging of these unbilled receivables (information that was not available to investors). As an accountant, he was therefore necessarily aware of the impropriety of counting these dubious and probably uncollectible claims as revenues, and of continuing to include them in receivables after the passage of multiple years. He was therefore likewise aware of the dubious quality of Halliburton's reported revenues during the Class Period. He nevertheless approved and failed to prevent the reporting of these revenues if they were bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable collectibility of the claims and their effects on reported earnings.

97. On information and belief, Individual Defendant Morris had, throughout the Class

Period, actual knowledge of the change in accounting policy that allowed Halliburton to count

-36- Case 3:02-cv-01 1 52 Document 178-1 Filed 03/09/2005 Page 38 of 50

unbilled claims as pre-tax income, the lack of adequate disclosure thereof, and the lack of likelihood that the claims would ever be paid. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Morris is a Certified Public Accountant with sophisticated knowledge of GAAP, cost accounting, financial accounting and auditing.

2. Prior to the Class Period, Individual Defendant Morris was head of Finance for KBR during 1995-1996, when he developed detailed knowledge of KBR's business, the actual performance of its projects, and accounting systems and procedures. KBR was the locus of most of Halliburton's long-term construction projects that were the source of the claims and change orders.

4. Individual Defendant Morris, as an accountant and CFO of Halliburton, reviewed the claimed performance of KBR's projects in full knowledge of serious problems at KBR that were a subject of intense concern for Halliburton management. He was well-aware of the actual stance of KBR customers with respect to claims and change orders, and the problems that the KBR was having collecting such claims.

5. As CFO of Halliburton, Individual Defendant Morris reviewed its financial statements closely and, as an accountant, was necessarily well-aware of the dramatic increases in unbilled receivables during the Class Period. He was also well-aware that there were no additional expenses associated with these new revenues, and that they therefore directly boosted Halliburton's earnings. As CFO, he also reviewed the aging of these unbilled receivables (information that was not available to investors). As an accountant, he was therefore necessarily aware of the impropriety of counting these dubious and demonstrably uncollectible claims as revenues, and of continuing to include them in receivables after the passage of multiple years. He was therefore likewise aware of the dubious quality of Halliburton's reported revenues during the Class Period. He nevertheless approved and failed to prevent the reporting of these revenues if they were bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable collectibility of the claims and their effects on reported earnings.

-37- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 39 of 50

98. On information and belief, Individual Defendant Muchmore had, throughout the

Class Period, actual knowledge of the change in accounting policy that allowed Halliburton to count unbilled claims as pre-tax income, the lack of adequate disclosure thereof, and the lack of likelihood that the claims would ever be paid. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Muchmore is a Certified Public Accountant with sophisticated knowledge of GAAP, cost accounting, financial accounting and auditing.

3. Individual Defendant Muchmore, as Halliburton's Principal Accounting Officer and Controller, reviewed the claimed performance of KBR's projects in full knowledge of serious problems at KBR that were a subject of intense concern for Halliburton management. He was well-aware of the actual stance of KBR customers with respect to claims and change orders, and the problems that the KBR was having collecting such claims.

4. As Halliburton's Principal Accounting Officer and Controller, Individual Defendant Muchmore reviewed its financial statements closely and, as an accountant, was necessarily well-aware of the dramatic increases in unbilled receivables during the Class Period. He was also well-aware that there were no additional expenses associated with these new revenues, and that they therefore directly boosted Halliburton's earnings. As Principal Accounting Officer and Controller, he also reviewed the aging of these unbilled receivables (information that was not available to investors). As an accountant, he was therefore necessarily aware of the impropriety of counting these dubious and demonstrably uncollectible claims as revenues, and of continuing to include them in receivables after the passage of multiple years. He was therefore likewise aware of the dubious quality of Halliburton's reported revenues during the Class Period. He nevertheless approved and failed to prevent the reporting of these revenues if they were bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable collectibility of the claims and their effects on reported earnings.

99. On information and belief, Individual Defendant Foshee had, from August 2001 to the end of the Class Period, actual knowledge of the accounting policy that allowed Halliburton to count unbilled claims as pre-tax income, the lack of adequate disclosure thereof, and the lack of

-38- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 40 of 50

likelihood that the claims would ever be paid. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Foshee is a Certified Public Accountant with sophisticated knowledge of GAAP, cost accounting, financial accounting and auditing.

2. From August 2001 to the end of the Class Period, Individual Defendant Foshee was Halliburton's Chief Financial Officer and as such had an extremely detailed knowledge of Halliburton and its subsidiaries' accounting policies and actual financial ,performance.

3. Individual Defendant Foshee, as Halliburton's Chief Financial Officer reviewed the claimed performance of KBR's projects in full knowledge of serious problems at KBR that were a subj ect of intense concern for Halliburton management. Individual Defendant Foshee himself told investors in a July 24, 2002, conference call that Halliburton had been able to collect less than half of the claims that it had counted as revenues almost four years earlier. He was therefore well-aware of the actual stance of KBR customers with respect to claims and change orders, and the problems that the KBR was having collecting such claims.

4. As Halliburton's Chief Financial Officer, Individual Defendant Foshee reviewed its financial statements closely and, as an accountant, was necessarily well-aware of the dramatic increases in unbilled receivables during the Class Period. He was also well- aware that there were no additional expenses associated with these new revenues, and that they therefore directly boosted Halliburton's earnings. As Chief Financial Officer, he also reviewed the aging of these unbilled receivables (information that was not available to investors). As an accountant, he was therefore necessarily aware of the impropriety of counting these dubious and demonstrably uncollectible claims as revenues, and of continuing to include them in receivables after the passage of multiple years. He was therefore likewise aware of the dubious quality of Halliburton's reported revenues during the Class Period. He nevertheless prepared and signed the reporting of at least $26 million in such claims as if they were bona fide revnues in the 3Q:01 10-Q, and failed to provide additional disclosure to investors that would have informed them of the questionable collectibility of the claims and their effects on reported earnings. SCHEME III: USE A "COOKIE JAR" OF CASH FOR MERGER EXPENSES TO INCREASE PROFITS

100. Yet another accounting scheme carried out by Defendants was their fraudulent misuse, in a classic cookie jar scheme, of the $241 million cash component of a massive special charge taken by Halliburton in conjunction with the Dresser Merger completed at the inception of the Class Period on September 29, 1998. Significant portions of this $241 million, earmarked for

-39- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 41 of 50

future cash outflows related to "personnel reduction" and "facility consolidation," was instead used to offset ordinary expenses and artificially boost profits. 101. Interviews with senior former Dresser executives who had resigned from Halliburton in disgust a few years after the merger detail this scheme. These former Dresser executives describe Lesar as the mastermind behind Halliburton's accounting manipulations, and whose personal ethics they described as "slash and burn." They said that he did not need anyone to advise him how to cook the books. Lesar, an accountant and Halliburton's former auditor, knew how to do it himself. After meetings with auditors during the Class Period, Individual Defendant Lesar would laugh derisively about how much questionable accounting he was able to get the auditors to accept or overlook, according to the former Dresser executives. 102. The accounting manipulations that most offended these former Dresser executives was the cookie jar scheme described in this section of the complaint, and the draw-down of Dresser's reserves described in the next section as Scheme IV. An analysis of Halliburton's disclosures in 10-Qs and 10-Ks as to how and when Halliburton used the $241 million cash component of the charge that it took in conjunction with the Dresser merger reveals this scheme. This $241 million was earmarked for future cash outflows related to "personnel reduction" and

"facility consolidation." 103. Halliburton announced details of the special charge in its 3Q:98 earnings press release on October 29, 1998. The press release emphasized that the special charge need not be considered as part of any realistic calculation of the Company's earnings or losses. The first paragraph of the press release describes the Company's earnings as follows:

Dallas, Texas — Halliburton Company (NYSE:HAL) announces that the company earned $195 million ($.44 per diluted share) in the 1998 third quarter, compared to $218 million ($.50 per diluted share) in the 1997 third quarter, before recognition of special charges. Financial results of both years have been restated to reflect completion of the company's merger with Dresser Industries, Inc. on September 29, 1998. The merger was accounted for as a pooling of interests. Third quarter 1998 revenues were $4,224 million, up one percent over the $44,177 million of revenues generated in the year earlier period.

Later in the press release, the Company disclosed that it had a net loss of $527 million in the third

-40- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 42 of 50

quarter of 1998 if one were to include the special charge. This disclosure was relegated to the end of the second paragraph of the press release, which describes the components of the special charge:

The 1998 third quarter financial results include a pretax special charge of $945 million ($722 million after tax or $1.64 per diluted share) to provide for consolidation, restructuring and merger related expenses. Components of the pretax special charge include $509 million of asset related writeoffs, writedowns and charges; $205 million related to personnel reduction costs; $121 million offacility consolidation charges; $64 million of merger transaction costs; and $46 million of other merger related costs. Including the special charge, Halliburton's net loss was $527 million ($1.20 per diluted share) in the 1998 third quarter.

104. The $205 million for "personnel reduction," and the $121 million for "facility consolidation" were increased in 4Q:98, when the Company took another charge related to the

Dresser Merger. Ostensibly, the Company had underestimated the amount of money needed for reducing redundant personnel and facilities resulting from the Merger. It therefore disclosed in its

1998 10-K (issued March 23, 1999) that in 4Q:98 it had taken an additional $30 million charge for

"personnel reduction," and an additional $5 million charge for "facility consolidation," thereby increasing the total cash charge in these two categories to $361 million, and bringing the total size of the charge taken by Halliburton in conjunction with the Dresser Merger to $980 million.

105. Having stated on March 23, 1999, that it had been excessively conservative in its initial determination of future cash expenses related to the Dresser merger, the Company disclosed in its 10-Q for 2Q:99, the quarter that began a week after the March 23 filing, that the Company had taken a $46 million credit that reversed $30 million of the personnel reduction charge and $16 million of the facilities consolidation charge. Conveniently, this credit was worth $32 million after- tax, enough to precisely offset a $33 million charge that the Company had to take in the same quarter for "a combination of items" including the write-down of Halliburton's investment in a Mexican company.

106. More important than these illogical and opportunistic additions to and subtractions

-41- Case 3:02-cv-01 1 52 Document 178-1 Filed 03/09/2005 Page 43 of 50

from the total amount of the charge, is the manner in which Halliburton used the remaining $230 million in cash between 3Q:98 and 3Q:00. Halliburton's use of the cash component of the special charge bears every indicia of a classic cookie jar scheme and bears little or no relationship to the actual number of employees being retired, or the number of facilities being closed. See Exhibit I, attached. In some quarters, the Company used $116,000 in cash per facility closed, and in others

(quarters in which the Company was performing well below guidance) the Company used $720,000 in cash per facility closed. In some quarters, the Company used $9,000 in cash per terminated employee, and in others (the very same quarters in which the Company was performing well below guidance) Defendants used $44,000 in cash per terminated employee. In one quarter, the Company used $23 million in cash for personnel reduction, even though, apparently, no employees were terminated during the quarter (see below).

107. Instead, according to the former Dresser executives and corroborated by times-series analysis of the use of the charge, the Company was using the special charge reserve to offset ordinary expenses, and thereby boost its profits, as needed from quarter to quarter. Not surprisingly, the charge was used most aggressively in the second and third quarters of 1999, quarters in which the Company was arguably beginning a descent into bankruptcy and under intense pressure to show results and progress following the Dresser Merger. These were the very quarters in which expense

per employee terminated or facility closed was as much as quintupled as Defendants desperately

drew on the reserve to offset ordinary expenses and bolster the Company's profits.

108. For example, the 2Q:99 10-Q (filed on August 13, 1999) states that $23 million was

spent in the second quarter for personnel reductions related to the Dresser merger. It then states, in a

separate paragraph, that 4,400 terminations related to the 1998 special charge had occurred during

the period January 1 to June 30, 1999. Previously, in its 1Q:99 10-Q, the Company had stated that

4,500 terminations had occurred in the first quarter of 1999 alone. Thus, embedded in the confusing

-42- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 44 of 50

footnotes disclosing the use of the special charge is disclosure that negative 100 employees were terminated during 2Q:99. Defendants used $23 million in cash to effectuate these (non-existent) terminations. Halliburton's reported net income in the 2Q:99 10-Q, signed by Individual Defendants

Morris and Muchmore, was $83 million. Accordingly, this $23 million alone accounted for approximately $16 million, or 20%, of Halliburton's "net income" in 2Q:99.

109. The 3Q:99 10-Q states that the Company used $22 million in cash for personnel reductions. However, when one compares the disclosure later in the footnote to the preceding footnotes, it becomes clear that only 500 employees were terminated during the quarter. Thus,

Defendants claimed that the Company spent $44,000 on each of these terminated employees during the quarter, four times the amount it spent per terminated employee during 1998. Thus, approximately $15 million of this $22 million was a trip to the cookie jar, accounting for 26% of the

Company's reported "net income" of $58 million in the 3Q:99.

110. Then, immediately following the Company's announcement on October 4, 1999, that it would receive a windfall cash inflow of approximately $600 million at the end of 1999 by selling off two Dresser joint ventures, Halliburton's pace of accruals decelerated by almost 50% and the

Company suddenly announced that it might continue to use the cash charges "into 2000." Prior to this unexpected announcement, Defendants had repeatedly stated that the Company would use all of the charge by the end of 1999. Instead, when Defendants realized that the divestiture of the two

Dresser joint ventures would add a one-time boost to their profits for the fourth quarter of 1999, the full-year of 1999, and the first quarter of 2000, Defendants decided to save the remaining cookies in their jar for use in 2000.

111. Thus, the Company continued to use the Merger cash until 3Q:00, two years after the

Merger had taken place. By the time the "cookie jar" was finally depleted in 3Q:00, however, the majority of Defendants' other accounting schemes (with the exception of Scheme I and the issuance

-43- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 45 of 50

of false invoices) run their course as well. For example, the one-off profit boosts from raiding

Dresser's reserve accounts (described in the next section) had been largely used up by this time. It was precisely at this point in time, when Defendants had run through the majority of their proverbial bag of accounting tricks, that the Company's stock peaked in late-August/early-September 2000, at a price of $54 per share. At this point, CEO Richard Cheney exercised stock options and sold 660,000 shares between Aug. 21 and 28 for $35 million. Other Halliburton insiders also sold shares in

August 2001, including the vice chairman and Individual Defendant Morris.

112. On information and belief, Individual Defendant Lesar had, from the beginning of the

Class Period to November 9, 2000, actual knowledge of the use of significant portions of the $241 million of the 4Q:98 special charge earmarked for future cash outflows related to "personnel reduction" and "facility consolidation," to offset ordinary expenses and artificially boost profits.

The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Lesar is a Certified Public Accountant with sophisticated knowledge of GAAP, cost accounting, financial accounting, and auditing.

4. Individual Defendant Lesar was, as of the beginning of the Class Period until January 1999, President and Chief Executive Officer of KBR.

5. Individual Defendant Lesar was, from January 1999 to August 2000, "Chairman of the Board" of K 3R.

6. From the beginning of the Class Period until August 2000, Individual Defendant Lesar was a member of the three-member executive committee of Halliburton, and the only accountant on the executive committee.

-44- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 46 of 50

7. Individual Defendant Lesar was, from August 2000 to the end of the Class Period, President, Chief Executive Officer and Chairman and of Halliburton.

8. The quarterly and annual allocations of the special charge were by definition high- level accounting decisions made in conjunction with the preparation of Halliburton's financial statements for a given quarter or year, decisions that Individual Defendant Lesar directed (or at a minimum privy to) given his high-level position of authority in Halliburton's accounting apparatus.

9. Moreover, Individual Defendant Lesar was, according to two senior former-Dresser executives, the mastermind of Halliburton's accounting schemes. One of the schemes that most offended these two executives was Lesar's misuse of the special charge, as detailed herein.

10.Throughout the Class Period, Individual Defendant Lesar reviewed its cost accounting closely and was therefore necessarily well-aware of the actual amounts of cash that the Company was expending as a result of personnel reductions and facilities consolidation related to the Dresser merger.

11.As a CPA, Individual Defendant Lesar was necessarily well-aware that using portions of the special charge to offset normal operating expenses would have the effect of boosting Halliburton's reported net income, and was a violation of GAAP and the securities laws. He nevertheless directed, approved and/or failed to prevent the reporting of such net income if it was bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable nature of the reported net income.

113. On information and belief, Individual Defendant Morris had, from the beginning of the Class Period to November 9, 2000, actual knowledge of the use of significant portions of the

$241 million of the 4Q:98 special charge earmarked for future cash outflows related to "personnel reduction" and "facility consolidation," to offset ordinary expenses and artificially boost profits.

The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Morris is a Certified Public Accountant with sophisticated knowledge of GAAP, cost accounting, financial accounting and auditing.

2. Prior to the Class Period, Individual Defendant Morris was head of Finance for KBR during 1995-1996.

3. Beginning in 1997 until August 2001, Individual Defendant Morris was Halliburton's Chief Financial Officer, with highest-level authority over Halliburton's financial reporting.

-45- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 47 of 50

4. The quarterly and annual allocations of the special charge were by definition high- level accounting decisions made in conjunction with the preparation of Halliburton's financial statements for a given quarter or year, decisions that Individual Defendant Morris directed (or at a minimum was privy to) given his high-level position of authority in Halliburton's accounting apparatus.

5. Throughout the Class Period, Individual Defendant Morris reviewed its cost accounting closely and was therefore necessarily well-aware of the actual amounts of cash that the Company was expending as a result of personnel reductions and facilities consolidation related to the Dresser merger.

6. As a CPA, Individual Defendant Morris was necessarily well-aware that using portions of the special charge to offset normal operating expenses would have the effect of boosting Halliburton's reported net income, and was a violation of GAAP and the securities laws. He nevertheless directed, approved and/or failed to prevent the reporting of such net income if it was bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable nature of the reported net income.

114. On information and belief, Individual Defendant Muchmore had, from the beginning of the Class Period to November 9, 2000, actual knowledge of the use of significant portions of the

$241 million of the 4Q:98 special charge earmarked for future cash outflows related to "personnel reduction" and "facility consolidation," to offset ordinary expenses and artificially boost profits.

The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Muchmore is a Certified Public Accountant with sophisticated knowledge of GAAP, cost accounting, financial accounting and auditing.

3. The quarterly and annual allocations of the special charge were by definition high- level accounting decisions made in conjunction with the preparation of Halliburton's financial statements for a given quarter or year, decisions that Individual Defendant Muchmore directed (or at a minimum privy to) given his high-level position of authority in Halliburton's accounting apparatus.

4. Throughout the Class Period, Individual Defendant Muchmore reviewed its cost accounting closely and was necessarily well-aware of the actual amounts of cash that the Company was expending as a result of personnel reductions and facilities consolidation related to the Dresser merger.

-46- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 48 of 50

5. As a CPA, Individual Defendant Muchmore was necessarily well-aware that using portions of the special charge to offset normal operating expenses would have the effect of boosting Halliburton's reported net income, and was a violation of GAAP and the securities laws. He nevertheless directed, approved and/or failed to prevent the reporting of such net income if it was bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable nature of the reported net income.

SCHEME IV: RAID DRESSER'S RESERVE ACCOUNTS

115. Prior to being acquired by Halliburton, Dresser's Kellogg construction unit had been known in the industry for conservative accounting and a history of never reversing a profit on a project. After the Dresser Merger was completed, according to the two former Dresser executives cited above, Defendants began to raid various reserve accounts (such as reserves for doubtful accounts receivable, also discussed above under Scheme I, and reserves for cost overruns on engineering and construction projects) that Dresser had previously maintained as part of its conservative approach to business. This was the second action on the part of the Individual

Defendants, detailed herein as "Scheme IV," that particularly enraged the former Dresser executives.

116. The common-sense concept underlying reserve accounts is that when one becomes aware that an invoice has a good chance of being uncollectible, one should reserve for it. When one knows that a lump-sum project is generating unexpected costs, one should reserve for it. Financial reporting should be reliable in that it represents what it purports to represent. FASB Statement of

Concepts No. 2, ¶¶58-59. Financial reporting should be complete, leaving nothing out that may be necessary to insure that it validly represents the actual knowledge of the authors. FASB Statement of Concepts No. 2, ¶79. Most important, financial reporting, in the face of uncertainty, should be conservative. FASB Statement of Concepts No. 2, ¶¶95, 97.

-47- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 49 of 50

117. As stated above, balance sheet accountants at the business unit, KBR, and Halliburton level were directed not to add to reserves for doubtful accounts, an action required under GAAP whenever one has information that an invoice is unlikely to be paid. (A reserve for doubtful accounts is a contra account of accounts receivable. Increasing the reserve reduces accounts receivable and revenue.) According to a balance sheet accountant, as of shortly after the end of the

Class Period, Halliburton accounts receivable aged over 180 days totaled approximately $180 million. This accountant was specifically instructed not to increase the Halliburton's "miniscule" reserve for doubtful accounts despite this staggering amount.

118. Similarly, a KBR Project Accountant reported that her business unit's accounts receivable aged over 180 days totaled $20 million, and yet the unit's reserve for doubtful accounts

was a "ridiculously low" $700,000.

119. Scheme IV goes beyond these infractions. Apparently, the Individual Defendants

also felt it their privilege to dramatically reduce Dresser's reserves following the merger in order to

extract one-time gains in reported profits. These high-level accounting decisions on the part of the

Individual Defendants are, like so many of the manipulations described herein, facial violations of

GAAP, and they in a sense require no further elucidation. Indeed, Dresser management had clearly

considered the reserves necessary and appropriate, and then were disgusted to witness those reserve

accounts being arbitrarily reduced by the Individual Defendants to ridiculously low levels. At best,

these were blatant violations of GAAP, violations that rendered all resulting financial statements

presumptively misleading and inaccurate underl7 C.F.R. §210.4-01(a)(1).

120. By secretly reducing Dresser's reserves for doubtful accounts and project losses to

ridiculously low levels, Defendants were able to create dramatic one-off increases in Halliburton's

revenues, just as they created one-off increases in revenues by booking, as revenue, false invoices

and "unbilled receivables" that often existed only in the minds of the Individual Defendants. While

-48- Case 3:02-cv-01152 Document 178-1 Filed 03/09/2005 Page 50 of 50

both Schemes II and IV had the effect of increasing Halliburton's accounts receivable and therefore revenues, Scheme II increased accounts receivable by secretly expanding the definition of accounts receivable, whereas Scheme IV increased accounts receivable by secretly reducing reserves created as contra accounts to decreased accounts receivable.

121. As in the Revenue Recognition scheme, because there were no additional expenses related to these "found" revenues, the revenue increases from decreasing reserve accounts flowed directly to pre-tax income. As in Scheme 11, this manipulation of the merged Company's reserves was not based on the Company's past experience with project expenses or accounts receivables — a best estimate of probable outcomes — or an effort to make Halliburton's financial statements more accurate and reasonable. Instead, Defendants illegally manipulated the merged Company's reserves to mask the Company's actual business performance and financial condition by artificially boosting reported revenues and net income. Defendants' statements, based on these aggressive changes to

Dresser's reserve accounts, constituted false and misleading statements under the securities laws.

122. On information and belief, Individual Defendant Lesar had, during the Class Period, actual knowledge the arbitrary reduction of Dresser's reserve accounts to ridiculous low levels in order to artificially boost revenues and net income. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Lesar is a Certified Public Accountant with sophisticated knowledge of GAAP, cost accounting, financial accounting, and auditing.

-49- Case 3:02-cv-011 Document 178-2 Filed 03/09/2005 Page 1 of 51 q 16

4. Individual Defendant Lesar was, as of the beginning of the Class Period until January 1999, President and Chief Executive Officer of KBR.

5. Individual Defendant Lesar was, from January 1999 to August 2000, "Chairman of the Board" of KBR.

7. Individual Defendant Lesar was, from August 2000 to the end of the Class Period, President, Chief Executive Officer and Chairman and of Halliburton.

8. Instituting policies to dramatically reduce pre-existing reserve accounts acquired in a merger are by definition a high-level accounting decisions, decisions that Individual Defendant Lesar directed (or at a minimum privy to) given his high-level position of authority at KBR and Halliburton's accounting apparatus.

9. Moreover, Individual Defendant Lesar was, according to two senior former-Dresser executives, the mastermind of Halliburton's accounting schemes. One of the schemes that most offended these two executives was the arbitrary reductions in Dresser's reserve accounts, as detailed herein.

10.Throughout the Class Period, Individual Defendant Lesar reviewed the actual performance of the projects associated with the reserves, and regularly reviewed the agings of the accounts receivable associated with the reserves, and was therefore necessarily well-aware of the actual amounts of reserves that were appropriate.

11.As a CPA, Individual Defendant Lesar was necessarily well-aware that reducing Dresser's reserves would have the effect of boosting Halliburton's reported revenues and net income. As a CPA, he knew that arbitrarily reducing reserves to levels that were lower than appropriate and conservative, was a violation of GAAP and the securities laws. He nevertheless directed, approved and/or failed to prevent the reporting of such revenue and net income if it was bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable nature of the reported revenue and net income.

123. On information and belief, Individual Defendant Morris had, during the Class Period, actual knowledge the arbitrary reduction of Dresser's reserve accounts to ridiculous low levels in order to artificially boost revenues and net income. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Morris is a Certified Public Accountant with sophisticated knowledge of GAAP, cost accounting, financial accounting and auditing.

-50- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 2 of 51 q

2. Prior to the Class Period, Individual Defendant Morris was head of Finance for KBR during 1995-1996.

3. Beginning in 1997 until August 2001, Individual Defendant Morris was Halliburton's Chief Financial Officer, with highest-level authority over Halliburton's financial reporting.

4. Instituting policies to dramatically reduce pre-existing reserve accounts acquired in a merger are by definition a high-level accounting decisions, decisions that Individual Defendant Morris directed (or at a minimum privy to) given his high-level position of authority at KBR and Halliburton's accounting apparatus.

5. Moreover, Individual Defendant Morris was, according to two senior former-Dresser executives, the mastermind of Halliburton's accounting schemes. One of the schemes that most offended these two executives was the arbitrary reductions in Dresser's reserve accounts, as detailed herein.

6. Throughout the Class Period, Individual Defendant Morris reviewed the actual performance of the projects associated with the reserves, and regularly reviewed the agings of the accounts receivable associated with the reserves, and was therefore necessarily well-aware of the actual amounts of reserves that were appropriate.

7. As a CPA, Individual Defendant Morris was necessarily well-aware that reducing Dresser's reserves would have the effect of boosting Halliburton's reported revenues and net income. As a CPA, he knew that arbitrarily reducing reserves to levels that were lower than appropriate and conservative, was a violation of GAAP and the securities laws. He nevertheless directed, approved and/or failed to prevent the reporting of such revenue and net income if it was bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable nature of the reported revenue and net income.

124. On information and belief, Individual Defendant Muchmore had, during the Class

Period, actual knowledge the arbitrary reduction of Dresser's reserve accounts to ridiculous low levels in order to artificially boost revenues and net income. The facts upon which Plaintiff bases this belief are as follows:

1. Individual Defendant Muchmore is a Certified Public Accountant with sophisticated knowledge of GAAP, cost accounting, financial accounting and auditing.

-51- Case 3:02-cv-011 52 Document 178-2 Filed 03/09/2005 Page 3 of 51 q

3. Instituting policies to dramatically reduce pre-existing reserve accounts acquired in a merger are by definition a high-level accounting decisions, decisions that Individual Defendant Muchmore directed (or at a minimum privy to) given his high-level position of authority at KBR and Halliburton's accounting apparatus.

4. Moreover, Individual Defendant Muchmore was, according to two senior former- Dresser executives, the mastermind of Halliburton's accounting schemes. One of the schemes that most offended these two executives was the arbitrary reductions in Dresser's reserve accounts, as detailed herein.

5. Throughout the Class Period, Individual Defendant Muchmore reviewed the actual performance of the projects associated with the reserves, and regularly reviewed the agings of the accounts receivable associated with the reserves, and was therefore necessarily well-aware of the actual amounts of reserves that were appropriate.

6. As a CPA, Individual Defendant Lesar was necessarily well-aware that reducing Dresser's reserves would have the effect of boosting Halliburton's reported revenues and net income. As a CPA, he knew that arbitrarily reducing reserves to levels that were lower than appropriate and conservative, was a violation of GAAP and the securities laws. He nevertheless directed, approved and/or failed to prevent the reporting of such revenue and net income if it was bona fide, and failed to provide additional disclosure to investors that would have informed them of the questionable nature of the reported revenue and net income.

SCHEME V: SELL OFF DRESSER PIECEMEAL 125. The merger of Halliburton and Dresser was accounted for as a "pooling of interests." Such treatment, which at the time created significant tax benefits, is based on the premise that the purpose of the merger is to create new, unified, ongoing entity. Such treatment, consistent with its sprit, precludes the sale of assets comprising more than 10% of the merged entity's assets, revenues or net income. Defendants' statements regarding the Merger likewise emphasized the synergy benefits that would result from creating an integrated company. The Company's press release of September 29, 1998 states as follows:

Dick Cheney, chief executive officer of Halliburton Company, said, "The merger is designed to result in long-term benefits for the company's stakeholders — its customers, employees, and shareholders. It significantly broadens the company's offerings and also improves our position as the leader in providing integrated project management services — from the earliest of field development through the production and delivery oil and gas to the marketplace. The combination of M. W. Kellogg's engineering expertise with Brown & Root's project management and construction strengths enhances the competitive position of the new Kellogg Brown & Root organization. In addition, we are adding a new energy equipment business segment. The merger will both lower Halliburton's cost structure and increase its operating -52- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 4 of 51 q

income from added revenues. We expect that net synergistic benefits will add at least $250 million pretax to earnings on an annualized basis." Bill Bradford, Halliburton Company's new chairman of the board, commented, "Halliburton's vision is to be the premier global solutions provider for energy services, engineering and construction, and energy equipment. The strategy the company has adopted to achieve this vision is based upon our commitment to integration - both the internal integration of all business operations, as well as integration of Halliburton's core competencies with those of our customers. We support the vision with four key goals to serve our customers - operational excellence, technological leadership, innovative business relationships and maintenance of a dynamic workforce." [Individual Defendant] Dave Lesar, president and chief operating officer of Halliburton, said, "The new organizational structure of Halliburton Company will now consist of three business segments. The Energy Services Group business segment will continue to operate with four business units. The Halliburton Energy Services business unit will now include the petroleum services business of Dresser. The Brown & Root Energy Services unit adds all of Dresser's upstream engineering and construction businesses. The Engineering and Construction Group business segment will incorporate Dresser's related units, including M.W. Kellogg, to form the new Kellogg Brown & Root business unit. The Dresser Equipment Group business segment will carry over in its entirety from Dresser to form a new a Halliburton business segment. We now move forward on a fast-track to implement cost savings, develop revenue enhancements and begin new research and development initiatives that will benefit future financial performance of the company."

Thus, at the time of the merger, Halliburton and Dresser executives emphasized that the purpose of the merger was allow the merged company to offer a broader range of services and expand its suite of solutions "from the earliest of field development through the production and delivery oil and gas to the marketplace." In reality, however, Defendants did not integrate Dresser into Halliburton.

Instead, their actions in the Class Period violated their treatment of the merger as a pooling of interests and directly contradicted Defendants' representations regarding the Dresser Merger.

126. As stated in this complaint, the net effect of the various accounting schemes discussed above was to make Halliburton's actual cash receipts lag far behind its reported profits.

For example, between 4Q:98 and 3Q:00, Halliburton reported positive net income of $1 billion, while suffering negative operating cash flows of $107 million. An imbalance of this nature could not continue indefinitely. By the end of 3Q:99, Halliburton's cash-on-hand had been reduced to

-53 - Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 5 of 51 q

$295 million, while its short-and long-term debt had ballooned to $2.3 billion. In addition, $308 million of the long-term debt would mature and become payable in 3Q:99, an amount that exceeded the Company's cash-on-hand.

127. To plug the hole between actual cash flows and reported net income, created by

Defendants' reporting of non-existent net income, the only thing Defendants could do to sustain the

Company was to begin selling off parts of Dresser. In 4Q:99 and 1Q:00, Defendants collected approximately $630 million in cash from the sale of two Dresser joint ventures, Dresser-Rand and

Ingersoll Dresser Pump. These divestitures directly violated regulations precluding the sale of assets comprising more than 10% of the merged entity's assets, revenues or net income. (See APB

Opinion No. 16.)

128. A Halliburton 8-K dated October 4, 1999, stated: "Based upon the company's analysis, advice from its independent auditors and consultation with the SEC, Halliburton has concluded that the sale of the joint venture interests will not adversely affect the pooling of interests method of accounting used for the Dresser Merger in 1998." If the SEC did review these transactions prior to their occurrence, as the aforementioned sentence suggests, the SEC would have had to provide an extraordinarily unusual exemption authorizing a black-letter violation of APB

Opinion No. 16. At the time when strict enforcement of this rule and the phasing out of pooling-of- interest mergers was a major focus of the SEC, and corporate finance staff at the SEC have indicated that it is SEC policy not to allow such violations by companies that were able to carry out pooling- of-interest transactions prior to the phase-out. No such exemption was ever made available to the public by the Company. In response to private requests made to the SEC pursuant to the Freedom of

Information Act to view the exemption, if it exists, the SEC has thus far been unable to uncover any documentation that would confirm that Halliburton had consulted with the SEC, or obtained any sort of written exemption from APB Opinion No. 16.

-54- Case 3:02-cv-011 52 Document 178-2 Filed 03/09/2005 Page 6 of 51 q

129. In addition to the Defendants' sale of the two joint ventures around the beginning of 2000, on April 10, 2001, Halliburton liquidated the "remaining businesses within the Dresser Equipment Group" for $1.55 billion. The buyers of Dresser Equipment Group, now renamed Dresser, Inc., was Odyssey Investment Partners, LLC, in partnership with First Reserve Corp. (with significant financing through Credit Suisse First Boston). The circumstances surrounding the sale were questionable. Published interviews with those involved in the transaction have subsequently revealed that, while Halliburton ostensibly conducted an auction to determine the highest bidder for Dresser Equipment, in reality, the Odyssey/First Reserve group had been in negotiations with Halliburton since before the "auction" began, and they were granted exclusive access to management of Dresser Equipment and Halliburton executives throughout the process. William Macaulay, Chairman of the Board of Directors of Dresser, Inc. and First Reserve, later stated in a published interview that the Odyssey/First Reserve's exclusive access to the management team and Halliburton was its main advantage. "We gradually got to know where the hot buttons were with them, things like tax, pension, some of the accounting... and how some of those things could be more meaningful to Halliburton than an extra $25 million or $50 million here or there," he said. In other words, Macauley implies that Halliburton was more concerned with how it could use the sale to dress up its financial statements than it was in maximizing the cash proceeds from the sale for the benefit of Halliburton shareholders. 130. The sale of Dresser Equipment was barely outside the two-year rule of APB Opinion No. 16. As stated above, the sales of Dresser-Rand and Ingersoll Dresser Pump were black-letter violations of APB Opinion No. 16. Assuming that Individual Defendants can meet their burden of showing that they did receive advice from the SEC and independent auditors that the sales of Dresser-Rand and Ingersoll Dresser Pump would not violate APB Opinion No. 16 (which is implied by the above 8-K but which current staff at the SEC and accounting experts have stated would have been highly unlikely), there is perhaps nothing independently fraudulent about the sale of the two joint ventures. Even if this is the case, the $2.1 billion in sales (coming so quickly on the heels of Halliburton's "synergistic" merger with Dresser in order to form a single "integrated" company)

-55- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 7 of 51 q

corroborate all of the other accounting fraud allegations in this complaint, which collectively indicate that most, if not all, of the Halliburton's reported net income (other than the net income generated by the sales) was a sham.

BASIS OF THE ASBESTOS LIABILITY NON -DISCLOSURE FRAUD ALLEGATIONS

131. In 1967, Dresser acquired Harbison-Walker Refractories Company which it owned and operated until 1992, after which Harbison and certain other non-core assets were placed in a new business, Indresco, Inc., and spun-off to Dresser's shareholders. Indresco's name was later changed to Harbison-Walker Refractories Company, and was later acquired by RHI, AG, an Austrian company. In conjunction with the 1992 spin-off, Dresser and Harbison entered into an agreement allocating responsibility for asbestos claims related to the refractory business. Dresser agreed to retain responsibility for asbestos claims filed prior to 1992 and Harbison agreed to indemnify

Dresser against asbestos claims filed after 1992.

132. Of course, nothing prevented asbestos plaintiffs from continuing to name Dresser as a

Defendant based on its conduct prior to 1992, and Harbison's indemnification of Dresser for such claims filed post-1992 claims had no value if Harbison proved unwilling or unable to defend or pay the claims. Indeed, on May 20, 1998, J.L. Jackson, the Chief Executive Officer of Harbison's parent company, Global Industries Technologies, notified the board of Dresser that Global believed that

Dresser had failed to contribute its share of the asbestos claims paid by Global for the Harbison refractory business and that, unless Dresser was willing to pay more money, Global's parent, RHI, AG, would seek arbitration.

133. There is some dispute as to when in 1998 the Individual Defendants became aware of

Dresser's asbestos-exposure liability or the existence of the Global Letter. (The Baltimore Sun on June 10, 2002, reported that Halliburton executives knew about Dresser's asbestos-exposure liability before the Dresser Merger closed. On March 1, 2002, a The New York Times article quoted Halliburton executives as saying they only became aware of the liability and the Global Letter shortly after the merger closed.) Regardless, it is undisputed that, by the end of 1998, Individual Defendants

-56- Case 3:02-cv-01 152 Document 178-2 Filed 03/09/2005 Page 8 of 51 q

knew of the asbestos liability and Harbison's displeasure with Dresser's conduct under the spin-off agreement. 134. Meanwhile, a growing list of dozens of major US companies, such as W.R. Grace & Co., North American Refractories Co., Federal-Mogul Corp., USG Corp., G-I Holdings, Inc. and US Minerals Products Co., had filed for bankruptcy protection as a result of asbestos claims. These bankruptcies sweeping through corporate America not only put Individual Defendants on notice of Halliburton's possible fate, they also increased Halliburton's risk of suffering such a fate, since fewer and fewer deep-pocket Defendants were left for plaintiffs to pursue. (Asbestos plaintiffs had established a pattern of seeking out "deep-pocket" Defendants with even a tenuous link to asbestos products makers or asbestos suppliers.) Moreover, the fact that Harbison was by relatively small and unprofitable companies put the Individual Defendants on notice of limited value of its indemnification, the scope of which was already in dispute. 135. The 1998 10-K, filed on March 23, 1999, devoted a footnote to Dresser's asbestos liabilities. The footnote reads in its entirety:

Asbestosis Litigation. Since 1976, Dresser and its former divisions or subsidiaries have been involved in litigation resulting from allegations that third parties had sustained injuries and damage from the inhalation of asbestos fibers contained in certain products manufactured by Dresser and its former divisions or subsidiaries or companies acquired by Dresser.

Over the last 20 years approximately 183,000 claims have been filed against Dresser and its former divisions or subsidiaries. Claims continue to be filed with 29,400 new claims filed in 1998. Dresser and its former divisions or subsidiaries have entered into agreements with insurance carriers which cover, in whole or in part, indemnity payments, legal fees and expenses for certain categories of claims. Dresser and its former divisions or subsidiaries are in negotiation with carriers over coverage for the remaining categories of claims. Because these agreements are governed by exposure dates, payment type and the product involved, the covered amount varies by Individual claim. In addition, lawsuits are pending against several carriers seeking to recover additional amounts related to these claims.

Since 1976, Dresser and its former divisions and subsidiaries have settled or disposed of 120,000 claims for a gross cost of approximately $89.1 million with insurance carriers paying all but $37.0 million. Provision has been made for the estimated exposure, based on historical experience and expected recoveries from insurance carriers, related to the 63,400 claims which were open at the end of 1998

-57- Case 3:02-cv-011 52 Document 178-2 Filed 03/09/2005 Page 9 of 51 q

including 14,000 for which settlements are pending. Management has no reason to believe that the insurance carriers will not be able to meet their share of future obligations under the agreements.

Pursuant to an agreement entered into at the time of the spin-off, Global Industrial Technologies, Inc. ("Global" formerly INDRESCO, Inc.) assumed liability for asbestos related claims filed against Dresser after July 31, 1992 relating to refractory products manufactured or marketed by the Harbison-Walker Refractories Division of Dresser Industries, Inc. These asbestos claims are subject to certain agreements with insurance carriers that cover expense and indemnity payments. Global now disputes that it assumed responsibility for any of such asbestos claims based on negligence. Global also now asserts certain other claims relating to the insurance coverage responding to asbestos claims. In order to resolve these assertions, Global has invoked the dispute resolution provisions of the 1992 agreement, which require binding arbitration. On February 19,1999 Dresser filed suit in the Delaware Chancery Court seeking an injunction to restrain such arbitration as being barred by the Delaware statute of limitations. The Company believes that these new assertions by Global are without merit and intends to vigorously defend itself against them.

Management recognizes the uncertainties of litigation and the possibility that a series of adverse rulings could materially impact operating results. However, based upon Dresser's historical experience with similar claims, the time elapsed since Dresser and its former divisions or subsidiaries discontinued sale of products containing asbestos, and management's understanding of the facts and circumstances that gave rise to such claims, management believes that the pending asbestos claims will be resolved without material effect on Halliburton's financial position or results of operations. 136. Individual Defendants repeated these paragraphs of disclosure, with minor variations, until the end of the Class Period in Halliburton's 1999, 2000 and 2001 10-Qs and 10-Ks. It was in 2001 that these rote disclosures, and associated press releases and conference calls, became misleading in the extreme due to facts known by the Individual Defendants but undisclosed to investors. 137. On June 28, 2001, Halliburton issued a press release from its executive headquarters in Dallas, Texas, entitled, "Harbison-Walker Asks Halliburton for Assistance." The key portions of the press release are as follows:

Halliburton Company (NYSE:HAL) today announced that Harbison-Walker Refractories Company ("Harbison"), formerly owned by a Halliburton subsidiary, Dresser Industries, Inc. ("Dresser"), has requested that Dresser provide Harbison with

-58- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 10 of 51 q

claims management and financial assistance for asbestos claims Harbison assumed when it was spun-off from Dresser in 1992.

Many of these Harbison claims are asserted in lawsuits that also name Dresser as a Defendant and Harbison is, in effect, co-insured with Dresser under a substantial insurance program that covers these claims and other asbestos claims against Dresser. Consequently, Dresser has a substantial interest in their resolution and the most effective use of this insurance.

Halliburton is now investigating Harbison's asbestos claims, including the status of various completed and proposed settlements and, open unsettled claims, and the financial condition of Harbison and its affiliates. Based on information received, Halliburton believes that Harbison now has about 165,000 open claims of which approximately 52,000 are subject to various settlement negotiations or agreements. These claims have not been previously reported by Halliburton because of Harbison's agreement to assume full responsibility for these claims and to indemnify and defend Dresser against them.

If Halliburton determines that Harbison is not able to perform adequately its obligations under the assumption agreement and that it is in Halliburton's best interest to do so, Halliburton may take the primary role for management and resolution of Harbison's claims. A decision in this regard is expected in the next several weeks.

"This is an unexpected development", said Dave Lesar, Chairman, President and CEO of Halliburton. "Although Harbison reaffirmed its responsibility for these claims as recently as Cast year, it appears that it may be in our best interest to step in and protect our shareholders." 138. The basic message of this press release is that Individual Defendant Lesar, and the other senior executives of Halliburton, had been surprised by this "unexpected development" and that the Company now would begin to try to learn about Harbison's claims history and financial condition. According to two Beaumont, Texas, asbestos attorneys that had been in major asbestos litigation against Harbison-Walker and Dresser since 1993, Halliburton had been "calling the shots" with respect to Harbison's claims and settlements since early 2001 at the latest. This fact fits with Individual Defendant's Lesar's hedging statement in the press release that "Harbison reaffirned its responsibility for these claims as recently as last year." These attorneys also pointed out that (contrary to the press release's implication that the Individual Defendants only learned of Harbison's 165,000 claims as a result of a just-launched investigation) Halliburton would have been receiving, as co-Defendant with Harbison in so many cases, regular reports from their insurers over the previous years as to the numbers of claims and amounts of money that were being paid out for

-59- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 11 of 51 q

Harbison/Dresser claims. Finally, from a perspective of basic common sense, the underlying premise that a Company that repeatedly boasted of its legal shrewdness was blind-sided by this issue is simply not plausible. 139. Instead, according to the two attorneys, the Individual Defendants were well-aware from the beginning of 2001 at the latest that they would ultimately face major new liabilities as a result of Harbison post-1992 claims, and had already begun to take an active role in their management. This knowledge rendered the Company's 2000 10-K (filed on March 27, 2001 and signed by Individual Defendants Lesar, Morris and Muchmore) and 1Q:01 10-Q (filed on May 11, 2001, signed by Individual Defendants Morris and Muchmore, and approved by Individual Defendant Lesar) materially misleading because they failed to disclose even the possibility that Halliburton would end up having responsibility for 165,000 additional asbestos claims. 140. On information and belief, Individual Defendants Lesar, Morris and Muchmore had actual knowledge at the time they prepared, signed and approved the 2000 10-K and the 1 Q:O 1 10-Q, of the probability that Halliburton would end up responsible for these claims because:

1. the Company had already begun actively managing the Harbison claims;

2. the Company was receiving reports from insurers regarding Harbison/Dresser claims, verdicts and settlements;

3. the Company's asbestos liabilities were the key focus and concern of the analyst and investment community at the time, causing a corresponding focus on the issue by Individual Defendants;

4. the Company's asbestos liabilities were the key focus and concern of the Halliburton board at the time, causing corresponding intense attention on the issue by Individual Defendants;

5. the Company had been embroiled in a various disputes with Harbison since the Dresser merger over two years earlier, which had made Individual Defendants quite familiar with Harbison, its difficulties, and the relatively small and unprofitable nature of Harbison and its owners;

6. the fate that was befalling Halliburton (ending up holding the bag on asbestos liabilities because the party primarily liable proves unable to defend or pay the claims) had already befallen dozens of other US companies in asbestos litigation.

-60- Case 3:02-cv-01 15 2 Document 178-2 Filed 03/09/2005 Page 12 of 51 q

141. At the close of trading on June 27, 2001, Halliburton shares were trading at $38.65 per share. After the release of the July 28, 2001, press release, the shares declined consistently for the next thirteen trading sessions to $30.66 per share, a decline of 21%. Halliburton shares have never approached $40 per share since. 142. As a result of this "revelation," in the Company's 2Q:01 10-Q (filed on August 8, 2001, signed by Individual Defendants Morris and Muchmore, and approved by Individual defendant Lesar) Individual Defendants increased Halliburton's asbestos reserves by $90 million to $124 million. These reserves purported to represent Individual Defendants' best estimate of the Company's ultimate liability for asbestos claims, net of expected insurance payments. 143. About a month later, on September 12, 2001, Individual Defendants learned that a jury in the 1281h Judicial District of Texas, upon hearing the evidence in Bell v. Dresser Industries, had returned a $130 million verdict against the Company and a co-Defendant in favor of five asbestos plaintiffs -- an average of $26 million per claim. The case had been filed in 1993 against Harbison- Walker/Dresser, as well as the co-Defendant. Normally, judgment follows verdict within 30 days in the court in question. In this case, judgment was delayed because the court had to consider additional matters related to a Harbison settlement agreement that Halliburton was contesting. Thus, it was not until ten weeks later on November 29, 2001, that the verdict became a final judgment of the court. 144. During this ten-week period, Defendants did not disclose this verdict to investors. They knew that the verdict had not been independently discovered or reported. Indeed, the verdict was far from reasonably discoverable by even the most diligent analyst. Halliburton was not a named Defendant, the verdict was not accessible on any database during the ten-week period, and the verdict was not reported by the press regionally or nationally during the ten-week period. The verdict was meanwhile available only at the single state district courthouse — one of hundreds in Texas- in which it was rendered. Because the investment community was never told of the existence of the case, much less the court in which it was heard, no analyst could have discovered the existence of the verdict unless it was the analyst's practice to physically visit, on a regular basis, every one of

-61- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 13 of 51 q

hundreds of courthouses in Texas, as well as thousands of state courthouses throughout the country, in which an asbestos case involving Halliburton could possibly have been heard. 145. Nevertheless, on October 23, 2001, five weeks after they had learned of the verdict, Individual Defendants Lesar and Foshee, in Dallas, Texas, hosted a conference call with analysts and investors to discuss the third quarter results that had been released that day. In this call, Lesar and Foshee stated that the news regarding asbestos in the quarter was "positive:"

Individual Defendant Lesar: Good afternoon everyone. At our last call in July, I shared with you my confidence that our earnings for the third quarter would exceed the estimates that were out there at that point in time. I'm very pleased to report today that we've met our commitment to you and earned 42 cents per share, which is a record, for the Halliburton/Dresser combined organization ...In the third quarter, KBR posted solid profitability in a very tough operating environment and raised their quarterly margins to 3.6%... And now I want to turn the call over to Doug to talk about operations and some positive news related to asbestos claims.

Individual Defendant Foshee: ...Before moving to segment results, I'd like to give you an update on activity in the quarter related to asbestos. With regard to asbestos, we've said consistently that we take this issue very seriously, but that we believe that we're adequately reserved and that we're adequately insured. I'm hitting this topic up front not because we see it as the most important agenda item, but because we believe that the discount in our current stock price that's associated with asbestos is significantly larger than the liability itself.

So, starting with claims activity, we had 13,000 new claims filed during the quarter. That's down significantly from 27,000 in the second quarter. It's just one data point, but it is in the right direction. During the quarter, 11,000 claims were settled at about our historical average cost [of $200 per claim]. At the end of the third quarter, we had total claims of 147,000, up only 2,000 net claims over last quarter. Not included in this number are the claims related to Harbison-Walker after their spin-off in 1992. For the quarter, there were only 1,300 new claims in this area naming Dresser as a Defendant.

With regard to settled claims, we've resolved, cumulatively, 194,000 claims at a total pre-tax cost of $143 million. We've received, or expect to receive, all but about $38 million of this amount from our insurance carriers, resulting in an average pre-tax net cost per resolved claim of less than $200.

As for our reserves related to asbestos, the net amount only increased by $1 million for the quarter. The gross liability went up $5 million from $699 to $704 million, and estimated insurance recoveries went up by $4 million from $575 to $579 million. The last topic on asbestos is insurance. As we've told you, we have insurance coverage that reimburses us for a substantial portion of the cost to defend ourselves

-62- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 14 of 51 q

against claims, and a substantial portion of settlements and judgments. This coverage is provided by a large number of insurance policies written by dozens of insurance companies. The largest single insurance provider covering our non-construction- related asbestos claims is Equitas. The most recent Equitas annual report indicates that at March 31 of this year, they had a gross, undiscounted asbestos reserve of 8.1 billion pounds, or roughly eleven and a half billion dollars. Using their average annual claims payment history over the last three years, that gives a twenty-six-and-a- half year life to that reserve. In addition, we have no indication that any of our other significant non-construction-related insurers will be unable to fulfill their obligations under our policies.

As our second-quarter 10-Q describes in detail, we are in litigation with these providers over changes that they're attempting to impose, requiring new levels of documentation for claims payment. We don't believe they have the right to do that, but the important thing for you as investors to understand is that we continue to be paid on our larger claims and on our defense costs.

Finally, let me talk about our dispute with Highlands Insurance.- We believe that Highlands has an obligation to provide asbestos coverage to Halliburton. We made that argument last month to the Delaware Supreme Court, and we expect a decision from them late this year or early next year. We remain extremely confident that we'll prevail in this litigation and retain our coverage_ [The appeal was singularly unsuccessful, and the judicial opinions of the case call into question Individual Defendants' extreme confidence in this regard, as well as Vinson & Elkins' purported extreme confidence. See Halliburton Co. v. Highlands Ins. Group, Inc., 801 A.2d 10 (Del. Supr., March 13, 2002); Highlands Ins. Group, Inc. v. Halliburton Co., No. 17971 (Del. Ch., March 21, 2001). See also the Delaware Supreme Courts denial of Halliburton's motion for reargument at Halliburton Co. v. Highlands Ins. Group, Inc., 811 A.2d 277 (Del.Supr., July 11, 2002).]

So, to summarize on asbestos, it was a good quarter. New claims filed were down by more than half from 27,000 to 13,000, and we resolved 11,000 claims at our historical average [of $200 per claim]. In addition, on the Harbison-Walker side, only 1,300 new claims were filed naming Dresser as a Defendant. Our total reserve only went up a million dollars net. We continue to be paid on large claims and defense costs by our London insurers, and finally our appeal in the Highlands case was heard and we expect to have a ruling by the first quarter.

Now, for those of you still awake and on the line, I'll move on to the other 99% of our company, Energy Services and Engineering and Construction...

Q&A: ...James Stone, UBS Warburg: Going back to Doug's opening comments on asbestos, can you talk about what kind of experience you are having as you start to go through the Harbison-Walker situation. You noted that claims are down. Can you give us some sense where the settlements stand right now and what's happening with some other settlements that were pending.

-63- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 15 of 51 q

Foshee: Yeah, um, Jamie, this is Doug, there really is not anything new to report on Harbison-Walker, other than the fact that new claims during the quarter naming Dresser as a Defendant were only1,300. Beyond that we just don't have enough information yet to start to put detailed numbers together on things like the total settlement cost.

Lesar: But I think it's fair to say, Jamie, that there have been no adverse developments at all with respect to the Harbison -Walker situation, and, uh, as Doug said, we just haven't had time enough to grind through some of the cases on it. But our view as we said today is that claims are coming down, both at the Harbison and on the rest of the claims that have come in over the last couple of quarters, and, more importantly, our settlement rate continues to be at historical levels. And I think both of those data points- and the third point is that we keep getting paid by our insurers for those that we do settle. And I think those are three really positive data points that people need to start putting into their thinking, because it's clear to me that if you look at performance versus stock price versus PIE, that the discount on our stock is way overdone versus what realistic expectation of liability might be.

Foshee: Jamie, one other thing I'd just remind you of is that when we originally booked those Harbison-Walker claims [the $90 million in additional reserves reported in the Q2:01 10-9/, we did that at Harbison- Walker's historical settlement costs, which were orders of magnitude higher than our own, so I guess that our expectation would be, as we get into those claims, and particularly as we start exercising control over the defense of those claims, we hope that experience would come back down approaching our own levels.

146. As a threshold point, Individual Defendant Lesar and Foshee's repeatedly reference the price of Halliburton's shares, which had by the time of the conference call fallen further to $24.86 per share. These comments demonstrate intense sensitivity on the part of Individual Defendants

Lesar and Foshee to investor perceptions of Halliburton's asbestos liabilities. Second, the statements contain outright lies with respect to the Harbison-Walker situation, especially Individual Defendant

Lesar's statement,"There have been no adverse developments at all with respect to the Harbison-

Walker situation," and Individual Defendant Foshee's implication that, if anything, the Company had over-reserved for the Harbison claims, "our expectation would be, as we get into those claims, and particularly as we start exercising control over the defense of those claims, we hope that experience would come back down approaching our own levels." In reality, they had been "getting into"the

-64- Case 3:02-cv-01 15 2 Document 178-2 Filed 03/09/2005 Page 16 of 51 q

claims since the start of 2001 at the latest, and the claims were proving disastrous: during the quarter, the Company had received a $65 million verdict related to Harbison in favor of only five plaintiffs.

147. The September verdict could not have been more material to investors' evaluation of the Company's prospects and risks, especially given the intense concern of investors regarding the asbestos issue at the time. Defendants themselves later admitted, in a December 7, 2001, press release, that the September verdict had been "significantly outside their past experience." Yes, there is a "significant" difference between $13 million per claim and $200 per claim when a Company is facing 145,000 claims:

145,000 claims x $200 per claim = $29 million

145,000 claims x $13 million per claim = $1.9 trillion.

148. The statements by Individual Defendants Lesar and Foshee on October 23, 2001, apparently had their intended effect: within three days Halliburton's shares had advanced by 12% to

$27.92 per share.

149. In the Company's next 3Q:01 10-Q (signed by Individual Defendants Foshee and

Muchmore, and approved by Individual Defendant Lesar) was filed on November 8, 2001, two

months after Defendants learned of the verdict In it, on pages 8-12, Defendants affirmatively stated

that in the third quarter, 12,000 asbestos claims had been resolved by the Company at a gross cost of

only $5 million, and a net cost to the Company of just $1 million. The Company also affirmatively

stated in this 10-Q that its historical net cost per claim had been a mere $200 per claim. The

Company also stated in this 10-Q that, based on their experiences during the quarter, it was only

necessary to increase Halliburton's reserves for asbestos liability by $1 million. Finally, the 10-Q

expressed the Company's belief that the Company's asbestos exposure would have no material

adverse effect on its financial condition or results.

-65- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 17 of 51 q

150. Their actual knowledge of the verdict in question rendered the Defendants' affirmative assurances in 3Q:01 10-Q misleading in the extreme. The affirmative statement that in the third quarter, 12,000 asbestos claims had been resolved by the Company at a gross cost of only $5 million, and a net cost to the Company of just $1 million, was materially misleading absent accompanying disclosure that a $65 million verdict had been rendered against the Company in the quarter. The affirmative statement in this 10-Q that the Company's historical net cost per claim had been a mere

$200 per claim was materially misleading absent accompanying disclosure that the Company had suffered a verdict of $13 million per claim for five plaintiffs in the quarter. The statement in the 10-Q that, based on their experiences during the quarter, it was only necessary to increase Halliburton's reserves for asbestos liability by $1 million was materially false and misleading because, based on the

Company's historical insurance recovery rate of 82%, the September 12 verdict alone should have boosted reserves by $12 million. Finally, the 10-Q's expression of belief that the Company's asbestos exposure would have no material adverse effect on its financial condition or results was materially misleading without, at a minimum, accompanying disclosure of the verdict. The degree of the disparity between Defendant's statements and their actual knowledge, coupled with the overwhelming materiality of the information in question, mean that the affirmative statements and omissions in the July 23, 2001 conference call and 3Q:01 10-Q were outright lies to innocent investors as crass as any that have been documented in recent securities frauds.

151. On information and belief, plaintiff is confident that Individual Defendants Lesar,

Foshee and Muchmore had actual knowledge, both at the time they hosted the October 23, 2001, conference call and at the time the signed or approved the 3Q:01 10-Q issued on November 8, 2001, of the existence of a September 12, 2001, $65 million verdict against the Company in favor of five plaintiffs for Harbison-Walker claims, because:

-66- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 18 of 51 q

1. the Company had been actively managing the case in question since early 2001;

2. the verdict was "significantly outside [Individual Defendants'] prior experience," according to the Company's press release of December 7, 2001, indicating that notice of it would certainly have been given to senior executives such as Individual Defendants Lesar, Foshee and Muchmore;

3. the verdict, if it was repeated with respect to the Company's outstanding claims, would result in $1.9 trillion in liability for the Company, indicating that notice of it would certainly have been given to senior executives such as Individual Defendants Lesar, Foshee and Muchmore;

4. the Company was receiving reports from insurers regarding Harbison/Dresser claims, verdicts and settlements;

5. the Company's asbestos liabilities were the key focus and concern of the analyst and investment community at the time, causing a corresponding focus on the issue by Individual Defendants;

6. the Company's asbestos liabilities were the key focus and concern of the Halliburton board at the time, causing corresponding intense attention on the issue by Individual Defendants.

INTERLOCKING NATURE OF THE ACCOUNTING AND ASBESTOS ALLEGATIONS

152. Finally, it is important to note that Defendants' accounting fraud and asbestos fraud were interlinked. Increased disclosure of the asbestos liabilities would have forced the Company to set aside additional reserves, reserves that the Company could ill-afford precisely due to Defendant's accounting fraud. Indeed, the Company, in July 2001, had been forced to assume an additional $425 million in medium-term debt in order to bolster its minimal cash position. The maximum amount reserved for the Company's asbestos liabilities at anytime during the Class Period was $125 million.

A simple comparison of this $125 million with the $4.3 billion for which the Company ultimately settled its asbestos claims, $2.3 billion of which will be borne directly by the Company, illustrates the magnitude of Defendants' asbestos liability non-disclosure fraud -- just as the "missing" $3.1 billion described above illustrates the magnitude of Defendants' accounting fraud.

-67- Case 3:02-cv-011 Document 178-2 Filed 03/09/2005 Page 19 of 51 q 16

153. The two frauds merged and came to a head on Friday, December 7, 2001, the last day of the Class Period. During that week, three asbestos verdicts or judgments against the Company totaling $131 million, including the $65 million verdict that Defendants had known about since

September, came to light. On that Friday, investors finally came to the collective realization that the

Company had been affirmatively misleading them in its assurances regarding the Company's asbestos exposure, financial performance and future prospects. Coupled with the Company's weak financial position, investors now realized that the Company could be in danger of bankruptcy. Halliburton shares declined from $21 to $12 per share that Friday. Analysts and commentators universally attributed the drop to a collective loss of faith on the part of investors in the veracity of the Company.

As TheStreet.com reported on that day, in the article "Halliburton Buried as Investors Stop

Believing:" "Halliburton's shares dove to nine-year lows Friday as investors lost faith in the company's claims

MISREPRESENTATIONS

154. Halliburton issued its 4Q:98 earnings press release on January 25, 1999, and filed its

1998 10-K with the SEC in Washington, D.C., on March 23, 1999, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Morris and Muchmore, reviewed and approved by Individual Defendant Lesar, as well as prepared and approved by Individual Lesar with respect to KBR. It states, on page 55, that

Halliburton earned $65.7 million in net income in 4Q:98. This statement was materially false and misleading because:

4Q:98 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme 1: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

-68- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 20 of 51 q

4Q:98 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

4Q:98 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

4Q:98 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

4Q:98 expenses had been artificially reduced by the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses, as described above under "Scheme III: Use A "Cookie Jar" Of Cash For Merger Expenses To Increase Profits," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses are set forth in the final three paragraphs of the section.

All of these fifteen sources of scienter on the part of the Individual Defendants are attributable to corporate Defendant Halliburton with respect to the 1998 10-K.

155. Halliburton issued its 1Q:99 earnings press release on April 26, 1999, and filed its

1Q:99 10-Q with the SEC in Washington, D.C., on May 14, 1999, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Morris and Muchmore, reviewed and approved by Individual Defendant Lesar, as well as prepared and approved by Individual Lesar with respect to KBR. It states, on page 2, that Halliburton

-69- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 21 of 51 q

earned $62 million in net income in I Q:99. This statement was materially false and misleading because:

1 Q:99 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

IQ:99 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

I Q:99 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme 11: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

IQ: 99 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

I Q:99 expenses had been artificially reduced by the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses, as described above under "Scheme III: Use A "Cookie Jar" Of Cash For Merger Expenses To Increase Profits," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses are set forth in the final three paragraphs of the section.

All of these fifteen sources of scienter on the part of the Individual Defendants are attributable to

corporate Defendant Halliburton with respect to the IQ: 99 10-Q.

-70- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 22 of 51 q

156. Halliburton issued its 2Q:99 earnings press release on July 22, 1999, and filed its

2Q:99 10-Q with the SEC in Washington, D.C., on August 13, 1999, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Morris and Muchmore, reviewed and approved by Individual Defendant Lesar, as well as prepared and approved by Individual Lesar with respect to KBR. It states, on page 2, that Halliburton earned $83 million in net income in 2Q:99. This statement was materially false and misleading because:

2Q:99 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

2Q:99 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

2Q:99 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

2Q:99 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

2Q:99 expenses had been artificially reduced by the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses, as described above under "Scheme III: Use A "Cookie Jar" Of Cash For Merger Expenses To Increase Profits," all paragraphs of

-71- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 23 of 51 q

which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses are set forth in the final three paragraphs of the section.

All of these fifteen sources of scienter on the part of the Individual Defendants are attributable to corporate Defendant Halliburton with respect to the 2Q:99 10-Q.

157. Halliburton issued its 3Q:99 earnings press release on October 21, 1999, and filed its

3Q:99 10-Q with the SEC in Washington, D.C., on November 15, 1999, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Morris and Muchmore, reviewed by Individual Defendant Lesar, as well as prepared and approved by Individual Lesar with respect to KBR. It states, on page 2, that Halliburton earned $5 8 million in net income in 3Q:99. This statement was materially false and misleading because:

3Q:99 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

3Q:99 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

3Q:99 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

3Q:99 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely

-72- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 24 of 51 q

reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

3Q:99 expenses had been artificially reduced by the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses, as described above under "Scheme III: Use A "Cookie Jar" Of Cash For Merger Expenses To Increase Profits," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses are set forth in the final three paragraphs of the section.

All of these fifteen sources of scienter on the part of the Individual Defendants are attributable to corporate Defendant Halliburton with respect to the 3Q:99 10-Q.

158. Halliburton issued its 4Q:99 earnings press release on January 27, 2000, and filed its

1999 10-K with the SEC in Washington, D.C., on March 14, 2000, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Morris and Muchmore, reviewed and approved by Individual Defendant Lesar, as well as

prepared and approved by Individual Lesar with respect to KBR. It states, on page 64, that

Halliburton earned (before extraordinary gains) $76 million in net income in 4Q:99. This statement

was materially false and misleading because:

4Q:99 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme 1: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

4Q:99 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

4Q:99 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme 11: Report

-73- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 25 of 51 q

False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

4Q:99 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

4Q:99 expenses had been artificially reduced by the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses, as described above under "Scheme III: Use A "Cookie Jar" Of Cash For Merger Expenses To Increase Profits," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses are set forth in the final three paragraphs of the section.

All of these fifteen sources of scienter on the part of the Individual Defendants are attributable to corporate Defendant Halliburton with respect to the 1999 10-K.

159. Halliburton issued its 1 Q:00 earnings press release on April 26, 2000, and filed its

1Q:00 10-Q with the SEC in Washington, D.C., on May 15, 2000, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Morris and Muchmore, reviewed and approved by Individual Defendant Lesar, as well as prepared and approved by Individual Lesar with respect to KBR. It states, on page 2, that Halliburton earned (before extraordinary gains) $49 million in net income in 1Q:00. This statement was materially false and misleading because:

IQ: 00 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

-74- Case 3:02-cv-01 152 Document 178-2 Filed 03/09/2005 Page 26 of 51 q

1Q:00 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

IQ:00 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme Il: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morns, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

1 Q:00 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

1 Q:00 expenses had been artificially reduced by the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses, as described above under "Scheme III: Use A "Cookie Jar" Of Cash For Merger Expenses To Increase Profits," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses are set forth in the final three paragraphs of the section.

All of these fifteen sources of scienter on the part of the Individual Defendants are attributable to corporate Defendant Halliburton with respect to the 1Q:00 10-Q.

160. Halliburton issued its 2Q:00 earnings press release on July 26, 2000, and filed its

2Q:00 10-Q with the SEC in Washington, D.C., on August 10, 2000, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Morris and Muchmore, reviewed and approved by Individual Defendant Lesar, as well as prepared and approved by Individual Lesar with respect to KBR. It states, on page 2, that Halliburton earned $75 million in net income in 2Q:00. This statement was materially false and misleading because:

-75- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 27 of 51 q

2Q:00 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

2Q:00 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

2Q:00 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

2Q:00 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

2Q:00 expenses had been artificially reduced by the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses, as described above under "Scheme III: Use A "Cookie Jar" Of Cash For Merger Expenses To Increase Profits," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses are set forth in the final three paragraphs of the section.

All of these fifteen sources of scienter on the part of the Individual Defendants are attributable to corporate Defendant Halliburton with respect to the 2Q:00 10-Q.

161. Halliburton issued its 3Q:00 earnings press release on October 24, 2000, and filed its

3Q:00 10-Q with the SEC in Washington, D.C., on November 9, 2000, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

-76- Case 3:02-cv-01 152 Document 178-2 Filed 03/09/2005 Page 28 of 51 q

Defendants Morris and Muchmore, and reviewed and approved by Individual Defendant Lesar. It

states, on page 2, that Halliburton earned $157 million in net income in 3Q:00. This statement was

materially false and misleading because: 3Q:00 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme 1: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

3Q:00 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme l: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

3Q:00 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme 11: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

3Q:00 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

3 Q:00 expenses had been artificially reduced by the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses, as described above under "Scheme III: Use A "Cookie Jar" Of Cash For Merger Expenses To Increase Profits," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the fraudulent use of the cash portion of the Dresser merger charge to offset ordinary expenses are set forth in the final three paragraphs of the section.

All of these fifteen sources of scienter on the part of the Individual Defendants are attributable to

corporate Defendant Halliburton with respect to the 3Q:00 10-Q.

-77- Case 3:02-cv-011 Document 178-2 Filed 03/09/2005 Page 29 of 51 q 16

162. Halliburton issued its 4Q:00 earnings press release on January 30, 2001, and filed its

2000 10-K with the SEC in Washington, D.C., on March 27, 2001, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Lesar, Morris, and Muchmore. It states, on page 64, that Halliburton earned $5 million in net income in 4Q:00. This statement was materially false and misleading because:

4Q:00 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme 1: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

4Q:00 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

4Q:00 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

4Q:00 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

All of these twelve sources of scienter on the part of the Individual Defendants are attributable to corporate Defendant Halliburton with respect to the 2000 10-K.

163. The 2000 10-K cited in the previous paragraph was also false and misleading because it failed to disclose that the Company had begun actively managing the post-1992 asbestos claims of

-78- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 30 of 51 q

Harbison-Walker and that the Company was highly exposed to massive liability from these claims because of the likelihood that Harbison-Walker would prove unable to defend or pay the claims. This omission was materially false and misleading for all of the reasons described above in the section,

"Basis of the Asbestos Fraud Allegations," all paragraphs of which are hereby incorporated by refenerce. In addition, the omission was materially false and misleading because:

1. when the information was later disclosed, in a June 28, 2001, press release, Halliburton shares declined 21%, and have never again traded at the levels they enjoyed prior to the disclosure;

2. the Company had in fact already begun actively managing the Harbison claims;

3. the Harbison claims had the potential to cause, and did in fact cause, costs to the Company measuring in the billions of dollars;

4. secondary liability for claims such as those from Harbison-Walker had caused the bankruptcy of dozens of major US companies;

5. the Company's asbestos liabilities were the key focus and concern of the analyst and investment community at the time.

164. Halliburton issued its 1Q:01 earnings press release on April 25, 2001, and filed its

1Q:01 10-Q with the SEC in Washington, D.C., on May 11, 2001, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Morris and Muchmore, and approved by Individual Defendant Lesar. It states, on page 2, that Halliburton earned $109 million in net income in 1 Q:01. This statement was materially false and misleading because:

1 Q:01 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

-79- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 31 of 51 q

1Q:01 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

1Q:01 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

IQ: 0 1 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme 1I: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

All of these twelve sources of scienter on the part of the Individual Defendants are attributable to corporate Defendant Halliburton with respect to the 1Q:01 10-Q.

165. The 1 Q:01 10-Q cited in the previous paragraph was also false and misleading because it failed to disclose that the Company had begun actively managing the post-1992 asbestos claims of

"Basis of the Asbestos Fraud Allegations," all paragraphs of which are hereby incorporated by reference. In addition, the omission was materially false and misleading because:

1. when the information was later disclosed, in a June 28, 2001, press release, Halliburton shares declined 21%, and have never again traded at the levels they enjoyed prior to the disclosure;

2. the Company had in fact already begun actively managing the Harbison claims;

-80- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 32 of 51 q

3. the Harbison claims had the potential to cause, and did in fact cause, costs to the Company measuring in the billions of dollars;

4. secondary liability for claims such as those from Harbison-Walker had caused the bankruptcy of dozens of major US companies;

5. the Company's asbestos liabilities were the key focus and concern of the analyst and investment community at the time.

166. Halliburton issued its 2Q:01 earnings press release on July 25, 2001, and filed its

2Q:01 10-Q with the SEC in Washington, D.C., on August 9, 2001, from its principal executive offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Morris and Muchmore, and reviewed and approved by Individual Defendant Lesar. It states, on page 2, that Halliburton earned (before extraordinary gains) $83 million in net income in

2Q:01. This statement was materially false and misleading because:

2Q:01 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

2Q:01 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme 1: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

2Q:01 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

2Q:01 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme Il: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely

-81- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 33 of 51

All of these twelve sources of scienter on the part of the Individual Defendants are attributable to corporate Defendant Halliburton with respect to the 2Q:01 10-Q.

167. Halliburton issued a press release entitled, "Harbison-Walker Asks Halliburton for

Assistance," on June 28, 2001, from its principal executive offices at 3600 Lincoln Plaza, 500 N.

Akard St., Dallas, Texas 75201. It was approved by Individual Defendant Lesar and reviewed by

Individual Defendant Foshee. It states that, in a surprising development, Halliburton had just been asked by Harbison for assistance with respect to asbestos claims, a request that management would now investigate and consider. Individual Defendant Lesar specifically states therein that this was an

"unexpected development." These statements were materially false and misleading for all of the reasons described above in the section, "Basis of the Asbestos Fraud Allegations," all paragraphs of which are hereby incorporated by reference. In addition, these statements were materially false and misleading because:

1. the Company had in fact been actively managing the Harbison claims since early 2001;

2. the Company had been receiving regular information about the claims from its insurers for years;

3. the Company had had a long history with Harbison, had been well-aware of its need for assistance, and had been well-aware of its weakening financial condition.

168. Halliburton issued its 3Q:01 earnings press release on October 23, 2001, and filed its

3Q:01 10-Q with the SEC in Washington, D.C., on November 8, 2001, from its principal executive

offices at 3600 Lincoln Plaza, 500 N. Akard St., Dallas, Texas 75201. It was signed by Individual

Defendants Foshee and Muchmore, reviewed and approved by Individual Defendant Lesar, as well as

prepared and approved by Individual Defendant Morris with respect to KBR. It states, on page 2, that

-82- Case 3:02-cv-011 52 Document 178-2 Filed 03/09/2005 Page 34 of 51 q

Halliburton earned $179 million in net income in 3Q:01. This statement was materially false and misleading because:

3Q:01 expenses had been artificially reduced by the systematic use of arbitrary reductions in cost accruals and negative cost accruals in the monthly project P&Ls at KBR, as described above under "Scheme I • Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary reductions in cost accruals and negative cost accruals are set forth in the final three paragraphs of the section.

3Q:01 revenues had been artificially increased by the systematic use of arbitrary revenue accruals in the monthly project P&Ls at KBR, as described above under "Scheme I: Manipulate Project-Level Accounting," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of these arbitrary revenue accruals are set forth in the final three paragraphs of the section.

3Q:01 revenues had been artificially increased by the systematic practice at KBR of overbilling with no expectation of getting paid, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of this practice of overbilling with no expectation of getting paid are set forth in the final three paragraphs of the section.

3 Q:O 1 revenues had been artificially increased by the undisclosed recognition as revenues and pre-tax profits of claims and change orders that would not likely be collected, as described above under "Scheme II: Report False Revenues," all paragraphs of which section are hereby incorporated by reference. The particular facts establishing the knowledge, or severely reckless disregard, on the part of Individual Defendants Lesar, Morris, and Muchmore of the undisclosed recognition as revenues and pre-tax profits of claims that would not likely be collected, are set forth in the final three paragraphs of the section.

All of these twelve sources of scienter on the part of the Individual Defendants are attributable to

corporate Defendant Halliburton with respect to the 3Q:01 10-Q.

169. The asbestos-related statements of Individual Defendants Lesar and Foshee in the

Company's third-quarter conference call on October 23, 2001, were materially false and misleading

for all of the reasons described above in the section, "Basis of the Asbestos Fraud Allegations," all

paragraphs of which are hereby incorporated by reference. In addition, the statements were

materially false and misleading because:

-83- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 35 of 51 q

1. Individual Defendant Lesar said that "there have been no adverse developments at all with respect to the Harbison-Walker situation" when in fact the Company had a month earlier suffered a $65 million Harbison- Walker-related asbestos verdict;

2. Individual Defendant Foshee said that "there really is not anything new to report on Harbison-Walker situation" when in fact the Company had a month earlier suffered a $65 million Harbison-Walker-related asbestos verdict, a verdict that the Company stated on December 7, 2001, was "significantly outside its experience;"

3. Individual Defendants Lesar and Foshee described the quarter's developments with respect to asbestos as "positive," when in fact the Company had a month earlier suffered a $65 million Harbison-Walker-related asbestos verdict;

4. Individual Defendants Lesar and Foshee each repeatedly emphasized that the Company continued to settle claims at $200 per claim, when in fact the verdict if September 12 amounted to $13 million per claim;

5. Individual Defendants Lesar and Foshee each emphasized that the Company's stock price was excessively discounting Halliburton's potential asbestos exposure(Lesar: "the discount on our stock is way overdone versus what realistic expectation of liability might be"), when in fact the Company had a month earlier suffered a $65 million Harbison-Walker-related asbestos verdict, a verdict that the Company stated on December 7, 2001, was "significantly outside its experience;"

6. Individual Defendant Foshee said that "we remain extremely confident" that the Company would prevail in its dispute with Highlands Insurance, despite the fact that the Company's weak arguments in the case had already been unequivocally rejected by the Delaware Chancery Court and were later dismissed out of hand by the Delaware Supreme Court;

7. secondary liability for claims such as those from Harbison-Walker had caused the bankruptcy of dozens of major US companies;

8. the Company's asbestos liabilities were the key focus and concern of the analyst and investment community at the time;

9. when investors finally learned the truth in the week of December 7, 2001, Hallurton's price per share declined by 43%.

170. Pages 8-12 of the 3Q:01 10-Q cited two paragraphs above were also materially false and misleading for all of the reasons described above in the section, "Basis of the Asbestos Fraud

-84- Case 3:02-cv-011 52 Document 178-2 Filed 03/09/2005 Page 36 of 51 q

Allegations," all paragraphs of which are hereby incorporated by reference. In addition, these pages was materially false and misleading because:

1. the affirmative statement that in the third quarter, 12,000 asbestos claims had been resolved by the Company at a gross cost of only $5 million, and a net cost to the Company of just $1 million, was materially misleading absent accompanying disclosure that a $65 million verdict had been rendered against the Company in the quarter;

2. the affirmative statement in this 10-Q that the Company's historical net cost per claim had been a mere $200 per claim was materially misleading absent accompanying disclosure that the Company had suffered a verdict of $13 million per claim for five plaintiffs in the quarter;

3. the affirmative statement in the 10-Q that, based on their experiences during the quarter, it was only necessary to increase Halliburton's reserves for asbestos liability by $1 million was materially false and misleading because, based on the Company's historical insurance recovery rate of 82%, the September 12 verdict alone should have boosted reserves by $12 million;

4. the expression of belief that the Company's asbestos exposure would have no material adverse effect on its financial condition or results was materially misleading without, at a minimum, accompanying disclosure of the verdict;

5. when the omitted information was later disclosed in the week of December 7, 2001, press release, Halliburton shares declined 43%;

6. the Company's asbestos liabilities were the key focus and concern of the analyst and investment community at the time

SUMMARY OF GAAP VIOLATIONS

171. GAAP defines the accepted principles, conventions, rules and procedures of accounting. An accounting procedure that does not accord with a Statement of Financial Accounting

Standards ("SFAS") or Statement of Concepts pronouncement by the Financial Accounting Standards

Board ("FASB") by definition does not accord with GAAP. During the Class Period, as alleged in this complaint, Defendants' scheme and course of conduct violated provisions of GAAP including but not limited to: Violation of SEC Rule 12b-20: For filing periodic reports which lacked the information necessary to make the required statements, in light of the circumstances under which they are made, not misleading;

-85- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 37 of 51 q

Violation of Item 303 of Regulation S-K: For failing to ensure that reports for interim periods include a discussion of any material changes in the registrant's results of operations and an identification of any significant elements of registrant's income that are not necessarily representative of the registrant's ongoing business;

Violation of APB Opinion No. 28: For failing to adequately identify and reserve for foreseeable costs and for failing to provide reasonable cost and expense estimates;

Violation of FASB Statement of Concepts No. 1: For failing to ensure that Halliburton's financial reports provided information about its financial performance that was useful to investors in making investment decisions related to Halliburton;

Violation of FASB Statement of Concepts No. 2: For failing to ensure that the Company's financial reports were reliable and accurate, and that nothing material was omitted; Violation of FASB Statement of Concepts No. 2: For failing to adhere to the principal of "conservatism" as a "prudent reaction to uncertainty;"

Violation of APB Opinion No. 22: For failing to disclose accounting policies and to identify and describe the accounting principles followed by Halliburton and the methods of applying those principles that materially affect its financial statements;

Violation of SFAS No. 5: For not accruing losses at the time when such a loss contingency exists and when there was a reasonable possibility that a loss may have been incurred; Violation of ABP Opinion No. 20: For failing to change accounting principles on the basis that the new policy is would be preferable because it provides increased transparency and facilitates anlysis . Specifically, APB No. 20 states: "The Board concludes that in the preparation of financial statements there is a presumption that an accounting principle once adopted should not be changed in accounting for events and transactions of a similar type. Consistent use of accounting principles from one accounting period to another enhances the utility of financial statements to users by facilitating analysis and understanding of comparative accounting data. The presumption that an entity should not change an accounting principle may be overcome only if the enterprise justifies the use of an alternative acceptable accounting principle on the basis that it is preferable." Violation of APB Opinion No. 16: For divesting of more than 10% of the merged company's assets, revenues or profits within two years of a pooling-of-interests merger.

Regulation S-X, to which the Company is subject as a registrant under the Exchange Act, 17 C.F.R.

210.4-01(a)(1), provides that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumptively misleading and inaccurate. PATTERN OF ILLEGAL ACTIVITY

-86- Case 3:02-cv-011 52 Document 178-2 Filed 03/09/2005 Page 38 of 51 q

172. While not components of the specific allegations alleged in this complaint, but plead to show Defendants' mindset, Defendants engaged in a pattern of questionable and illegal activity during the Class Period and continue to do so to date. Specifically, Defendants:

a. Circumvented U.S. trade restrictions by using a Cayman Island subsidiary to open an office in Tehran, Iran, in 2000. These acts are currently the subject of a federal criminal grand jury in the Southern District of Texas. Halliburton Chairman Cheney on July 26, 2000, said in a speech such sanctions "are nearly always motivated by domestic political pressure, the need for Congress to appeal to some domestic constituency;" b. Sold $73 million of oil production, pipeline and water treatment equipment to Iraq from 1997 to 2000, via two join ventures;

C. Systematically overcharged the U.S. government, as revealed in General Accounting Office studies in 1997 and 2000, charging as much as $86 for a 4-by-8-foot sheet of plywood that cost $14.06, and cleaning some military offices as many as four times a day;

d. Inflated bills to the Army Corps of Engineers for work at military bases in Monterey and Seaside, California, sparking a lawsuit and a grand jury investigation, both of which Defendants eventually settled in 2002 for a payment of $2 million plus plaintiff's legal expenses. Full settlement came out of shareholders' pockets; and e. Paid bribes totaling $2.4 million to a tax official in Nigeria in an effort to obtain favorable tax treatment. Such bribes came out of shareholders' pockets. These bribes are currently the subject of an investigation by the SEC for potential violations of the Foreign Corrupt

Practices Act. 173. This partial list of illegal activities undertaken by Defendants during the Class Period is relevant to Plaintiff's allegations because it evinces a predilection on the part of Defendants to place themselves above the law. This pattern of illegal activity buttresses an inference the fraudulent acts alleged here were committed knowingly and intentionally, and the policies and corporate culture developed and implemented by Defendants included a willingness to break the rules and or law in pursuit of their personal and corporate objectives.

-87- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 39 of 51 q

DAMAGES 174. As a result of the illegal and improper conduct specified in this complaint,

Defendants have caused significant damages and losses to those who innocently purchased or otherwise acquired securities in Halliburton at vastly inflated prices during the Class Period.

Between the inception of the Class Period and June 27, 2001, the average daily closing price of

Halliburton shares was $40.15 per share. Upon the revelation of Defendants' illegal conduct, the price of Halliburton shares had decreased to $12 per share as of the end of the Class Period on

December 7, 2001, causing damages to innocent investors. A similar fate has befallen the buyers of Halliburton's debt securities during the Class Period. Up to the middle of 2001, Halliburton's credit rating were solidly investment-grade. By the end of the Class Period, it was at just above junk status and effectively locked out of the commercial paper market.

175. The market for Halliburton's securities was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and failures to

disclose, Halliburton's common stock traded at artificially inflated prices during the Class Period.

Plaintiff and other members of the Class purchased or otherwise acquired Halliburton securities

relying upon the integrity of the market price of Halliburton's securities and market information

relating to Halliburton, and have been damaged thereby.

176. During the Class Period, Defendants materially misled the investing public, thereby

inflating the price of Halliburton's common stock, by publicly issuing false and misleading

statements and omitting to disclose material facts necessary to make Defendants' statements, as set

forth here, not false and misleading. Said statements and omissions were materially false and

misleading in that they failed to disclose material adverse information and misrepresented the truth

about the Company, its business and operations, as alleged in this complaint.

-88- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 40 of 51 q

177. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by plaintiff and other members of the Class. As described here, during the Class Period,

Defendants made or caused to be made a series of materially false or misleading statements about

Halliburton's business, prospects and operations. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of Halliburton and its business, prospects and operations, thus causing the Company's securities to be overvalued and artificially inflated at all relevant times. Defendants' materially false and misleading statements during the Class Period resulted in plaintiff and other members of the Class purchasing the

Company's securities at artificially inflated prices, thus causing the damages complained of in this complaint.

SUBSEQUENT EVENTS 178. On December 12, 2002, the Company announced it had reached a global settlement for its asbestos exposure claims. The Company's most current estimates are that the total settlement amount is $4.3 billion, $2.3 billion of which will be borne directly by the Company. At the time this settlement was announced, several plaintiffs' attorneys had already stated that they would object to such a settlement because it undervalues the Company's total liability.

179. On December 17, 2002, Bloomberg reported the Company's insurance carriers, American International Group, Inc., Equities Allianz AG, Chubb Corp. and at least 100 other insurers are challenging policies they have with Halliburton that would cover the proposed asbestos exposure

liability settlement. According to Bloomberg, the insurers were denying coverage because the Company had not met minimum documentation requirements, by providing proof that every member

of the settlement group suffered an asbestos related disease and that the sickness was provoked by

exposure to Halliburton's products or facilities. In addition, Bloomberg reported certain insurers had also denied coverage because Defendants had submitted two fraudulent asbestos bills in 2001.

-89- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 41 of 51 q

180. By December 20, 2002, the SEC inquiry into the Company had become a formal investigation and accounting probe. The formal probe allowed regulators to subpoena Individuals and documents. 181. According to the Company's latest Proxy filing, Lesar received $7.75 million in

salary, bonuses, restricted stock and other compensation during 2002, compared to $7.22 million in

2001. Defendant Foshee also received a raise, earning $2.07 in 2002, compared to $2.02 million in

2001. In a separate regulatory filing, at or about this time, the Company also disclosed it had provided about 300,000 documents to the SEC related to its investigation into the Company's

accounting and certain disclosures related thereto.

182. The Daily Deal reported on December 16, 2003, that Halliburton put Dresser, certain parts of Kellogg Brown & Root and other units in Chapter I 1 as part of deal to give asbestos creditors

$4.2 billion in cash and shares in return for protection against additional lawsuits.

183. On December 23, 2003, The Houston Business Journal reported: "Insurers sue

Halliburton to block units of bankruptcy petition." More than twenty insurance companies are

seeking to block the bankruptcy of several Halliburton units, a move related to its $4 billion in

asbestos settlements, the Associated Press reported this week. The insurers want a judge to dismiss

the bankruptcy, claiming Halliburton bought approval from more than 90% of the claimants before

last week's bankruptcy filing by agreeing to pay much more per claim than other asbestos

settlements. According to the Associated Press, the insurers say the cash alone in the settlement

would equate to an average of nearly $7,000 per claim.

184. Several subsidiaries of both Ace Ltd. and Hartford Financial Services are among a

larger group of insurers attempting to get the Bankruptcy Judge to deny Chapter 11 protection to the

Halliburton-owned companies. Insurers contend they had no say in the plan that calls for them to pay

$2.3 billion (Bestwire, 01-26-04). The Insurers are appealing the Judge's decision to deny them

-90- Case 3:02-cv-011 52 Document 178-2 Filed 03/09/2005 Page 42 of 51 q

standing in bankruptcy. Insurers also claim Halliburton is trying to abuse the bankruptcy system.

Unlike other asbestos debtors that have ever filed for Chapter 11 protection, Halliburton and its

subsidiaries are able to pay all of their current and future asbestos liabilities in full, a point the

insurers say Halliburton repeatedly has assured equity markets of in filing with the SEC.

185. Halliburton issued a Release on May 11, 2004, announcing that the bankruptcy court

had completed hearing on confirmation of Dresser Industries proposed plan of reorganization. The

Company expects the necessary bankruptcy court and district court orders confirming the proposed

plan of reorganization will be entered by the end of the summer of 2004. Consistent with earlier

rulings, the bankruptcy court announced it intends to issue a final order denying standing to the

insurance carriers' objection to confirmation of Dresser Industries proposed plan of reorganization,

other than relating to insurance neutrality. Certain insurers have reserved the right to appeal the final

order denying standing.

186. On May 17, 2004, the Pentagon suspended $159.5 million in payments for meal charges submitted by KBR as it continued to audit bills for feeding soldiers in Iraq and Kuwait. The

Defense Contract Audit Agency cited concerns about the KBR's billing system for all its Iraq-related contracts, characterizing the system as inadequate. The U.S. government had already suspended

$35.8 million in contested charges, and auditors said Halliburton had voluntarily deleted $141 million from dining room billings in which costs exceeded the number of meals served.

187. On May 25,2004, the International Advisory and Monitoring Board, a watchdog set up by the U.N. Security Council to oversee spending by the U.S.-led occupation of Iraq's oil and gas money, issued a press release in which its stated that it had yet to receive documents it had requested two months earlier related to contracts funded with Iraqi oil money and awarded to Halliburton without competitive bidding.

-91- Case 3:02-cv-011 52 Document 178-2 Filed 03/09/2005 Page 43 of 51 q

188. On May 30, 2004, Time Magazine reported that a Pentagon e-mail states that U.S.

Vice President Dick Cheney's office "coordinated" a multibillion-dollar no-bid Iraq reconstruction contract awarded to his former employer Halliburton.

INSIDER SELLING 189. As alleged in this complaint, Defendants acted with scienter in that Defendants knew the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. In addition, the insider trading of certain of the individual defendants suggests Individual Defendants' motive to perpetrate the fraudulent schemes detailed in this complaint. The following chart details Defendants' Class Period insider trading:

Defendant Lesar Insider Selling 9/98 —12/00

Date No Shares Price Proceeds

5/31/00 15,000 $ 50.97 $ 764,550

3/5/99 5,334 $ 44.00 $ 234,696

3/5/99 14,666 $ 44.00 $ 645,304

TOTAL Lesar 35,000 -- $1,644,550

Defendant Morris Insider Selling 9/98 —12/00

Date No Shares Price Proceeds

8/31/00 7;500 $ 53.50 $ 401,250

TOTAL Morris 7,500 -- $401,250

-92- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 44 of 51 q

190. Defendants' stock sales, in addition to the hundreds of other sources of sciter detailed in the section, "Misrepresentations," demonstrate scienter, in that each sale was unusual in its timing and amount, and did not follow either the prior trading patterns or the trading histories of the Defendants liquidating their shares, for the following reasons, among others: a. All of Defendants' stock sales occurred at a time when they were aware of or when they had recklessly disregarded the fact that Halliburton was not performing according to public guidance that they prepared, made, reviewed or approved, and prior to the time that the true financial and operational condition of the Company became known to investors; b. The timing of Defendant Lesar's stock sales were also unusual because, prior to his sales of 35,000 shares of Halliburton stock which occurred in May 1999 and 2000, inclusive, Defendant Lesar had sold only approximately 18,500 shares in the 33 months pre-dating the inception of the Class Period. That Defendant Lesar sold twice as much Halliburton stock during the first 27 months of the Class Period than he had sold during the 33 months preceding it is further evidence of Defendant Lesar's scienter; and

C. The timing of Defendant Morris' stock sales were also unusual because, prior to his sales of 7,500 shares of Halliburton stock which occurred in late-August 2000, Defendant Morris had sold only 3,400 shares in the 33 months pre-dating the inception of the Class Period. That Defendant Morris also twice as much Halliburton stock during the first 30 months of the Class Period than he had sold during the 33 months preceding it is further evidence of Defendant Morris' scienter. Most important, Individual Defendant Morris' sales occurred at the absolute peak of Halliburton's share price, a price which the Company achieved at a time only when the majority of the accounting schemes described herein had run their course.

APPLICABILITY OF PRESUMPTION OF RELIANCE — FRAUD-ON-THE-MARKET DOCTRINE

191. At all relevant times, the market for Halliburton's securities was an efficient market for the following reasons, among others:

-93- Case 3:02-cv-011 52 Document 178-2 Filed 03/09/2005 Page 45 of 51 q

a. Halliburton's stock met the requirements for listing, and was listed and actively traded on the NYSE, a highly efficient and automated market; b. As a regulated issuer, Halliburton filed periodic public reports with the SEC and the NASD;

C. Halliburton regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and d. Halliburton was followed by several securities analysts employed by major brokerage firms who wrote reports that were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace. 192. As a result of the foregoing, the market for Halliburton's securities promptly digested current information regarding Halliburton from all publicly available sources and reflected such information in Halliburton's stock price. Under these circumstances, all purchasers of Halliburton's securities during the Class Period suffered similar injury through their purchase of Halliburton's securities at artificially inflated prices and a presumption of reliance applies. NO SAFE HARBOR 193. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this complaint. Many of the specific statements pleaded in this complaint were not identified as "forward-looking statements" when made. To the extent there were any forward-looking statements, there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded in this complaint, Defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements were made, the particular speaker knew that the particular forward-looking statement was false, and/or the forward-looking statement was authorized and/or

-94- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 46 of 51 q

approved by an executive officer of Halliburton who knew that those statements were false when made.

FIRST CLAIM

Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder Against All Defendants

194. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth in this complaint.

195. During the Class Period, Defendants carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did deceive the investing public, including plaintiff and other Class members, as alleged in this complaint and caused plaintiff and other members of the Class to purchase Halliburton's securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, Defendants, and each of them, took the actions set forth in this complaint.

196. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to maintain artificially high market prices for Halliburton's securities in violation of Section 10(b) of the Exchange Act and Rule

IOb-5. All Defendants are sued either as primary participants in the wrongful and illegal conduct charged in this complaint or as controlling persons as alleged below.

197. Defendants, Individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations and future prospects of Halliburton as specified in this complaint.

198. These Defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged in this complaint in an effort to assure investors of Halliburton's value and

-95- Case 3:02-cv-011 52 Document 178-2 Filed 03/09/2005 Page 47 of 51 q

performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Halliburton and its business operations and future prospects in the light of the circumstances under which they were made, not misleading, as set forth more particularly in this complaint, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of Halliburton securities during the Class Period. 199. Each of the Individual Defendants' primary liability, and controlling person liability, arises from the following facts: (i) the Individual Defendants were expert accountants and high-level accounting executives and/or directors at the Company during the Class Period and members of the Company's management team, (ii) each of these Defendants, by virtue of his responsibilities and activities as a senior accounting officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company's accounting policies and methods, internal budgets, plans, projections and/or reports; (iii) each of these Defendants enjoyed significant personal contact and familiarity with the other Defendants and was advised of and had access to other members of the Company's management team, internal reports and other data and information about the Company's finances, operations, and sales at all relevant times; and (iv) each of these Defendants was aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading. 200. The Defendants had actual knowledge of the misrepresentations and omissions of material facts set forth in this complaint, or acted with reckless disregard of the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such Defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing Halliburton's operating condition and future business prospects from the investing public and supporting the artificially inflated price of its securities. As demonstrated by Defendants' accounting policies and methods, and the resultant overstatements and misstatements of the Company's business, operations and earnings throughout the Class Period, Defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged,

-96- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 48 of 51 q

were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading.

201. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price of Halliburton's securities was artificially inflated during the Class Period. In ignorance of the fact that market prices of

Halliburton's publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by Defendants, or upon the integrity of the market in which the securities trade, and/or on the absence of material adverse information that was known to or recklessly disregarded by Defendants but not disclosed in public statements by Defendants during the

Class Period, plaintiff and the other members of the Class acquired Halliburton securities during the

Class Period at artificially high prices and were damaged thereby.

202. At the time of said misrepresentations and omissions, plaintiff and other members of the Class were ignorant of their falsity, and believed them to be true. Had plaintiff and the other members of the Class and the marketplace known the truth regarding the problems that Halliburton was experiencing, which were not disclosed by Defendants, plaintiff and other members of the Class would not have purchased or otherwise acquired their Halliburton securities, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid.

203. By virtue of the foregoing, Defendants have violated Section 10(b) of the Exchange Act, and Rule l Ob-5 promulgated thereunder.

204. As a direct and proximate result of Defendants' wrongful conduct, plaintiff and the other members of the Class suffered damages in connection with their respective purchases and sales of the Company's securities during the Class Period.

SECOND CLAIM

Violation Of Section 20(a) Of The Exchange Act Against Individual Defendants

-97- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 49 of 51 q

205. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth in this complaint. 206. The Individual Defendants acted as controlling persons of Halliburton within the meaning of Section 20(a) of the Exchange Act as alleged in this complaint. By virtue of their accounting expertise, their high-level accounting positions, and their ownership and contractual rights, participation in and/or awareness of the Company's operations, accounting policies and methods, and/or intimate knowledge of the false financial statements filed by the Company with the SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which plaintiff contends are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by plaintiff to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected. 207. In particular, each of these Defendants had direct and supervisory involvement in the day-to-day operations, and accounting policies and methods of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged in this complaint, and exercised the same.

208. As set forth above, Halliburton and the Individual Defendants each violated Section 10(b) and Rule IOb-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of Defendants' wrongful conduct, plaintiff and other members of the Class suffered damages in connection with their purchases of the Company's securities during the Class Period.

-98- Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 50 of 51 q 1

PRAYER WHEREFORE, plaintiff prays for relief and judgment, as follows: A. Determining that this action is a proper class action, certifying plaintiff as a class representative under Rule 23 of the Federal Rules of Civil Procedure and designating this complaint as the operable complaint for class purposes; B. Awarding compensatory damages in favor of plaintiff and the other Class members against all Defendants, jointly and severally, for all damages sustained as a result of Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon; C. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 and any appropriate state law remedies to assure that the Class has an effective remedy; and D. Awarding plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and E. Awarding such other and further relief as the Court may deem just and proper.

99 Case 3:02-cv-01152 Document 178-2 Filed 03/09/2005 Page 51 of 51 q

JURY TRIAL DEMANDED Plaintiff hereby demands a trial by jury. KILGORE & KILGORE PLLC DATED: August 3, 2004 THEODORE C. ANDERSON

E DORE C. AND RSON S.B.No. 0121570 3109 Carlisle Dallas, TX 75204 ,/J Telephone: 214/969-9099 214/953-0583 (fax) Local Attorney for Plaintiff

Of Counsel: SCOTT + SCOTT, LLC DAVID R. SCOTT NEIL ROTHSTEIN 108 Norwich Avenue P.O. Box 192 Colchester, CT 06415 Telephone: 860-537-5537 Facsimile: 860/537/4432 SCOTT + SCOTT, LLC ARTHUR L. SHINGLER III 401 B Street, Suite 307 San Diego, CA 92101 Telephone: 619/233-4565 Facsimile: 619/233-0508 Attorneys for Plaintiff

100